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

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Profit sharing refers to monetary benefits offered to the employees by the employer apart from salary and bonuses. They are a form of incentives given to employees either directly or 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.

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

Profit sharing is a gesture extended by the company to make the employee feel that he or she is also part of the company. An 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. The sole aim of the employees is the success of the company.
  • Motivation levels of the employees are high because of the extra financial gain they get if company is profitable.
  • The employee focus is on profitability and they work together as a team.
  • It increases commitment to the organization.
  • 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 helps them to lead a comfortable life. If they are comfortable in their personal life, the performance at workplace improves too.

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 of the profit rather than on quality.
  • With time the motivation behind hard work for higher company’s profit diminishes and employees start taking it as their right.
  • People get their share of the profit regardless of their contribution.
  • Employees at top position feel more motivated than the bottom rung as they get higher percentage of profit share.

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.

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