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.