Profit Sharing formulas

[Guest Benmark]

One of our affiliates, a medium-sized non-regulated utility, determines additional monies that will be contributed into our 401(k) by use of a profit sharing formula. Currently, this determination is made upon achievement of certain corporate goals which are published early in the calendar year for which they will be applicable. Some of these goals are financial but others are non-financial. (This is the same basis they use for determining their incentive awards/bonuses.) Profit sharing is determined and contributed by March of the following year.

Someone within their management chain has suggested that the firm use separate formulas for determining 401(k) profit sharing contributions and their incentive programs. For the former, they are looking for a type of financial metric that they can use to base the contribution on.

Based on the research I have done to-date, I have collected the following:

[*]Most companies base profit-sharing on a hybrid formula, like the affiliate uses now.

[*]If financial measures are used, they are generally EPS or EBIT/DA

[*]Most companies that have profit sharing do not publish an up-front formula like the affiliate does each year--the contribution is discretionary and is determined by management or the Board of Directors.

Just wanted to check with everyone here. Does your company use a profit sharing formula, if so, what is that? Anything else you might have seen from other clients (preferably larger clients) or in your research on this issue? Other comments?

Thanks, as always, for your help!

[MWeddell]

I agree with your summary largely. If you have access to the 51st Annual PSCA Survey, Table 18 provides documentation that most profit sharing contributions are merely discretionary, without a formula written into the plan document.