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April 1991, Vol. 114, No. 4

Profit sharing today: plans and provisions

Edward M. Coates, III

T outed by some observers as tools for increasing the productivity of workers or for increasing the flexibility of labor markets, profit-sharing plans have attracted much attention in recent years. Other observers have questioned the benefits of these plans, arguing that they expose employees to risk by shifting a portion of the compensation package from relatively stable wages and salaries to payments contingent upon company profits. (See exhibit 1 for a summary of these contrasting views.)

The debate is complicated by the fact that today's plans vary considerably in how they are designed. A plan that distributes profits immediately in cash, for example, may forge a direct link between work performance and compensation. On the other hand, a plan that places profits in relatively inaccessible accounts for employees may function primarily as a long-term retirement and savings vehicle.

Data for the Bureau of Labor Statistics' (BLS) 1989 Employee Benefits Survey show that profit-sharing plans differ in many key features. While 16 percent of all full-time employees in medium and large private establishments-or just over 5 million workers-participated in these plans, it was also true that:

• Most participants were in deferred plans, wherein profits are credited to employees for distribution at retirement or some other future date.
• One percent were in cash plans, in which profits are paid directly to employees as soon as profits are determined.
• Two percent were in plans that combined cash and deferred features.¹ (See table 1.)

This excerpt is from an article published in the April 1991 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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Footnotes
¹ Some plans offering both cash and deferred benefits are Internal Revenue Code section 401 (k) cash or deferred arrangements. Such arrangements allow the employees to choose to take a profit-sharing contribution in currently taxable cash or to place the contribution in a tax-deferred account.

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Employee Benefits Survey

 

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