60 second guide: Profit-sharing schemes

Typically, however, schemes are designed: - to deliver a cash bonus to participating employees after a specified 'performance period' - so that the amount of the bonus payable will depend upon the financial performance of the employer, or perhaps the employee's own performance in their role during the performance period - so that the ability to receive a payment is linked to remaining as an employee until the date on which payments are to be made under the scheme. These features are commonplace because such an arrangement should help to focus employees on the financial performance of their employer and foster long-term employee loyalty and retention. Different companies will have different ideas about the length of the performance period – it is typical for this to range from one to three years. Clear targets Importantly, the performance target (whether based on personal or company performance) used to determine the amount paid to participants should be clearly defined and capable of objective verification. Ensuring that this is the case will prevent arguments arising between employees and their employer. Terms and conditions Usually, it won't be necessary to amend each employee's contract of employment in order for them to participate in a new profit-sharing scheme, provided that the scheme is designed properly and contains appropriate provisions – such as recovering any employee taxation arising on payments received under the scheme. Schemes will often also include special clauses to protect the employer from claims made by participants in respect of loss or damage suffered as a result of cessation of employment before the date on which cash payments might otherwise be due.