A Computerized Simulation Model for Analyzing Profit Sharing Plans

Abstract

In 1940, less than 20 percent of all employees in commerce and industry were covered under private retirement plans [1, p. 2]. Today, nearly 50 percent of a much larger workforce is covered [5, p. 20]. Still, more than half have no retirement plan and many plans provide only minimal retirement income. Large corporations have experienced rapid growth of retirement plans due to pressures from labor unions, competition for skilled workers, and other factors. Smaller firms have faced less organized pressure for retirement plans, rather having greater concern with mere survival. These and other factors have reduced their attention to employee benefits in general and retirement plans specifically. There are many alleged incentives for small businesses1 to develop retirement plans increased ability to attract and retain employees, increased employee morale, even increased productivity. Nevertheless, it is postulated that concern for the owners' own wealth and/or income at retirement age influences the decision to establish a retirement plan more than any other single factor. Unlike large widely-owned corporations, closely held corporations often have one or more major stockholders who are active managers of the business. Thus, while the executives of large corporations are highly paid employees who might also own some stock, managers of small corporations tend to be major owners. The point of view can be significantly different in practice. Specifically, owner-managers are generally more concerned with their personal after-tax income derived from both salary and dividends (or stock appreciation), whereas the corporate manager is generally more concerned with salary and other benefits. All expenses come out of the owner-manager's pocket, one way or the other, whereas expenses for the manager are absorbed by a large number of stockholders.