Performance-related pay in the context of Profit sharing

Profit sharing refers to various incentive plans introduced by businesses which provide direct or indirect payments to employees, often depending on the company's profitability, employees' regular salaries, and bonuses. In publicly traded companies, these plans typically amount to allocation of shares to employees.

The profit sharing plans are based on predetermined economic sharing rules that define the split of gains between the company as a principal and the employee as an agent. For example, suppose the profits are ${\displaystyle x}$, which might be a random variable. Before knowing the profits, the principal and agent might agree on a sharing rule ${\displaystyle s(x)}$. Here, the agent will receive ${\displaystyle s(x)}$ and the principal will receive the residual gain ${\displaystyle x-s(x)}$.