Accounting Profit

Finance allah shmoop what is a profit sharing plan Hey

all you employees you gets keep thirty percent of this

company's profits okay that's a profit sharing plan and in

general they're really good to have in place Why Well

because when employees are financially incentivized to act like owners

or co owners companies just generally do a whole lot

better Welcome to the advent of the profit sharing plan

Directly sharing in profits is one way employees get rewarded

when their company does well and punished when it doesn't

But some companies pay their employees in stock instead instead

of cash because in a given situation where a company

trades and on twenty times earnings taking say fifteen percent

of those earnings out of the prophet bull and giving

them to employees well it essentially cost shareholders twenty times

that earnings number in the form of simply a lower

priced stock like if they were going to earn one

hundred million dollars in Instead they only earned eighty five

while twenty times the hundred million mornings is two billion

and twenty times the eighty five million is one point

Seven there's three hundred million dollars of market cap gone

Yeah that's not such a good idea so paying employees

with stock has become a whole lot more of a

thing these days Then not the challenge and allocating profits

among employees of course lives inside of the concept of

attribution meaning who was responsible for actually producing profits in

this area or that who was naughty you know and

who was nice And what if a company has multiple

divisions where it's senior manager did incredible work during a

time where the jet engine division usually loses money such

that the manager heroically helped the company's division toe on

ly lose three percent that year Well compare this manager

to the manager of the insurance division which in a

normalized competitive world should have made twenty percent profit margins

this year but only made eighteen Well who did better

The insurance guy or the jet engine gal Well who

gets more profit And how is the profit allocated among

the most senior managers who actually can directly affect profits

versus the junior hardworking people who are really projectiles of

whatever their senior managers tell them to do so Yeah

it's Not an easy process This whole profit sharing thing

And in practise allocating profits among managers inside of divisions

in companies that actually have profit sharing plans is usually

done in such a way as to have the quote

Lowest rung on the corporate ladder unquote Be directly involved

in allocating those profits so that fewer employees feel like

they're under appreciated when the final prophet allocations get made

And so that you know the janitor who spent all

year cleaning out the urinals doesn't feel you know totally 00:02:42.808 --> [endTime] whizzed upon by the senior management there Yeah