Profit Sharing

1. Profit Sharing Definition of Profit Sharing • Employees share a portion of the profits based on corporate or division performance. • 16 % of ‘ees in medium/large firms covered • No requirement for employee involvement • more passive than gainsharing • Profits shared on quarterly or annual basis. • Workers share common fate with management. • In US, 3/4 of plans used to fund retirement. MGMT 4030 - Mnaaging Employee Reward Systems

2. Profit Sharing (Continued) Operational Features • Tax Deferred Plan • Funds retirement - most common plan • Cash Bonus Plan • Employees receive quarterly or annual check for cash • Ex: Hewlett Packard, GM, Ford, Nucor • Mixed Plan • Portion of money deferred, rest is given in cash. MGMT 4030 - Mnaaging Employee Reward Systems

3. Profit Sharing (Continued) Drawbacks • Weak line of sight • External factors (business cycle) can influence profits • Lack of employee control • May restrict management’s ability to utilize profits. • Union resistance • Some countries use for ideological reasons (example: Mexico requires profit sharing) MGMT 4030 - Mnaaging Employee Reward Systems

4. Profit Sharing (Continued) Most favorable conditions for profit sharing • Private sector firm • Mature firm or Growing firm (not Declining firm) • Firms that operate in unstable markets • “Shock Absorber” Effect - preserves jobs during business downturn. • Complements “pay for performance” plans based on individual or team contributions. • May support a cooperative labor relations strategy. MGMT 4030 - Mnaaging Employee Reward Systems