Different Profit-Sharing Plans

Profit-sharing plans are a kind of retirement plan for employees. Profit-sharing is sharing a part of the profit earned by a company with its employees. Doing this helps to build a strong relationship between the company and its employees. It also instils a sense of responsibility and ownership among the employees.

Different Types of Profit-Sharing Plans

There are three different types of profit-sharing plans, and they are based on the type and time of payment. The plans are the cash plan, the deferred plan, and the combination plan.

Cash Plan

According to the Cash Plan, the company's cash rewards or stocks are gifted to the employees as a token of appreciation. These rewards are awarded to the employees either every quarter or at the end of each year. Employees have to pay tax on this additional income, which can be considered a disadvantage of the cash plan.

Deferred Plan

Deferred plans are a kind of profit-sharing plan, but employees do not immediately see a payout. In this plan, all the rewards earned by the employee are deposited in a Trust Fund. A Trust Fund is a fund in which a company's assets and stock are stored. These rewards are paid later to the employee such as at the time of retirement.

Combination Plan

This plan is a combination of the cash plan and the deferred plan. According to this plan, a part of the rewards are paid in cash, and the other part of the reward is transferred to the Trust Fund. The amount of the reward kept in the Trust Fund is given to the employee later, such as retirement.

How Benefits are Shared with Employees

Profit-sharing plans can also be divided by how the benefits are shared or distributed among employees. These plans are the pro-rata plan, the age-weighted plan, and the new comparability plan.

Pro-Rata Plan

According to the Pro-Rata Plan, all employees receive the same percentage or the same amount of reward involved in a specific job, task, or project. This reward is a fixed amount of money that will be received by all employees, along with their regular salary.

Age-Weighted Plan

The Age-Weighted Plan considers an employee's age and current salary. The employer rewards older employees a higher percentage of reward than younger employees due to their closeness to retirement.

New Comparability Plan

A New Comparability Plan is a kind of profit-sharing plan, referred to as a Cross-Testing Plan. In this kind of plan, the company awards a different percentage of rewards or contributions to different employees at different rates.

Advantages and Disadvantages of Profit-Sharing Plans

Profit-sharing plans are advantageous for both employees and employers. Employees are encouraged and motivated by the potential to earn a reward or part of the total profit. This improves the performance of the employees, which in turn benefits the employer. This helps in increasing the profit of the organization as employees put in more effort.

Profit-sharing plans have some disadvantages too. Profit-sharing plans may not prove beneficial in the long run due to a financial crisis. It may also create a difference in salary in the same designation, which may result in the deterioration of employees' performance.

Conclusion

A profit-sharing plan is a way in which employers present their employees with a token of appreciation. It helps in creating a spirit of responsibility towards their employer. It motivates and encourages an employee to improve their performance and contribute more towards the employer. Profit-sharing plans are beneficial for both employer and employee. It helps strengthen the relationship between employer and employee and brings in added success for the company.