Profit sharing is popular because it is simple, its measures are understandable, and everybody--from the lowest employee to the company's owner--has a stake in profits. Make a profit and everybody gets to keep her job and the investors in the company are happy. Profit-sharing plans include both immediate cash payout plans and deferral plans. A payout plan pays cash to eligible employees at the end of a stated period of time, typically at the end of the company's fiscal year. A deferral plan can take many forms. The company could make deposits on behalf of employees into their IRA or 401(k) plans. Deferral plans can have tax advantages for employees.
Excerpted from Attracting & Rewarding Outstanding Employees