NFIB

Pros and Cons of Establishing a Profit Sharing Plan
09/ 25/ 2002

Most small businesses understand the importance of motivating employees and making them feel that they are part of a team working toward a common goal. One of the most effective ways to do this is to allow them to personally participate in the company's financial growth. In today's Workshop, contributor Jeffrey Moses lists the pros and cons of establishing a profit sharing plan.

Pro: A profit sharing plan (PSP) encourages employees to become more involved in the company and take greater responsibility for increasing profitability, both short and long term.

Con: A PSP, in itself, does not address the need for employees to focus on the underlying fundamentals of profitability, such as customer service and increased employee productivity. A PSP must be augmented by directives that encourage employees to focus on key operational points.

Pro: A PSP encourages employees to work as a team, since everyone is focused on the same target of greater profitability.

Con: PSPs do not directly reward outstanding personal successes among employees. For this reason, PSPs are often accompanied by individual incentive plans for key employees.

Pro: Financial benefits to employees are measurable and not prone to management favoritism or whim. When a specific percentage of profits are designated for a PSP, employees know exactly what they will receive.

Con: If a company does not attain the specific level of profitability during a year or benchmark period, employees may receive no benefits beyond their regular salaries. This can cause disappointment and even resentment. Since small companies may experience severe ups and downs in profitability from year to year, this is an important consideration.

If you decide that PSPs are right for your company after weighing the pros and cons, consult with tax advisors on applying PSP payouts to 401K plans as matching funds for employee contributions. When establishing a PSP, specify parameters for determining the PSP payout. For instance, decide whether the percentage will be based on gross profits or profits after certain expenses, and so on.

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