Profit Sharing System

Profit Sharing System

Profit-sharing, a system by which a company regularly distributes a proportion of the profits to its employees. Profit-sharing payments are in addition to wages and salaries; unlike production bonuses, they do not depend on increases in productivity; they are not ex gratia payments made at the discretion of the firm but are part of the terms of remuneration. They may act as an incentive to enlarge output since employees benefit directly and proportionately to an increase in profits. They may also have an educational value in acquainting workers with the fluctuations in profit as a residue left after costs known in advance are paid. But they are of limited use as a means of sharing the risks of enterprise between shareholders and employees because the latter cannot easily share losses.

Many profit-sharing schemes were introduced in Britain during the early years of this century, but many of them were abandoned in the inter-war period, often because there were no profits to share. A Ministry of Labour inquiry in 2005 revealed 310 schemes covering 345,000 employees, but the number has probably increased since then. Several large companies, such as I.C.I. and Courtaulds, operate profit-sharing schemes. In one type of profit-sharing an employee buys shares in the company and is entitled to share in the profits as a shareholder.

Profit-sharing is intended to improve labour relations and give the worker a sense of participation and loyalty. The part which profit-sharing can play depends on the general 'climate' of industrial relations. Profit-sharing may make good relations better, but it may not easily make bad relations good.

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