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Profit-sharing refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on the company's profitability in addition to employees' regular salaries and bonuses. In publicly traded firms, these programs typically consist of stock distribution to workers.
Profit-sharing plans are based on predetermined economic sharing principles that specify how profits are shared between the corporation as the principal and the employee as the agent. In the United States, a profit-sharing plan can be set up where all or some of the employee's profit-sharing amount can be contributed to a retirement plan. These are often used in conjunction with 401(k) plans. Gainsharing is a system that gives workers a lump-sum bonus in exchange for cost savings. Profit-sharing is a profitability metric, while efficiency is a productivity metric. There are three major types of gainsharing that include Scanlon plan, Rucker plan, and, Improshare. The Scanlon system, which dates back to the 1930s, is focused on the development of cost-sharing ideas by committees. Designed to reduce labor costs without reducing a company's operation level. The incentives are derived as a function of the ratio between labor costs and sales value of production (SVOP). While the committee structure is simpler in the Rucker plan, the cost-saving calculations are more difficult. Improshare is a more recent plan that stands for "Improved efficiency by sharing."
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