profit sharing

profit sharing, arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of equipment, and the like. Profit sharing does not imply participation by the workers in management. The employer determines the rate at which profits are shared; since the rate is fixed beforehand, profit sharing differs from the bonus system. Profit sharing plans have been in operation in France since 1842 but have not been widely adopted in the United States. The plan has been most successful in businesses where employees work without direct supervision or where it is limited to supervisory employees or lesser executives, e.g., branch managers and department managers in department stores.

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profit sharing

System by which employees are paid a share of the profits of the business enterprise in which they are employed, in keeping with a plan outlined in advance. These payments, which may vary according to salary or wage, are in addition to regular earnings. Profit-sharing plans were probably first developed in France in the early 19th century as worker incentives. Today such plans are used by businesses in Western Europe, the U.S., and parts of Latin America. Profit shares may be distributed on a current or deferred basis or through some combination of the two. Under current distribution, profits are paid out to employees immediately in the form of cash or company stock. In deferred-payment plans, profit shares may be paid into a trust fund from which employees can draw annuities in later years.