Profit Pool

A Profit Pool is the simplest of all long-term incentive plans. The sponsoring company selects a percentage of annual profits to contribute to a pool for employees. The percentage may reflect an amount above a minimum profit threshold. The pool contribution is then allocated among the participating employees. The company may be discretionary when determining the allocation formula. This process continues annually for several years. Let’s assume it’s a three year period. At the end of year three the company would pay one-third of the accumulated value to each employee and carry the remaining two-thirds forward. The idea is that each employee’s pool would grow as profits grow. Likewise, their annual payment (beginning after the third year) would also increase. When employees leave the company they would customarily forfeit any remaining amount. The pool may or may not be credited with interest.