PROFIT SHARING PLANS

A profit sharing scheme is an example of a variable pay plan. In profit sharing, company leadership designates a percentage of annual profits as a pool of funds to share with employees, or a portion of employees such as management. The pool of funds generated is then divided across covered employees using a formula for distribution. It is a good idea for entrepreneurs to motivate, recognize, and reward their employees for their input towards their business entities meeting their annual financial objectives and strategic goals. This helps assemble a team of dedicated employees and can pay abundantly in dividends.

Unlike the law in the United States through the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service (IRS) which provides specific provisions for this, South African law does not provide specific provisions for employee incentive schemes. Nonetheless, contract law can be used to address the situation. Thus, employers can get into contractual agreements with their employees to provide for such incentives.
Advantages of this scheme include that:
•    It brings groups of employees to work together toward a common goal, that is, the success/benefit of the company.
•    It enables employees to focus on profitability.
•    The costs of implementing the plan rise and fall with the company's revenues.
•    Enhances commitment to organizational goals
Such incentives do not necessitate giving employees shares hence ownership in the business and create an environment where the key employees feel that they have entrepreneurial decision making authority, and are compensated based on profits. However, they will not have authority in two non-delegated roles, which remain the entrepreneur’s sole responsibility. That is, capital expenditures and signing checks. Entrepreneurs should thus consider management profit sharing schemes for their businesses.