8 Pros and Cons of Profit Sharing Plan

When there is a profit sharing plan in place, then it allows employers to share the wealth an organization makes with their employees. The goal is to reward employees for their profitable actions so that they’ll invest their loyalty and productivity into the future of the business, creating a positive relationship between choices and profits. With a good incentive plan, good workers stick around. Not every plan is designed well, however, so here is a look at the pros and cons of a profit sharing plan.

What Are the Pros of a Profit Sharing Plan?

1. It helps to create a culture of ownership.
People will treat things better when they own them as a general rule. It’s like renting a house instead of owning your own home. A renter is going to do the bare minimum when it comes to maintenance. The homeowner, on the other hand, is going to do everything in their power to protect their investment. Profit sharing plans help to create a culture where ownership is emphasized because working becomes an investment in oneself.

2. It encourages participation.
Employees must be empowered to do more than just come to work every day. A profit sharing plan helps to make an impact because people can see their consistent efforts being translated into tangible dollars and cents. When profit sharing isn’t considered to be valuable, then there isn’t the same empowerment that happens and worker are more likely to leave instead of stay.

3. It links rewards to the idea of a hard day’s work.
Most employees want more than just a solid paycheck at the end of the day. They want to know that the work they did had some lasting meaning to the world in some way. Creating a profit sharing plan that can help workers give back to their community can do just that. Instead of a larger paycheck or a bonus vacation day, some organizations are seeing success by offering a paid volunteer day instead. This allows workers to serve local food banks, kid’s programs, and other nonprofits and still get their pay for that day.

4. It gives an organization a competitive advantage within their market share.
When competition levels are high, an organization needs to have some sort of edge to maintain or grow their market share. A profit sharing plan can create this edge because employees are directly compensated when they make a difference. There are numerous options for compensation as well, including stock options and other investment choices.

What Are the Cons of a Profit Sharing Plan?

1. It can put the focus of the employee in the wrong spot.
Although the idea of profit sharing is to have workers focus on innovation and productivity, sometimes workers wind up focusing on the actual profits instead. Workers can focus solely on profits and wind up pushing products or services that only have high profit margins, which eventually erodes the reputation of the entire organization. Customers know when you’re out to meet your own needs instead of trying to solve their problems.

2. Many profit sharing plans aren’t 100% equal.
Employees want to know that their getting a square deal when it comes to their profit sharing arrangement. If one employee gets better stock options or receives a compensation structure that someone else may not receive but wants, then the work place will develop a sense of entitlement. This is because workers will feel like they aren’t being treated equally.

3. There can be added costs when a profit sharing plan is implemented.
Profit sharing plans are quite cost effective at the implementation stage, but that changes as time goes by. When an organization commits to distributing a portion of the profits to workers, it means there isn’t as much disposable income available for expansion, reinvesting, and other growth opportunities. What’s even worse is that if there are no profits to distribute, your workers are going to realize this quickly and think about abandoning the ship.

4. The profit sharing plan may wind up being completely worthless.
If your organization issues stock options, what happens when the stock price goes lower than anticipated? If a stock price is at $90 and stock options are issued at $60, then that’s a lot of potential profit for the employee. If the stock drops to $45 after the options have been received, then there’s no value that has been offered to the workers at all. If the stock price never increases again, the only value of the stock options being held is in its recycling amount.

The pros and cons of a profit sharing plan show that when one is designed correctly, it can be a powerful recruiting and retention tool. The wrong plan can be just as demotivational, however, which is why a complete examination of each key point is necessary so the best possible decision can be made.

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