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Finance: What is a Profit-Sharing Plan? 3 Views


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A profit-sharing plan is when you share all your profits with Shmoop. No, really. Don't hit play. Just trust us and send us money.

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Transcript

00:00

Finance allah shmoop what is a profit sharing plan Hey

00:07

all you employees you gets keep thirty percent of this

00:11

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

00:14

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

00:17

because when employees are financially incentivized to act like owners

00:21

or co owners companies just generally do a whole lot

00:24

better Welcome to the advent of the profit sharing plan

00:28

Directly sharing in profits is one way employees get rewarded

00:31

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

00:34

But some companies pay their employees in stock instead instead

00:37

of cash because in a given situation where a company

00:40

trades and on twenty times earnings taking say fifteen percent

00:44

of those earnings out of the prophet bull and giving

00:46

them to employees well it essentially cost shareholders twenty times

00:50

that earnings number in the form of simply a lower

00:53

priced stock like if they were going to earn one

00:55

hundred million dollars in Instead they only earned eighty five

00:58

while twenty times the hundred million mornings is two billion

01:01

and twenty times the eighty five million is one point

01:03

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

01:07

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

01:09

with stock has become a whole lot more of a

01:11

thing these days Then not the challenge and allocating profits

01:14

among employees of course lives inside of the concept of

01:17

attribution meaning who was responsible for actually producing profits in

01:23

this area or that who was naughty you know and

01:26

who was nice And what if a company has multiple

01:28

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

01:32

time where the jet engine division usually loses money such

01:36

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

01:40

ly lose three percent that year Well compare this manager

01:43

to the manager of the insurance division which in a

01:46

normalized competitive world should have made twenty percent profit margins

01:50

this year but only made eighteen Well who did better

01:53

The insurance guy or the jet engine gal Well who

01:56

gets more profit And how is the profit allocated among

01:59

the most senior managers who actually can directly affect profits

02:03

versus the junior hardworking people who are really projectiles of

02:08

whatever their senior managers tell them to do so Yeah

02:11

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

02:14

And in practise allocating profits among managers inside of divisions

02:19

in companies that actually have profit sharing plans is usually

02:22

done in such a way as to have the quote

02:24

Lowest rung on the corporate ladder unquote Be directly involved

02:28

in allocating those profits so that fewer employees feel like

02:32

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

02:36

And so that you know the janitor who spent all

02:39

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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