Profit Sharing Incentive Plan

Question (orig. at WorldatWork):  Do you have a profit sharing incentive plan?  If so, what % of eligible wages does an award equate to?  What % of your company’s profit does the pool represent?

Any info would be appreciated.  Thanks.

Answer by Dan Walter

"Profit Sharing" is a term that is often misunderstood.

On one hand you may mean a formal, tax qualified, profit-sharing program that is subject to ERISA requirements etc.

On the other hand you may mean an STI or LTI plan that use profit amount, profit growth, profit margin or a similar metric, or combination of metrics to deliver cash or equity compensation.

The first type of profit-sharing is subject to some very well-defined rules, mainly via the IRS.  These rules tend to drive some similarity in the plans across companies.  But, these rules often are viewed as too difficult to deal with and this results in less companies using these plans than you might expect.

The second type of plan does not provide the tax advantage, but it is far more flexible in design, features and eligibility.  These plans are fairly common and there is not a lot of commonality between companies (nor should there be).

I am happy to chat with you about either type of plan or, if you provide a bit more detail here, I may be able to expound on this answer.

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