Profit sharing can be used to motivate workers. Image credit navyfinancial.com/aboutus/

Profit sharing can be used to motivate workers. Image credit navyfinancial.com/aboutus/

ZIMSEC O Level Business Studies Notes: Profit Sharing and Share Options

  • A profit sharing scheme is a plan that gives employees a share in the profits of a company
  • Under this type of plan, an employee receives a percentage of a company’s profits based on its quarterly or annual earnings (profits)
  • way for a business to give its employees a sense of ownership in the company
  • These percentages are usually at the discretion of the employer
  • Share Options- shsh a benefit in the form of an option/right given by a company to an employee to buy a share in the company at a discount or at a stated fixed price
  • Both profit sharing and share options give employees the possibility to earn a percentage share of the business’s profit

Advantages

  • Gives employees a sense of ownership and belonging as they can now identify with the business/organisation
  • It ties the fate of the business and employees together as it bridges the gap between employer and employee
  • Makes employees loyal to the business and increases the employee’s commitment to the organisation
  • Can lead to improved productivity
  • Can result in tax benefits to the business and employees alike e.g. the tax rate for pay (PAYE) is higher than the tax rate on business profits at higher amounts
  • Increases the wealth and improves on the well being of employees
  • Motivates employees to work towards the organisation’s goals/objectives
  • No payment is made when the business makes a loss

Disadvantages

  • Increases the cost to the business
  • There are restrictions which limits how the employee can use the scheme/plan
  • Can lead to wild fluctuations in the earnings of employees
  • Makes financial planning difficult
  • The link between individual performance and earnings can be very weak as it is affected by the performance of others
  • Dilutes ownership and control of the business
  • Can lead to deliberate suppression of profits

To access more topics go to the O Level Business Notes page.

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