After reading this article you will learn about:- 1. Definition of Profit Sharing 2. Objectives of Profit Sharing 3. Methods 4. Advantages 5. Limitations.
Definition of Profit Sharing:
Profit sharing schemes may effectively supplement other incentive plans. Profit sharing is a scheme to augment the compensation of workers through the sharing of profits of the company. Profit sharing may be defined as an agreement freely entered into, by which the employees receive a share, fixed in advance, of the profits.
This compensation is in addition to the regular wages and bears a definite percentage relationship to company profits. This definition would exclude bonuses based on profits which are not assured on a continuing basis.
Objectives of Profit Sharing:
(i) To promote worker’s efficiency.
(ii) To raise productivity.
(iii) To make workers feel that their interests are identical with those of the employer.
(iv) To make workers behave in a more responsible manner.
(v) To arouse cooperative spirit in the workers and to minimize industrial disputes.
(vi) To develop scrap reduction and waste elimination consciousness in the workers.
(vii) To develop a proprietary attitude on the part of employees.
(viii) To minimize labour turnover.
(ix) To foster industrial democracy,
(x) To improve employee morale.
(xi) To bring workers and management closer so that many problems can be sorted out due to already developed better mutual understanding and cooperative spirit.
Methods to Distribute Profits:
Profits under the profit sharing scheme can be distributed to employees in a number of ways, such as:
(i) In the form of cash money.
(ii) In the form of company shares.
Profits under the profit sharing scheme can be paid to employees on the basis of:
(i) Their years of service with the company.
(ii) A fixed percentage of their total wages during a stipulated period.
(iii) Merit rating of the employees.
(iv) Their attendance.
(v) Their good performance record.
(vi) Their good general record, etc.
Advantages of Profit Sharing:
(i) Employees and employers develop better mutual understanding and cooperation.
(ii) Industrial disputes tend to reduce.
(iii) Productivity increases.
(iv) Scrap and waste tends to reduce.
(v) Labour turnover reduces.
(vi) Worker’s efficiency increases.
(vii) Worker’s morale and motivation improves.
(viii) It develops a sense of participation in the employees.
Limitations (or Objections) of Profit Sharing:
(i) It is difficult to gauge the varying contributions of individual employees.
(ii) Compensation is not paid soon after the employee effort is made.
(iii) Compensation amount fluctuates annually and is generally too small to prove an incentive.
(iv) Even if workers have put their best efforts, they will not get any compensation if the company goes in loss due to other reasons, e.g., excessive on-cost burden, etc.
(v) All workers, semi-skilled or highly-skilled, non-productive or highly productive may receive equal share.
(vi) Workers expect some form of profit distribution and if this sum is lower than anticipated, they may become skeptical as to the exact stated amount of profit by the company and may get disappointed and disgruntled.