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Finance allah shmoop what is a profit sharing plan Hey

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all you employees you gets keep thirty percent of this

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

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

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because when employees are financially incentivized to act like owners

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or co owners companies just generally do a whole lot

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better Welcome to the advent of the profit sharing plan

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Directly sharing in profits is one way employees get rewarded

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

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But some companies pay their employees in stock instead instead

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of cash because in a given situation where a company

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trades and on twenty times earnings taking say fifteen percent

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of those earnings out of the prophet bull and giving

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them to employees well it essentially cost shareholders twenty times

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that earnings number in the form of simply a lower

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priced stock like if they were going to earn one

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hundred million dollars in Instead they only earned eighty five

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while twenty times the hundred million mornings is two billion

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and twenty times the eighty five million is one point

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

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

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with stock has become a whole lot more of a

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thing these days Then not the challenge and allocating profits

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among employees of course lives inside of the concept of

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attribution meaning who was responsible for actually producing profits in

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this area or that who was naughty you know and

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who was nice And what if a company has multiple

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

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time where the jet engine division usually loses money such

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

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ly lose three percent that year Well compare this manager

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to the manager of the insurance division which in a

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normalized competitive world should have made twenty percent profit margins

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this year but only made eighteen Well who did better

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The insurance guy or the jet engine gal Well who

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gets more profit And how is the profit allocated among

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the most senior managers who actually can directly affect profits

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versus the junior hardworking people who are really projectiles of

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whatever their senior managers tell them to do so Yeah

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

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And in practise allocating profits among managers inside of divisions

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in companies that actually have profit sharing plans is usually

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done in such a way as to have the quote

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Lowest rung on the corporate ladder unquote Be directly involved

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in allocating those profits so that fewer employees feel like

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

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And so that you know the janitor who spent all

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

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