Profit Sharing

Profit sharing is a performance incentive plan that distributes a fixed percentage of an organization's pretax profits to qualified employees. According to a 2001 survey by Medical Economics, 30% of physicians in the United States participate in a profit-sharing plan. The goal of profit sharing is to focus workers on a company's profitability and to link their performance to the company's goals. The amount an employee receives is based on salary (for example, 6% of annual pay), position in the company (such as partner or staff member), or on a combination of these and other variables. Payouts can take the form of cash given directly to employees or of deferred compensation via a retirement account. In general, companies use standard accounting metrics (such as net income, return on equity, earnings per share) to measure profitability. However, other longer-term strategic metrics are gaining in popularity, most notably the “balanced scorecard” approach, which tracks data from financial, customer, growth, and internal process goals to assess success of an organization.

Profit-sharing plans work best when a company is stable and profitable, when employees perceive their efforts have an impact on organizational goals, and when incentives based on individual merit are also included in the overall compensation package. In addition, payouts should not become an expectation of employees; expectation not only reduces the motivating force of profit sharing but also may cause significant backlash if a company reduces or stops sharing profits because of economic hardships. Implemented thoughtfully, profit-sharing plans can be a powerful tool for retaining not only doctors but also nurses, billing staff, and other vital employees.

Profit-sharing plans must comply with complex federal tax codes and labor laws. An accountant or other individual with expertise in this area should review all components of any profit-sharing plan.