PROFIT SHARING

ESOP’s
PAY PERFORMANCE BY
VISHNU
&
UPENDRA
PROFIT SHARING
PROFIT SHARING

• An incentive based compensation

program to award employees a percentage
of the company's profits.
How does Profit sharing work?
• The company contributes a portion of its pre-tax
profits to a pool that will be distributed among
eligible employees.
• The amount distributed to each employee may
be weighted by the employee's base salary so
that employees with higher base salaries receive
a slightly higher amount of the shared pool of
profits.
• Generally this is done on an annual basis.
ADVANTAGES

• Brings groups of employees to work together toward a

common goal (the success/benefit of the company).
• Helps employees focus on profitability.
• The costs of implementing the plan rise and fall with
the company's revenues.
• Enhances commitment to organizational goals.
DISADVANTAGES
• The pay for each employee moves up or down
together (no individual differences for merit or
performance).
• Focuses only on the goal of profitability (which may
be at the expense of quality).
• For smaller companies, these plans may result in
drastic swings in earnings for employees which the
employees may find difficult to manage their personal
finances.
TIPS
• When does Profit sharing work best?
• When company earnings are relatively stable (or
steadily increasing).
• What is the best way to implement Profit sharing?
Meet with executives to develop a clear
understanding of profit sharing. Develop various
formulas and models to be used in predicting
future gains and the costs associated with
sharing those gains.
ESOP
 ESOP
• Employee Stock Ownership Plan (ESOP):

An ESOP is a defined contribution employee

benefit plan that allows employees to become
owners of stock in the company they work for. It
is an equity based deferred compensation plan.
Several features make ESOPs unique as
compared to other employee benefit
plans.
• First, only an ESOP is required by law to invest
primarily in the securities of the sponsoring
employer.
• Second, an ESOP is unique among qualified
employee benefit plans in its ability to borrow
money.
As a result, "leveraged ESOPs" may be used
as a technique of corporate finance.
How does ESOP work?
• The ESOP operates through a trust, setup by the
company, that accepts tax deductible contributions
from the company to purchase company stock.
• The contributions made by the company are
distributed to individual employee accounts within the
trust.
• The amount of stock each individual receives may
vary according to pre-established formulas based on
salary, service, or position.
• The employees may cash out after vesting in the
program or when they leave the company.
• The employees may cash out after vesting in the
program or when they leave the company. The amount
they may cash out may depend on the vesting
requirements.
• When an ESOP employee who has at least ten years
of participation in the ESOP reaches age 55, he or she
must be given the option of diversifying his/her ESOP
account up to 25% of the value. This option continues
until age sixty, at which time the employee has a one-
time option to diversify up to 50% of his/her account.
This requirement is applicable to ESOP shares
allocated to employee's accounts after December 31,
1986.
ADVANTAGES
• Capital Appreciation. Companies sell some or all of
their equity to employees and by doing so convert
corporate and personal taxes into tax-free capital
appreciation. This allows the owner to sell 100% of
his or her company, get money out tax-free and still
maintain control of the company.

• Incentive Based Retirement. Provides a cost-effective

plan to motivate employees. After all, who works
harder, owners or employees?
• Tax Advantages. Enables tax advantaged purchasing
of stock of a retiring company owner. With this
purpose, a company owner may sell their shares to the
ESOP and incur no taxable gain on the sale. A
company owner can sell all or some of the company
to the employees cost free. Owners who sell 30% or
more of their company to an ESOP are allowed to
"roll-over" the proceeds into other securities and defer
taxation on the gain.
• Company reduces it's tax liability. A company can
reduce its corporate income taxes and increase its cash
flow and net worth by simply issuing treasury stock or
newly issued stock to its ESOP.
DISADVANTAGES
• Dilution. If the ESOP is used to finance the company
s growth, the cash flow benefits must be weighed
against the rate of dilution.
• Fiduciary Liability. The plan committee members who
administer the plan are deemed to be fiduciaries, and
can be held liable if they knowingly participate in
improper transactions.
• Liquidity. If the value of the stock appreciates
substantially, the ESOP and/or the company may not
have sufficient funds to repurchase stock, upon
employees retirement.
What is the best way to implement
ESOP?

• Determine how you want to use the ESOP. Will it be

used as an employee benefit plan? Or, as an incentive
program?
• An ESOP requires different accounting procedures
and a different method of allocating stocks and other
investments among the employees than other types of
plans. For this reason the plan should be designed by
an ESOP specialist in order to avoid IRS difficulties.
What are the alternatives to ESOP?

• Employee stock options.

• Profit Sharing. An ESOP differs from a profit
sharing plan in that an ESOP is required to
invest primarily in employer securities, while a
profit sharing plan is usually prohibited from
investing primarily in employer securities.
ESOP websites?

• http://www.the-esop-emplowner.org/
• http://www.cpateam.com/tax-esop.htm
• http://www.esop.org/info/esop-howto.html
• http://www.nceo.org/
MERIT PAY
MERIT PAY/PAY FOR
PERFORMANCE

• An incentive plan implemented on an institutional

wide basis to give all employees an equal opportunity
for consideration, regardless of funding source. The
merit increase program is implemented when funds
are designated for that purpose by the institution's
administration, dependent upon the availability of
funds and other constraints. .
ADVANTAGES
• Allows the employer to differentiate pay given to high
performers.
• Allows a differentiation between individual and
company performance.
• Allows the employer to satisfactorily reward an
employee for accomplishing a task that might not be
repeated (such as implementation of new systems).
THANK YOU