Why have Profit Sharing? – Advantages and Disadvantages of Profit Sharing


Profit sharing refers to monetary benefits offer to the employees by the employer apart from salary and bonuses. They are a form of incentives given to employees either directly or perhaps indirectly, depending upon the profits made by the respective company. The profit can be shared in the form of bonds, stocks or cash, which can be given at the time of retirement.

A company will share its pre-taxed profits with employees who are eligible for it. The base salary of the employee will be taken into consideration and depending upon the amount the profit will be shared. Those employees having higher base salaries will get a higher share of the profits to be shared.

Profit sharing is a gesture extended by the company to make the employee feel that he or she is also part of the company. Any employee who is well taken care of will perform better. His or her motivation to work will be higher.

Advantages of profit sharing

  • Brings employees together to work towards a common goal. Their sole aim will be the success of the company.
  • Motivation levels will be high.
  • The employee focus will be on profitability.
  • Increases commitment to the organization among the employees.
  • Employee can identify with the company. He or she will feel part of it.
  • Bridges the gap between the employee and employer.
  • Promotes the well-being of the employee.
  • Additional income for the employee to lead a comfortable life. If he or she is comfortable in personal life, then his or her performance at work will also be good.

Disadvantages of profit sharing

  • The salaries of the individual employees go up equally, not on the basis of merit or promotion.
  • In the case of smaller companies the drastic fluctuations in the earnings of company’s employees may affect the personal earnings of the employees.
  • The focus of the employee may be on the profit rather than on quality.

Employees would like to have share in the profits of the company. It is some kind of reward for their hard work and efforts. They would be motivated to put in their best.


Leave A Reply