Profit Sharing and Gain Sharing Plans

The advantages of implementing a profit sharing plan are that in theory they create an environment where all employees start to think like owners and they think about doing what is right for the company as a whole. Another advantage is that during hard economic times companies do not have as many cutbacks or layoffs because of the nature of the profit sharing plan which decreases the money paid out in leaner times.

The disadvantages of implementing a profit sharing plan are that the plans effectiveness in making the company more competitive or more profitable are dubious at best. I have worked for companies with profit sharing plans and without profit sharing plans and I have seen no real change in the attitude of the employees towards the company based on the plan. As a Human Resources Professional it is interesting to see people who do not understand or see the value in the profit sharing plans. I have had several people come to me after having worked for a company for several years and they have no idea that the company has a profit sharing plan or what that even means. It turns out that they have accounts with money in from their profit sharing but the money in the account is not a tangible item to the employees.

The profit sharing plans may not actually create the environment that they set out to create among the employees. One of the reasons or this could be that many of the profit sharing plans are not set up to pay a cash incentive to employees right away. The plans are set up as deferred plans where the money is put into a separate account for the employee’s retirement. Employees often view the retirement accounts as intangible rewards because they cannot access the money and they are hit with high fees and taxes if they need the money.

One other reason that profit sharing plans may not have the desired motivational outcome is because often times the employees feel that they do not play a direct role in the actual success of the company; they feel that one individual will not make any difference. This reaction may differ between employees at different levels of the organization. For example, a custodian or office clerk may not see the impact of their work on their share from the profit sharing plan. However, an operations manager may feel more directly involved with the outcome.

The size of an organization should also be a consideration because a company with 150 employees that offers profit sharing is likely to have employees who feel involved in the actual profitability or the company. In larger organizations with thousands or millions of employees there will not be the same sense of involvement or dedication to the profit sharing program.

Companies interested in implementing a monetary incentive to their employees would be wise to consider gainsharing. This is similar to profit sharing but instead of being on a very broad company wide level it is scaled down and the incentives are based on department or location specific performance. Gainsharing empowers the employees and shows them that their performance actually makes a real difference in the amount of incentive they receive.

The company that I work for now has a gainsharing type of incentive and it is very popular with the employees. The bonuses are based on efforts from the actual division and department that the employees work in. The employees feel that they can make a difference in the amount that is paid out to them. There are clear categories that are rated and specific levels of completion.

Gainsharing programs also pay out incentives more frequently and they often paid out in a way that employees can access the money immediately. The frequency of the payouts keeps employees and managers talking about the performance of the group and it rewards them often for their productivity. The fact that employees have immediate access to the money turns their efforts quickly into a tangible reward.

The company that I currently work for also talks about the bonuses very frequently as they are paid out quarterly. This keeps people engaged in their business and keeps them thinking about their performance.

Whichever type of incentive a company choses it is very important that they keep their employees in the loop and consistently go over numbers and data that support the profit sharing. In some companies that I have worked for there was no mention of the profit sharing until the end of the fiscal year when it already too late to make any effort to change the outcome. If the profit sharing or gainsharing is a common topic at meetings and in newsletters and if the progress it tracked then the employees will be able to see their efforts or lack of efforts and they will be able to push harder and help make the company more profitable.

Work Cited:

Human Resources Management: Gaining a Competitive Advantage. Noe, Hollenbeck, Gerhart, Wright. McGraw-Hill/Irwin, 8th edition. ISBN: 0078029252