profit-related pay

profit-related pay (PRP)
1. The situation in which the pay of employees is related to the profit made by the employer. The purpose is to increase motivation, commitment, and effort by the workforce by ensuring that all staff have a positive stake in the commercial success of the company. For such a scheme to be a success it must be believed in, valued, and understood by all concerned. Staff must clearly understand that a bonus payment will be forthcoming if the organization has a good year but will not be if the organization does not make profits. Above all, profit-related pay should never be used as a means of cutting wage and salary bills. Its general effect is to put up wage and salary bills and this legitimately raises the expectations of the individuals concerned.

Profit-related rewards are usually offered in one of two ways. The simplest of these is to allocate an amount from the surplus generated by the organization and to share this out among employees. For maximum equality, this will be as a percentage increase in all employees' salaries. The other approach is to offer shares in the organization; the employees will thus become investors in their own future. In the UK, the Bell-Hanson Report (1989), researching 113 publicly quoted companies, found that profit-sharing companies out-performed others by an average of 27% on returns on capital, earnings per share, and profit and sales growth. See also gain sharing; profit-sharing scheme.

2. A former UK scheme enabling employees to be paid part of their salary tax-free; it was phased out in 2000–01. Payments to employees under a registered scheme could be tax-free up to the maximum for the year.