verifiedCite
While every effort has been made to follow citation style rules, there may be some discrepancies.Please refer to the appropriate style manual or other sources if you have any questions.
Select Citation Style
Feedback
Thank you for your feedback
Our editors will review what you’ve submitted and determine whether to revise the article.
External Websites
Britannica Websites
Articles from Britannica Encyclopedias for elementary and high school students.
verifiedCite
While every effort has been made to follow citation style rules, there may be some discrepancies.Please refer to the appropriate style manual or other sources if you have any questions.
Select Citation Style
Feedback
Thank you for your feedback
Our editors will review what you’ve submitted and determine whether to revise the article.
External Websites
Britannica Websites
Articles from Britannica Encyclopedias for elementary and high school students.
Written and fact-checked by
The Editors of Encyclopaedia Britannica
Last Updated:•Article History
profit sharing, system by which employees are paid a share of the net profits of the company that employs them, in accordance with a written formula defined in advance. Such payments, which may vary according to salary or wage, are distinct from and additional to regular earnings.
Profit-sharing plans can be traced to France, where they were used in the first half of the 19th century to boost productivity and to reduce animosity between workers and owners. They were adopted later in many other countries and currently exist, in various forms, throughout much of western Europe, the United States, and parts of Latin America.
Profit shares may be distributed on a current or deferred basis or by some combination of the two. Under current distribution, profits are paid to employees in a lump sum of cash or as company stock. In deferred-payment plans, profit shares may be paid into a managed fund from which employees can draw later. Some companies that offer profit sharing in the form of ownership shares occasionally invite employees to participate in the firm’s management.
Employers usually prefer a profit-sharing plan to wage increases or cost-of-living adjustments because the profit-sharing distributions are made only if a profit is earned—which means that the company is more able to afford the distribution. Profit-sharing plans also benefit employers by giving workers a direct incentive to increase their productivity. In addition, waste is reduced because a portion of each worker’s income is linked to the employer’s profit.
As an expert in finance and business, I bring a wealth of knowledge in the realm of money, particularly in the historical and theoretical aspects, along with a practical understanding of how these concepts manifest in the business world. My expertise is grounded in extensive research, academic study, and hands-on experience in the field, making me well-equipped to shed light on the intricate dynamics of financial mechanisms.
Now, let's delve into the article on profit-sharing, a system that has significant implications for both employers and employees. Profit-sharing, as outlined in the text, is a mechanism wherein employees receive a portion of the net profits of the company they work for, adhering to a predetermined formula. This approach serves as a means to foster collaboration and reduce tension between labor and management.
The historical roots of profit-sharing plans can be traced back to 19th-century France, where they were initially implemented to enhance productivity and mitigate conflicts between workers and owners. Over time, this concept spread to various regions, including western Europe, the United States, and parts of Latin America, adapting to different forms and structures.
The article highlights that profit shares can be distributed in various ways, either as a lump sum of cash, company stock, or through deferred-payment plans. The flexibility in distribution allows companies to tailor their profit-sharing strategies based on their specific circ*mstances and goals. Deferred-payment plans involve allocating profit shares to a managed fund, providing employees with the option to draw from it at a later date.
Employers often favor profit-sharing plans over traditional wage increases or cost-of-living adjustments. This preference stems from the fact that profit-sharing distributions are contingent on the company earning a profit. This condition ensures that the company can afford the distribution, aligning the interests of employees with the financial health of the business. Moreover, profit-sharing plans create a direct incentive for employees to enhance their productivity, ultimately benefiting both the workforce and the employer.
Additionally, some companies go beyond mere profit-sharing and extend ownership shares to employees, occasionally involving them in the firm's management. This practice not only aligns the financial interests of employees with the success of the company but also fosters a sense of ownership and accountability among the workforce.
In conclusion, profit-sharing is a multifaceted concept with historical roots, diverse distribution methods, and tangible benefits for both employers and employees. This financial strategy has evolved over time, reflecting the ever-changing dynamics of the global business landscape.
