Are profit sharing plans effective in motivating employees?
Profit sharing is a phrase known to every individual since the beginning of business. This is nothing new but an old concept since the time when fishermen and farmers have used it to earn their livelihood. In USA this concept was brought in 18th century. When the civil war ended and industrialization prevailed companies all over and states started to share profit so as to stop their employees from unionizing. At the end of 2nd world war, government levied taxes on income but it didn’t practice on the money earned due to profit sharing which further flourished this concept.
Profit sharing concept was developed due to the businesses that regulate direct as well as the payments that are made indirectly to all the related employees that are dependent on company’s profitability including their salary and incentives. In public Limited Corporation these plans differ from that of private Limited Corporation. Profit sharing plan in public corporation deals with share allotment its employees as they become shareholders too.
In the profit sharing plan economic rules that are shared are between employee and the company. Here company act as a principle whereas agent is the employee. In United States of America, the profit sharing of each employee is also kept as a security for their retirement. When an employee retires the portion of his profit which was saved for his retirement is given to them for their prosperous old life. This plan is mention in combination with other plan of 401 (K). One type of retirement pension also commonly known as contribution plan is also a supplement to the agreement. For instance, if a worker in an organization gets wounded or become sick then this kind of agreement to his organization would not let him quit organization. He would be encouraged to resume his work when he gets stable so as to get the desired amount of his saving of profit at the end of his tenure. Now all the new organizations possess this profit sharing plan only and not any kind of other benefits plan.
Some of the employees in an organization are hired and promised to be given pay that is usually variable instead of hourly wage or a defined fixed salary. It is designed so as to encourage these individuals to work harder, productively and efficiently in order to get the maximum return at the end of the month. It will benefit both the organization and the employees. Obviously, employee would strive harder to get the maximum profit which in turn will increase the profit of an organization. Here one type of scale of pay is when a certain percentage of annual profit is shared by employer with his workers to motivate and appreciate them. In this way all these happy employees would work even harder than before to get appreciated and earn their maximum livelihood. But for employers and the individuals that are responsible to distribute the share keeps in mind certain components in order for the smooth process smooth, flawless and profitable for the organization itself. These components are as follows :
- Legal Fairness
Foremost ingredient for any plan is the clear and candid rules and regulations to be stated and followed. Employees are given a certain set of rules where they have been made clear to follow these rules in order to participate in this program. What are their desired goals and its outcome is discussed by the employers so that employees strive to achieve them. This rule may include maximum and minimum working hours, number of holidays, allotment of resources and the specific goals by the department. It also includes a wider perspective of goals which include number of product to be made, sales target and minimum income for the organization. Each goal is set with the reward and the set duration of completion. Employees that are clear about the specification of their tasks and duties are liable to be more productive and passionate about achieving their goals. On the contrary those employees who are vague about what to be achieved are less motivated.
- Ethical Considerations
Managers and their subordinates work hand in hand to set a friendly and desire able working environment for their department. The top management meets their middle and lower management before distributing the profit achieved by the organization. They are required to sell subordinates on the achievement of the gain so that when they leave this meeting excitement can be seen on their faces. This excitement will obviously be noticed by their juniors who will eventually make them excited and curious too. It will encourage their lower level staff too for the attainment of their goals according to the set plan.
- Strategic Aspects
When the middle level management gets excited about their plan and its reward they serve their energy in meeting those goals and achieving those rewards as promised by their upper level management. As day passes, this upper level management keeps reminding their set goals and rewards which will motivate their employees to progress efficiently and effectively. When the progress is seen by these employees this will in turn make them motivated foreseeing the profitable future of their organization.
- Economical Profit Sharing
Now the time comes when the rewards once promised by the employer to the employees has to be gifted based on their achievements of goals as allocated initially. The promise made should be delivered accordingly by the employees after the assessment of the performance of employee. Through this practice the motivation will keep on growing in future and the organization thus excels.
Key Features of Profit Sharing Plans
Following are some key features of Profit Sharing Plans:-
When an employee receives a financial perks and benefits, they feel highly motivated and appreciated. Just few words of appreciation don’t lasts long than a financial achievement in shape of bonus and salary increment. All the workers of an organization must be aware of their actions and the reactions of their employers. This awareness can be practiced through extensive communication and bridging the gaps between the employee and employer .
- Pay Discrepancy
Those employees that are in middle and top level management usually gets a greater share of profit from the annual income of an organization than the employees who are working under them. As they have worked out more to upgrade the business they gets a better share. But employees who have put up their best efforts in achievement of set goals are also rewarded; may it be at the lower level of management or middle level of management in organizational hierarchy .
Generally the employees that are at a senior level of management and are of greater experience develop a better understanding of how the projects has to be taken place and what will be the consequences of their decisions in the organization. They have a strong dedication on the fact that the rise in their income will eventually increase the income of an organization. Whereas, the activity of lower level management’s doesn’t have a direct link to the company’s profitability. Therefore the profit sharing incentive may be of less importance to them. It can vary from department to department and goal to goal. For example a manager who solve a problem faced by his junior or resolves two conflicting employees will have not result in any change to the profit of the company and its share .
