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I've heard of an interesting "equity" scheme in a company from my friends and I'm wondering what this scheme is called.

You work as the Manager for a supermarket chain, and they will give you 5% of annual profits per year. But you do not have 5% equity of the company, as when you leave, you can't take the 5% equity with you and sell it. It goes to the next Manager. This serves as a way to incentivize CEO performance without diluting the share ownership when the Manager leaves.

What is this kind of scheme called and is it common?

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  • 14
    Getting 5% if the profits has nothing to do with getting 5% equity in the company.
    – RonJohn
    Commented Mar 11 at 10:31
  • 4
    Just as importantly, 5% equity is a LOT. And mathematically unsustainable. After all. 20 store managers would own the whole company!!
    – RonJohn
    Commented Mar 11 at 10:33
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    @RonJohn who said it was store managers? 5% sounds like C-suite
    – Caleth
    Commented Mar 11 at 14:51
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    @RonJohn OP didn't specify profits of what, and it could be reasonably interpreted as "5% of the profit of the store managed".
    – chrylis -cautiouslyoptimistic-
    Commented Mar 12 at 15:10
  • 2
    Store Manager != CEO
    – UpAndAdam
    Commented Mar 13 at 19:33

2 Answers 2

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There is no equity. You don't get dividends. You can't sell it at all. Not on the stock market. Not to other investors. Not back to the company.

This is an example of profit sharing. You are getting 5% of the profits.

You work as the Manager for a supermarket chain, and they will give you 5% of annual profits per year

Careful. Who decides how the profit for your store is calculated? How are certain expenses beyond your control factored in? If the parent company decides what is on sale this week how does that impact your profit? What prices with vendors can you negotiate? What about capital expenditures?

It may mean that you see a significant amount of money or nothing at all. The grocery business claims that profits are 1 to 2% of the grocery bill for the store. That would mean the manager would get 5 to 10 cents of a $100 in groceries.

If you can't control all the costs and expenses, then percent of profits is risky. That is why sales people want % of sales. It is easier to know what you are going to get.

People in Hollywood always want % of gross box office. They never want % of profits. There may never be profits.

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    People in Hollywood used to want a % of profit and then suddenly every movie made exactly $0 profit because every cent that would have been profit was suddenly taken up by a "license fee" paid to the company that made the movie. This technique is literally called "Hollywood accounting". Sales numbers are not so easily cheated.
    – Stack Exchange Supports Israel
    Commented Mar 12 at 1:33
  • @user253751 or the costume department suddenly demanded more (it just so happened that it's a subsidiary of the production company) and so on
    – Hobbamok
    Commented Mar 12 at 9:06
  • no guarantee for dividends from equity. dividends are completely irrelevant to the well made point you make. There is no equity. That said most of your info while incredibly correct and accurate is really quite tangential.
    – UpAndAdam
    Commented Mar 13 at 19:34
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It can be just performance-based bonus, or profit sharing.

If the performance is based on actual shares (without issuing them), you may want to look into Phantom Stock.

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