Employee profit sharing plan (EPSP)
Employee profit sharing plan (EPSP) or a “profit share plan” is when a company allocates a share of profits to its employees. An EPSP is generally based upon performance, such as annual profitability. ESPS are thought to improve employee efficiency by providing them with a sense of ownership in the company. Most ESPS have limits on when and how employees can withdraw their interests.
A Little More on Profit-Sharing Plans
An employee retirement plan that is financed by the employer can be termed as an employee profit sharing plan (EPSP). Defined contribution plans are not EPSPs.
Companies generally adjust profit sharing plans according to the needs and profit earnings of each financial year. In some years, when firms incur losses, it may not contribute to employee profit sharing plan.
The Comp-to-Comp Method of Profit-Sharing is the most common method of determining an employee’s entitlement to a share of profits. The company first derives the total compensations for all employees. It determines the amount to which each employee is entitled by dividing each employee’s annual compensation by the total compensation of employees.
Example of Employee Profit Sharing Calculation
Under the comp-to-comp method, if employee A earns $100,000 and employee B earns $200,000 per year. The company decides to give employees 20% in the company’s annual profits. The company earnings are $ $500,000. The company would calculate each employee share as following;
- Employee A = ($500,000 * 0.20) * ($100,000/$300,000) = $33,333
- Employee B = ($500,000 * 0.20) * ($200,000/$300,000) = $66,667