Also known as: profit splits · profit-split · profit sharing
Written by attorneys · grounded in primary & secondary sources — see below
A compensation arrangement under which a business allocates a portion of its profits to current or former directors, officers, employees, or agents through plans, trusts, or similar programs. The arrangement defers receipt of the benefit to a later date or future event such as retirement or termination. It encompasses pension, stock-bonus, and deferred compensation structures but excludes ordinary insurance benefits.
Peak Performance establishes a new plan that awards a percentage of annual net profits to its long-serving officers upon retirement. The board approves the plan after confirming it fits within the corporation's enumerated powers. Officers later receive distributions calculated from the company's earnings, which are treated as deferred compensation rather than current wages.
During divorce proceedings, Priya Prasad claims an interest in Pedro Pacheco's accumulated benefits under his employer's profit-sharing arrangement. The court classifies the benefits as deferred employment compensation because they represent profits earned during the marriage but payable only upon future retirement. The valuation includes the present value of the expected future distributions for equitable distribution purposes.
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A profit split plan ties compensation to the business's actual earnings and often defers payment until a future event, whereas salary is a fixed obligation paid regardless of profitability. The deferred character subjects the arrangement to special treatment in marital property valuation and corporate authority rules.
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A corporation possesses express statutory authority to establish profit sharing plans and similar incentive arrangements for its directors, officers, employees, and agents. This power allows the board to adopt such plans without additional shareholder approval beyond ordinary governance requirements.
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