Month End Glossary

Profit Sharing

Profit sharing is a plan where employees receive a share of the company's profits, often based on predetermined criteria such as performance or tenure.

Profit sharing refers to a system employed by a company to distribute a portion of its profits to employees as a form of financial reward beyond regular salaries or wages. This system may be implemented as an employee incentive plan aiming to align employee productivity with company performance goals.

In practice, a profit-sharing plan typically works by allocating a percentage of company profits to a pool, which is subsequently distributed to eligible employees. This distribution can be based on predetermined criteria, such as proportionate base salary, tenure, rank, or other performance indicators, ensuring fairness and motivating employees to contribute to the company's profitability. An example of using profit sharing in a sentence would be: "The company introduced a profit-sharing program to enhance employee engagement and productivity, sharing 10% of the annual profits with all eligible staff."

There are different approaches to profit sharing, such as cash plans, where employees receive bonuses, or deferred plans, where the funds are deposited into retirement accounts. This type of compensation fosters a sense of ownership among employees and can improve retention and morale. However, companies must design their profit-sharing plans carefully to ensure clarity and alignment of objectives.

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