Profit Sharing

What profit sharing is

Profit sharing (المشاركة في الأرباح) is an arrangement under which an organisation distributes a share of its profits among the people who work for it, by an announced rule that ties what each of them receives to the result of the organisation, and not to their own performance alone.

How profit sharing differs from an individual bonus

An individual bonus measures what the person did. Profit sharing measures what the organisation reached over the period, as a whole.

Because profit sharing is tied to the result of the organisation, its effect on behaviour is indirect. A single employee does not see a clear link between the work they do each day and the profit the organisation records at the end of the year, and the link can be harder to see in a large organisation.

The real value of profit sharing lies in what it says about the relationship between the organisation and the people who work for it: that the result is shared between them. Its value does not lie in directing an employee towards any particular task.

Profit sharing distribution rules

A profit sharing arrangement needs a rule for dividing the distributed share among employees. Three rules can be used:

• A uniform percentage of the wage. It is the simplest rule and the clearest. Each employee receives the same percentage of their wage, so the distribution follows the existing pay levels automatically.
• An equal amount for everyone. It comes across as a message of equality, because every employee receives the same sum. Its relative effect is larger at the lower wages, since the same amount forms a bigger part of a smaller wage.
• A coefficient by length of service or by level. It can be seen as the more precise rule, since it distinguishes between employees by their service or their level, but it becomes more contentious the more complex the coefficient is.

Whichever rule is chosen, the condition is the same: the rule has to be announced before the period, not after it. A profit sharing rule announced once the figure is known comes across to employees as a decision taken on the result rather than as a system applied to it.

The overlooked condition of profit sharing

Profit sharing presumes that the employee believes the figure that is announced: the profit for the period, from which every share in the distribution is calculated.

If the organisation does not let its employees see its results to any degree, the distribution becomes an amount that arrives from no source they can understand. The arrangement then loses its effect on trust, and trust is its first purpose.

For that reason profit sharing needs an accompanying degree of transparency about the result of the organisation, even if what is disclosed is only a summary of it.

How profit sharing payments are classified under the Saudi Labor Law

How a payment made under a profit sharing arrangement is classified, whether it counts as an element of the wage or not, has an effect on other entitlements that are calculated on the wage.

The Saudi Labor Law (نظام العمل) defines the actual wage (الأجر الفعلي) in Article 2 as the basic wage (الأجر الأساسي) plus all other due increases established for the worker in return for effort expended in the work, for risks incurred in performing it, or for the work under the employment contract or the work regulation (لائحة تنظيم العمل). Article 2 of the Labor Law then lists items among those increases, and two of them bear on profit sharing:

• The first item. It names commission, or a percentage of sales, or a percentage of profits, paid in return for what the worker markets, produces or collects, or for an increase or improvement in production that the worker achieves.
• The fourth item. It names the grant or bonus (المنحة أو المكافأة), which counts where it is provided for in the employment contract or in the work regulation, or where it has customarily been granted until workers have come to regard it as part of the wage and not as a gift.

Article 2 of the Labor Law also provides that the wage, where it is not qualified, means the actual wage. So an entitlement that the Labor Law calculates on the wage, without qualifying it, is calculated on the actual wage.

The place of a particular arrangement in the wage is settled in the Labor Law and in the work regulation of the organisation. The time to settle it in those two instruments is before the arrangement is approved, not after the first distribution.

The provision relied on is Article 2 of the Saudi Labor Law as published by the Ministry of Human Resources and Social Development: the definitions of the basic wage and the actual wage, the first and fourth items among the items of the actual wage, and the reading of an unqualified wage as the actual wage. Royal Decree M/44 of 1446H, in force since 19 February 2025, added other definitions to Article 2 of the Labor Law. That decree did not amend the definitions of the basic wage and the actual wage in Article 2 of the Labor Law.

Profit sharing is not a substitute for an adequate wage

Profit sharing does not serve as a substitute for an adequate wage. The fixed wage covers the employee’s living, and the share of profit is built on top of it, not in its place.

An arrangement that lowers the fixed wage in exchange for a possible share of profit moves the organisation’s risk onto people who are not in a position to bear it.

Profit sharing in a year without profit

A year without profit means a share of zero.

The point is easy to understand in theory but heavy in practice if employees have come to count on the share.

What eases it is stating plainly from the first day that a year without profit is a year in which the arrangement pays nothing.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.