Understanding Profit Sharing
Profit sharing refers to incentive plans that provide direct or indirect payments to employees based on a company’s profits. Such plans constitute part of the employee’s variable pay. Profit sharing plans can take many forms, extending from directly appropriating a portion of the profits to employees, allocation of company shares to the employee, or any other specific profit sharing plan.
First, download a free and generic template for an employee profit sharing agreement from the Bright Hub Media Gallery. This generic template lists out terms and conditions to offer the employee a fixed share of the company’s net profits.
How to Use the Template
The downloaded template for employee profit sharing agreements is generic. Modify it as required and fill in the required information.
Use a separate agreement for each employee. Specify the company name, and address with zip code to represent the “employer” and specify the employee’s name, designation, residential address with state and zip code to represent the “employee.”
The contents of the agreement are self explanatory.
The most crucial section of the template is paragraph listed as number one. The sample template allocates a percentage of the net profits of the company directly to the employee, with the percentage and a possible upper cap being the two input fields. Change this section to include any other type of incentive payment. Possible options include stock options instead of a percentage payment, a structured slab specifying a certain amount for a certain range of profits, or anything else specific to your agreement.
The second paragraph defines net profits, which constitutes the basis of making the incentive salary in the sample template. Change the definition as required, or if the basis is turnover or some other consideration instead of net profit, make changes accordingly.
The third paragraph clarifies payout dates. The template follows an annual payment option. Another common approach is to make monthly pay-outs.
Paragraphs four through eight lists out conditions that make the employee eligible for the incentive payment, and safeguards the employers’ interest. Such inclusions depend on the incentive scheme in force. Make the necessary alterations referring to the in-house scheme for incentive payments. However, make sure to include the gist of paragraph seven that stipulates the incentive payments end when the employee ceases to remain on the payroll of the company for whatever reason.
Paragraphs nine and ten make the agreement legally binding. State laws vary so make sure the agreement complies with the relevant state laws.
Also, an authorized representative of the company and the employee must sign the agreement in the presence of any two witnesses.
Employee profit sharing agreements lend clarity to profit sharing schemes and help resolve misunderstandings and improve employee motivation. Employers need to pay due attention when formulating the same, as it creates a legal obligation, and employees may exploit loopholes in the agreement to demand more or file lawsuits. Employees also need to ensure the agreement is consistent with what is promised, to prevent complications later on.
“Sample Employment Contract. Retrieved from ”https://www.cnmdallas.org/downloads/sample_employmentcontracts.pdf on May 04, 2011.
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