A profit-sharing plan is a contribution plan in which the employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the participant (employee). (investor, 2011)
A smart CEO understands that employee performance is tied directly to how vested they feel to the company they work for. That's why many companies have begun to consider profit sharing plans, because they can be a powerful incentive for employees to work harder for the company and gain a sense of satisfaction from knowing they'll all get a cut of the profits. It's also likely that the added productivity will increase the overall financial performance of the company. Recent statistics show just how popular variable pay programs, including profit sharing plans, have become. (bos, 2010)
Before Implementing PS plans we need to consider a number of things.
First, make sure you're profitable. And make sure you expect to continue making money for at least the next three years, to the best of what you can anticipate. "If we announce the plan and we have no profit sharing for a couple of years, it loses its credibility as a motivating force," Wray explains. "If we have a bad year and you don't pay that year, then people usually get it."
The most important step in implementing a successful profit sharing plan is to have a clear idea of what you want to accomplish through the initiative. Various plans serve very particular purposes. Traditional profit sharing plans are designed as a retirement benefit. Employers contribute a specific, predetermined amount of their annual profits into a deferred trust, which the employees earn access to upon retirement from the company...
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...ntage that is required. For example, let’s say that your money purchase plan has a contribution of 5% of each eligible employee’s pay. You, as the employer, need to make a contribution of 5% of each eligible employee’s pay to their separate account. A participant’s benefit is based on the amount of contributions to their account and the gains or losses associated with the account at the time of retirement”. (IRS, 2013)
“That type of arrangement is different than, say, a profit-sharing plan. With the profit-sharing plan, you, the employer, can decide that you’ll contribute a certain amount, say $10,000. Then, depending on the plan’s contribution formula, you allocate that $10,000 to the separate accounts of the eligible employees. Also, in past years, money purchase plans had higher deductible limits than profit-sharing plans. This is no longer the case.” (IRS, 2013)