What Is Profit Sharing?

Profit-sharing system, also known as profit sharing or labor sharing system, means that at the end of each year, an enterprise first extracts a portion of the company's total profits in proportion to form a "dividend fund", then determines the amount of distribution according to the performance of employees, and finally pays labor in the form of dividends income.

Profit sharing

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Profit sharing system

English name

Profit Sharing System

The traditional profit-sharing system is that the company pays dividends to employees at the end of the year. In addition to the dividends, the modern share-sharing system also includes the right of employees to purchase shares in the company and own the company.

The profit sharing system is an internal redistribution of after-tax profits of enterprises, and it is a supplementary form of wages and bonuses. The theoretical and practical basis for its establishment is:

1. In modern enterprises, enterprises are independent producers of goods, and the income of employees depends not only on individual labor results, but also on the overall economic benefits of the enterprise, that is, the results of collective labor.

2. The profit made by an enterprise in a year is the return of various forms of capital, including

1. The labor dividend is the distribution of the company's year-end net profit and belongs to the company.

1. Proportion of total dividends

The total labor dividend and its proportion are generally made by the highest decision-making level of the enterprise, and are divided into "first-period proportion" and "renewal proportion".

1) "First-period ratio" refers to the dividend ratio determined by the year in which the company first established a dividend system, and is expressed by the formula:

S = H * G / L

In the formula: S is the proportion of labor dividends in the first period; H is the total labor dividends as a percentage of total wages; G is the total annual wages; L is the total annual distributable profits.

2) "Renewal ratio" means that in the years after the establishment of the profit sharing system, the labor dividend ratio can be determined in three ways: constant, progressive or floating. Constant means that the proportion of labor dividends to total profits will not change in the following years after the first period is determined. Progressive means that the proportion of labor dividends will increase year by year by a certain percentage. Floating means that the proportion of labor dividends is not fixed and changes with the profits of the enterprise.

Dividend amount is based on a certain percentage of corporate profits. A more commonly used form is a floating dividend ratio. The calculation method is that after the profit obtained by the enterprise reaches a predetermined "return on investment", the remaining part is the dividend.

2.Employee Dividend Ratio

After the total labor dividend is determined, the distribution method among employees is:

1) Distribution based on a fixed percentage of wages. This method is based on wages and uses dividends as a supplement to labor compensation.

2) Distribution based on progressive percentage of wages. In this method, the higher the salary level, the higher the percentage of labor dividends. The progressive distribution method mainly plays a role in enlarging the salary level and stimulating employees to contribute more.

3) Distribution according to "dividend coefficient". According to the nature and characteristics of the job, the Labor Dividend Coefficients for different positions are formulated. The total annual dividend is divided by the total coefficient to find the standard dividend. The dividend distribution multiplied by the work undertaken by the individual is sparse. The formula is:

A = [Y / (X1-n)] * Xn

In the formula: Y is the total annual dividend; X1-n is the total coefficient; Xn is the personal dividend distribution coefficient.

This method reflects the double difference between the contribution of the job and the individual employee's profits through dividends. Compared with other wage ratio methods, it is more reasonable.