Compensation: Incentive Plans: Profit

Sharing
An incentive based compensation program to award employees a percentage of the
company's profits.

How does Profit sharing work?

The company contributes a portion of its pre-tax profits to a pool that will be distributed
among eligible employees. The amount distributed to each employee may be weighted by
the employee's base salary so that employees with higher base salaries receive a slightly
higher amount of the shared pool of profits. Generally this is done on an annual basis.

Advantages Disadvantages

 Brings groups of employees to work  The pay for each employee moves up
together toward a common goal (the or down together (no individual
success/benefit of the company). differences for merit or
 Helps employees focus on performance).
profitability.  Focuses only on the goal of
 The costs of implementing the plan profitability (which may be at the
rise and fall with the company's expense of quality).
revenues.  For smaller companies, these plans
 Enhances commitment to may result in drastic swings in
organizational goals. earnings for employees which the
employees may find difficult to
manage their personal finances.
 Adherence to the FLSA requires
employers to recalculate each
worker's "regular rate" of pay. To
overcome this limitation, employers
may restrict this type of
compensation to exempt employees.

When does Profit sharing work best?

When company earnings are relatively stable (or steadily increasing).

What is the best way to implement Profit sharing?

Meet with executives to develop a clear understanding of profit sharing. Develop various
formulas and models to be used in predicting future gains and the costs associated with
sharing those gains. Prepare rules.
Profit sharing is an incentivized compensation program that awards employees a percentage
of the company’s profits. The amount awarded is based on the company’s earnings over a
set period of time, usually once a year. Unlike employee bonuses, profit sharing is only
applied when the company sees a profit. There are both benefits and drawbacks to offering
a profit sharing program, but when trained human resources professionals are able to plan
and execute it effectively, profit sharing can be an ideal way to both improve employee
morale and boost the bottom line.

Cash profit sharing plan

There are two types of profit sharing plans: cash and deferred. In a cash profit sharing plan,
“contributions are paid directly to employees in the form of cash, checks, or stock. The
amount is taxed as ordinary income when distributed,” according to the Employee Benefit
Research Institute (EBRI).

Deferred profit sharing plan

When contributions are deferred to individual employee accounts, this is referred to as a

deferred profit sharing plan. “Benefits—and any investment earnings accrued—are
distributed at retirement, death, disability, and sometimes at separation from service and
other events,” EBRI notes. When a company uses a cash plan, it is generally considered a
type of employee bonus, while deferred plans are intended to supplement other benefits.

Benefits of profit sharing

For employers, the main benefits of profit sharing stem from employee motivation. It can
help organizations secure and retain talented employees, and can be a motivating factor
that can increase productivity and loyalty, writes the Houston Chronicle’s Owen Richason.
And because a profit must exist before it is distributed among employees, profit sharing
may be less risky than outright bonuses. Profit sharing can also increase the ownership
employees feel in regard to their jobs because they are sharing in the profits they create for
the company. The costs rise and fall with revenue as well, which is another benefit.

Types of Employee Benefits

Benefits are any perks offered to employees in addition to salary. The most common benefits are
medical, disability, and life insurance; retirement benefits; paid time off; and fringe benefits.

Benefits can be quite valuable. Medical insurance alone can cost several hundred dollars a month. That's
why it's important to consider benefits as part of your total compensation. Make sure you understand
which ones you will receive.

Medical Insurance

Medical insurance covers the costs of physician and surgeon fees, hospital rooms, and prescription
drugs. Dental and optical care might be offered as part of an overall benefits package. It may be offered
as separate pieces or not covered at all. Coverage can sometimes include the employee's family
(dependents).
Employers usually pay all or part of the premium for employee medical insurance. Often employees pay
a percentage of the monthly cost. The cost of insurance through an employer

Minnesota Facts:

 Fifty-three percent of firms offer medical insurance to full-time employees. Only 12 percent
offer it to part-time employees. Dental insurance is less common, especially for part-time
workers.

 By industry, manufacturing, financial, education, and health services are the most likely to offer
benefits. The leisure and hospitality sector is the least likely.

 Larger firms are more likely to offer benefits than small firms.

Disability Insurance

Disability insurance replaces all or part of the income that is lost when a worker is unable to perform
their job because of illness or injury. This benefit is not commonly offered. There are two main types of
disability insurance:

 Short-term disability insurance begins right away or within a few weeks of an accident, illness,
or some other disability. For example, someone hurt in a car accident would be offered a few
paid weeks to recover.

 Long-term disability insurance provides benefits to an employee when a long-term or

permanent illness, injury, or disability leaves the individual unable to perform his or her job. For
example, an employee with spinal injuries could be entitled to long-term disability benefits until
retirement age.

Minnesota Facts:

 Only 19.2 percent of firms offer short-term disability insurance. Only 18.1 percent offer long-
term disability insurance to full-time workers.

Life Insurance

Life insurance protects your family in case you die. Benefits are paid all at once to the beneficiaries of
the policy — usually a spouse or children.

You can get life insurance through an employer if they sponsor a group plan. Company-sponsored life
insurance plans are standard for almost all full-time workers in medium and large firms across the
country. You can also buy it privately, but this is usually more expensive.

Minnesota Facts:

 The number of people employed usually determines whether a company will offer life insurance
or not.

 Only 15.5 percent of firms with fewer than 10 employees offer this benefit. Firms with more
than 250 employees offer it almost universally.

Retirement Benefits
Retirement benefits are funds set aside to provide people with an income or pension when they end
their careers. Retirement plans fit into two general categories:

 In defined benefit plans (sometimes called pension plans), the benefit amount is pre-
determined based on salary and the years of service. In these plans, the employer bears the risk
of the investment.

 In defined contribution plans (such as a 401k plan), employer or employee contributions are

specified, but the benefit amount is usually tied to investment returns, which are not
guaranteed.

Minnesota Facts:

 Most full-time workers in Minnesota are offered access to retirement benefits. Sixty-four
percent are offered a defined contribution. Only 15.6 percent are offered a defined benefit
program.

 Defined benefit plans are offered most frequently in those sectors with the highest levels of
unionization. These include public administration, construction, manufacturing, and trade,
transportation, and utilities.

Paid Time Off

Paid time off (also referred to as PTO) is earned by employees while they work. The three common types
of paid time off are holidays, sick leave, and vacation leave.

Most employees earn these as separate benefits. About 10 percent of Minnesota employers offer
consolidated PTO. This combines sick leave and vacation into one account for the employee to use as
needed.

Minnesota Facts:

 The most popular benefit with employees is paid vacation. Sixty-two percent of firms offer this
benefit to full-time workers. Paid holidays are also very common.

 Thirty-three percent of firms have paid sick leave for full-time employees.

Fringe Benefits

Fringe benefits are a variety of non-cash payments are used to attract and retain talented employees.
They may include tuition assistance, flexible medical or child-care spending accounts (pre-tax accounts
to pay qualified expenses), other child-care benefits, and non-production bonuses (bonuses not tied to
performance).

Tuition reimbursement can be an especially important benefit if you plan to take classes in your
personal time. This can be a great way to advance in your career. Most firms offering tuition assistance
require that courses are related to job duties.

Minnesota Facts:

 Fringe benefits are most common for full-time employees in the manufacturing sector.
 Non-production bonuses are the most common type of fringe benefit offered to full-time
workers in Minnesota. These include hiring, signing, year-end, attendance, and holiday bonuses.

 Tuition or educational assistance is offered by 19 percent of companies in Minnesota.