ZUNAIRA AKHTAR

UW-17-MGT-BBA-014
 TOPIC

PROFIT SHARING PLAN

 CONTENT
1. HISTORY
2. DEFINITION
3. EXPLANATION
4. CALCULATION
5. APPLICABILITY
 HISTORY
 Profit sharing was quite common in primitive fishing and
farming economies.
 Albert Gallatin, Secretary of the Treasury under
Presidents Jefferson and Madison, introduced profit
sharing into his New Geneva, Pennsylvania, glassworks
in the 1790s.
 Profit-sharing plans as we know them today were
developed in the 19th century.
 The first deferred profit-sharing plan was developed in
1916 by Harris Trust and Savings Bank of Chicago.
 DEFINITION
 Profit sharing can work in a variety of ways. The
company contributes part of its pre-tax profits into a
pool that is distributed among eligible employees.
Amounts distributed can be dependent on salary, and
profit sharing can be used as a supplement to existing
benefit plans as well. Profit sharing generally occurs
after the company determines final profitability for the
year.
 EXPLANATION
 Once a pool is created, either company leadership or the human resources team will create
a formula for distribution. According to the Department of Labor, the following are 
THE STEPS REQUIRED TO SET UP A PROFIT SHARING PLAN:
1. Adopt a written plan document
2. Arrange a trust for the plan’s assets
3. Develop a record keeping system
There are two types of plan

Cash Profit Sharing Plan

 There are two types of profit sharing plans: cash and deferred. In a cash profit sharing plan,
contributions are paid directly to an employee, typically in cash or checks, but also
sometimes as stock. The amount is taxed as regular income.

Deferred Profit Sharing Plan

 When contributions are deferred to individual employee accounts, this is referred to as a
deferred profit sharing plan and is thought of as a retirement benefit. Earnings are
distributed at retirement, upon death, after disability, or sometimes at separation from
service or other events. When a company utilizes a cash plan, it is generally considered a
type of employee bonus, while deferred plans are intended to supplement other benefits.
 CALCULATION
 Comp-to-Comp Method
The easiest profit sharing formula is the comp-to-comp method, which gives each employee a
contribution that's proportionate to his or her pay. To calculate the employer contribution, add the
compensation for all employees. Divide each employee’s compensation by the total to get their
percentage of the overall compensation. Then give each employee an equivalent percentage of the profit
sharing bonus.
 Pro-Rata Method
Pro-rata is another simple profit sharing formula as all you're doing is awarding every employee the
same bonus in terms of percentage of their pay or a fixed dollar amount. So, if one employee gets a
profit-sharing bonus equal to 10 percent of their compensation then all do. Or, everyone may get the same
bonus of $1,000

EXAMPLE
Let’s say you have a small business. Your business has earned $400,000 in the fiscal year and
would like to allocate 10% of annual profits to its employees
Employee 1: If this employee earns $50,000 as their salary, their profit sharing
total would be calculated by (400,000 x 0.10 ) x (50,000 / 205,000) = $9,756
 APPLICABILITY
 The amount distributed to each employee may be weighted by the employee's base salary so that
employees with higher base salaries receive a slightly higher amount of the shared pool of profits.
Generally this is done on an annual basis
 ADVANTAGE
 Brings groups of employees to work together toward a common goal (the success/benefit of the
company).
 Helps employees focus on profitability.
 The costs of implementing the plan rise and fall with the company's revenues.
 Enhances commitment to organizational goals.
 DISADVANTAGE
 The pay for each employee moves up or down together (no individual differences for merit or
performance).
 Focuses only on the goal of profitability (which may be at the expense of quality).
 For smaller companies, these plans may result in drastic swings in earnings for employees which
the employees may find difficult to manage their personal finances.
THANK YOU
ANY QUESTION……???