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What is Profit Sharing Scheme | Advantages and Disadvantages

Profit Sharing Scheme
Profit Sharing Scheme

Meaning of Profit Share Scheme

Under Profit Share Scheme system, the employer agrees to pay a certain pre-determined amount of profit in addition to the usual salary payable to employees. Profit sharing scheme, differs from factory to factory.

In some factories, it is restricted only to executives, while in others it is applicable to all employees. Again in some factories, it is paid for the year during which profit is earned while in others, the payment of profit is deferred.

This is to enable the employees to get a sizeable fund at the time of retirement, disability or separation. The method of distribution profit also differs from factory to factory.

In some factories, the length of service is taken as the basis for determining the percentage of profit. In others, a fixed percentage of the total wages or merit rating of the employees constitutes the basis.

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Advantages of Profit Sharing Scheme

Following are the advantages of this method;

1. It reduces excess labour turnover.

2. It increase production due to increased efforts of workers with a view to earn profit.

3. It eliminates conflicts between the employer and the employees.

4. It leads to better co-operation, team spirit and increased efficiency of workers.

5. It boosts up labour morale which is responsible for industrial peace.

6. Workers get a chance to participate in management. This creates a sense of belonging to the factory. As a result, materials and machineries will be handled with care, minimizing losses and wastages.

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Disadvantages of Profit Sharing Scheme

Following are the drawbacks of this system:

1. Usually the worker has no control over profit and it is not directly related to his effort.

2. Unless merit rating is considered as the basis, both efficient and inefficient workers get profit at the same rate.

3. Payment of profit is at long intervals, usually once a year and the share received by employees is negligible.

4. Employees share only the profit but not the losses.

5. When workers are habituated to the payment of profit on a regular basis, non-payment of profit in any particular year will discourage the employees.

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