Who isn't interested in profits? We're interested in profits...do you have any profits for us to be interested in?
You're the head salesperson for a company that makes koala-skin coats. The company, Dundee & Son Down Under Coats, is organized as a partnership. You are neither Dundee nor his son, but you are the best sales person they've ever had.
They want to keep you. To do so, they will give you something special for your years of service and the contribution you've made. They offer you a profits interest. It's a share of the company's profit, even though you never put in any capital. You don't become a partner in the business (Dundee says that's only for him and his son). But you will get a share of any profits the partnership generates.
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Finance: What is a Profit-Sharing Plan?3 Views
Finance allah shmoop what is a profit sharing plan Hey
all you employees you gets keep thirty percent of this
company's profits okay that's a profit sharing plan and in
general they're really good to have in place Why Well
because when employees are financially incentivized to act like owners
or co owners companies just generally do a whole lot
better Welcome to the advent of the profit sharing plan
Directly sharing in profits is one way employees get rewarded
when their company does well and punished when it doesn't
But some companies pay their employees in stock instead instead
of cash because in a given situation where a company
trades and on twenty times earnings taking say fifteen percent
of those earnings out of the prophet bull and giving
them to employees well it essentially cost shareholders twenty times
that earnings number in the form of simply a lower
priced stock like if they were going to earn one
hundred million dollars in Instead they only earned eighty five
while twenty times the hundred million mornings is two billion
and twenty times the eighty five million is one point
Seven there's three hundred million dollars of market cap gone
Yeah that's not such a good idea so paying employees
with stock has become a whole lot more of a
thing these days Then not the challenge and allocating profits
among employees of course lives inside of the concept of
attribution meaning who was responsible for actually producing profits in
this area or that who was naughty you know and
who was nice And what if a company has multiple
divisions where it's senior manager did incredible work during a
time where the jet engine division usually loses money such
that the manager heroically helped the company's division toe on
ly lose three percent that year Well compare this manager
to the manager of the insurance division which in a
normalized competitive world should have made twenty percent profit margins
this year but only made eighteen Well who did better
The insurance guy or the jet engine gal Well who
gets more profit And how is the profit allocated among
the most senior managers who actually can directly affect profits
versus the junior hardworking people who are really projectiles of
whatever their senior managers tell them to do so Yeah
it's Not an easy process This whole profit sharing thing
And in practise allocating profits among managers inside of divisions
in companies that actually have profit sharing plans is usually
done in such a way as to have the quote
Lowest rung on the corporate ladder unquote Be directly involved
in allocating those profits so that fewer employees feel like
they're under appreciated when the final prophet allocations get made
And so that you know the janitor who spent all
year cleaning out the urinals doesn't feel you know totally 00:02:42.808 --> [endTime] whizzed upon by the senior management there Yeah
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A profit center is whatever aspect of a company's business makes them the most dough, and should make up for the...not-so-profit-y centers.