Information technology also plays great role in the profit making of an organization. Some advertisement placed on websites is based on the quantity of views whereas other publishers pay their websites for a certain clicks done by the viewers on their ad. But here the advertiser is subjected to lose money on the advertising if the website visitors don’t buy any product shown on their websites. This practice becomes useless for both the advertiser and the organization. Here site only gets a good amount of profit when the viewer of advertise also becomes a customer of that organization. Through this the website also gets a good amount of share from that earned profit. The disadvantage of this program is that these sites promotes those goods and services that are not deserved to be promoted which makes the websites less authentic and reliable in customers and viewers eyes. For instance, take an example of a soap made up of Aloe Vera. Although this soap not superior than any regular beauty soap but to compel the viewer to buy the soap they might do false claims and publish blogs and comments that this soap has far more advantage than any other regular soap .
This concept of profit sharing assists both advertisers as well as employers with budgeting. They don’t have to be worried about giving employees and advertisers much more than desired amount because they at last earns a good amount of profit which is far more than the actual amount being paid to the website advertisers and employees. But on the other hand employees along with advertisers sometimes face crucial financial situation as they earn a very little or no profit in return of their huge efforts .
Conditions for motivating employees through profit sharing
Profit sharing plan acts as a great motivator for both the management and employees. This plan is usually designed to share a small portion of the lion’s share profit earned by the organization. Profit sharing activity is usually practiced annually in a shape of bonus. There are certain rules and regulations which are required to be set up so as further increase the level of motivation out of this bonus plan .
- Retirement Accounts
In the IRS the profit sharing amount is deposited into the accounts that are tax-deferred for instance an organization 401K. A huge amount of profit entitles to go to the retirement plan of the employees. This at the end is sum up to the employee’s efforts for the company and his achievements. These processes at the ends allow the individual to have a large fund for their future safety which is a strong source of motivation for them.
- Performance Goals
Many organization practices to set a goal based on the performance of an individual. In order to share a profit earned by the organization that employee strive to attain that goal with their best performance. For instance, an employee who is working in a manufacturing department is expected to maintain a record of his production in order to show it as a proof for getting a due share in profit. But his goals don’t guarantee employers to enhance the motivation of their staff to sustain their performance.
According to one of the “Inc.” website most of the employees gets motivated when their names are tagged with a renowned and reputed organization. When a company shares its profit to its employees, it increases their goodwill as a successful corporation. To further enhance the goodwill of an organization the top management can send their profit distribution ceremony details in a press and announces a celebration for all the employees which further increase the motivation level.
- Escalating Percentage
The main source of motivation in the usage of profit sharing plan is to allocate cash bonuses to the employees. This amount of bonus can be deferred in retirement plan or rewarded as due lump sum amount. Employees can monitor the escalating percentage in profit sharing which helps them to be more motivated in achieving their goals.
Advantages of Profit Sharing Plans
Profit sharing plan with an employee has several advantages that is a part of medium scale and small scale business’s morale the bottom line .
When the remuneration increases definitely loyalty has a significant increment. Those employees who are asked to be a part in the profit sharing program are more devoted in attainment of the goal associated with the reward. Moreover it also shoes that the company has invested a sense of pride and ownership for the organization in the employees. For these employees status, rank and designation is of less worth than the company’s ownership and status.
All those employees that are a part of profit sharing program consider the business setup as their own as their roles are pre-determined, clear and defined by the employers. Such programs that are associated with the rewards are directly connected the work with reward. Hence productivity touches its extreme when personnel are allocated their due right in the part of the profit. Employees consider these rewards as a result of their efforts and hard work instead of just a compensation for the time spent in his organization.
- Tax Benefits
Employees can utilize the concept of 401k as tool of tax deduction that is to be chopped off from their personal incomes which eventually decreases their gross earning by fencing profit sharing in a program that is tax deferred. All the contributions made to 401k are taxed only when withdrawing the whole amount, which allows the employees to grow their tax deferred payment until the amount is withdrawn.
Another important concept which is quite relevant to profit sharing is the known as gain sharing; salient features of which are as mentioned below :-
- It is usually a lump sum bonus which gives back the cost saving to their workers. It is basically a tool of measuring productivity whereas the profit sharing plan was a tool to measure profitability. There are majorly three different kinds of profit sharing.
- Scanlon Program was initiated in 1930s and bases were to share the cost. The main idea behind this program was to lower the costs of labor without decreasing company’s activity. The outcome is the ratio function between the cost of labors and SVOP.
- Rucker plan: Although this program also involves committees where the structure of committee is simpler but the calculations of cost saving is complex. Value of production is required to calculate the ratio with every cent of total salary bill.
- Improshare: Full form of improshare is” improvement in productivity and to share the productivity. It is the most recent program. In program, a standard calculated or assigned that tells number of employees that are expected and working hours which is spend to produce a product, and all the saving done between this set time and then the real production done is shared among the employees and employers.
When any organization earns a profit, the employee gets the perks directly too. This is the reason of encouragement for the employees. Through this motivational factor every employee will work hard to save the extra cost associated with the production and services, manage the waste, increase the sale and provide better services to its customer. Along with the financial benefits, the morale and motivation of the employees also increases.
But on the other hand profit sharing has certain disadvantage also. As all the employees equally gets the profit there is no differentiation for the individual contributors. Therefore those employees that have put fewer efforts as compared to others are also rewarded in the same way. Another drawback occurs when the organization experience a certain fluctuations in profit which will be difficult for the organization to predict profit and make budget for future. Quality of goods and services may also get affected due to the need of achieving more and timely target.
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