Ready to use legal template

Drafted by experienced lawyers

Compliant with Indonesian law

Ready to use legal template

Drafted by lawyers

Compliant with Indonesian law

HomeBusiness contractsProfit Sharing Agreement

Learn more about Profit Sharing Agreement in Indonesia

A profit-sharing agreement is a formal arrangement between a company and its employees or shareholders that outlines how the profits of the business will be distributed among the parties involved. In this agreement, the company agrees to share a portion of its profits with the designated individuals or groups based on predetermined terms and conditions. The profit-sharing agreement defines the percentage or formula used to calculate the distribution of profits and establishes the frequency at which the payouts will occur. Themis Partner offers you an easy to edit Profit Sharing Agreement drafted by lawyers to comply with the law in Indonesia. Regarding management of shareholder in Indonesia, Themis partners also provides templates for Shareholder Agreements

Table of contents


What is a Profit Sharing Agreement in Indonesia?

A profit sharing agreement is a contractual arrangement between a company and its employees that establishes the terms and conditions for distributing a portion of the company’s profits among eligible employees. It serves as a mechanism to reward and incentivise employees based on the company’s financial performance. In the agreement, the specific formula or methodology for calculating and allocating profits is outlined, taking into consideration factors such as individual or team performance, tenure, or a predetermined percentage. This agreement is designed to align the interests of employees with those of the company, fostering a sense of ownership, motivation, and engagement among the workforce. By linking financial rewards to the company’s success, it can promote a collaborative and results-oriented culture within the organization.

Why use a Profit Sharing Agreement?

The agreement is utilised for several reasons, primarily to foster a sense of shared success and align the interests of employees with the overall performance of the company. By implementing an agreement, organizations can create a powerful incentive structure that motivates employees to contribute their best efforts towards achieving the company’s goals. It can promote teamwork, collaboration, and a collective sense of responsibility among employees, as they recognise that their individual contributions directly impact the company’s profitability and, subsequently, their own financial rewards. Furthermore, it can help attract and retain talented individuals by offering them a stake in the company’s success. This can enhance employee loyalty and reduce turnover rates, as employees feel valued and financially invested in the organization’s growth. Overall, the agreement can be an effective tool to drive employee engagement, enhance productivity, and foster a positive and performance-driven work environment.

What should a Profit Sharing Agreement include under Indonesian law?

1. Eligibility criteria

Clearly define which employees are eligible to participate in the profit sharing program, such as full-time or part-time employees, specific job roles, or length of service requirements.

2. Profit calculation methodology

Specify the formula or method used to calculate the company’s profits, which will serve as the basis for determining the distribution of funds.

3. Allocation criteria

Outline how the profits will be allocated among eligible employees, whether it’s based on individual performance, team performance, a fixed percentage, or another predetermined criterion. You may use an Employee Performance Evaluation for this.

4. Timing and frequency

Indicate when and how often the profit sharing payments will be made, such as annually, quarterly, or at the end of each financial period.

5. Terms and conditions

Include any conditions or requirements for employees to be eligible for the profit sharing program, such as maintaining employment throughout the year or meeting certain performance targets.

6. Discretionary provisions

Specify whether the company has the discretion to adjust or withhold profit sharing payments based on exceptional circumstances or unforeseen events.

7. Communication and transparency

Emphasise the importance of transparency in communicating profit sharing results to employees, ensuring they understand the calculation process and how their individual contributions impact the overall distribution.

8. Termination or amendment clause

Address the circumstances under which the profit sharing agreement can be modified or terminated, and the process for making any changes.

9. Legal and regulatory compliance

Ensure that the agreement complies with applicable laws, regulations, and tax requirements.

10. Confidentiality

Include provisions to maintain the confidentiality of financial information and protect sensitive data related to profit sharing calculations.

ℹ️ It’s important to note that a legal professional should review and customise the profit sharing agreement based on the specific needs and requirements of the organisation.

How to distribute profits with a Profit sharing agreement?

When determining how to distribute profits, several factors come into play, including the Shareholders’ Agreement and Share Purchase Agreement. Here are some common methods of distributing profits:

1. Dividends: The shareholders’ agreement typically governs the distribution of profits to shareholders in the form of dividends. Dividends can be paid out in proportion to each shareholder’s ownership stake, as specified in the agreement.

2. Capital appreciation: If the share purchase agreement includes provisions for capital appreciation, profits can be distributed through the sale of shares at a higher price than the initial purchase price. Shareholders may realise profits by selling their shares to other parties or through a buyback arrangement facilitated by the company.

3. Bonus shares: Instead of distributing profits as cash dividends, the company may issue additional shares to existing shareholders in proportion to their current holdings. This method allows shareholders to increase their ownership percentage in the company without requiring immediate cash payouts.

4. Stock options or equity-based incentives: Under the shareholders’ agreement or separate equity incentive plans, the company may distribute profits by granting stock options or other equity-based incentives to employees or key stakeholders. This aligns their interests with the company’s performance and may allow them to benefit from future appreciation in share value.

ℹ️ It is important to note that the specific method of profit distribution will depend on the terms and provisions outlined in the shareholders’ agreement and share purchase agreement. These agreements play a crucial role in defining the rights and obligations of shareholders, including the distribution of profits and the mechanisms for realising gains from share ownership.

What if I don’t have a Profit Sharing Agreement?

If you don’t have an agreement in place, the distribution of profits can become uncertain and potentially contentious. Without a clear framework to guide profit allocation, disputes may arise among partners or stakeholders regarding how profits should be divided. In the absence of a profit sharing agreement, the default provisions of the Partnership Agreement, if applicable, may come into play. However, the partnership agreement may not specifically address profit sharing or may have limited provisions on the matter. This ambiguity can lead to disagreements, confusion, and even damage the relationships between partners. Therefore, it is crucial to establish a comprehensive agreement that outlines the criteria, methods, and conditions for profit distribution, ensuring transparency, fairness, and the smooth functioning of the partnership.

What considerations should be taken into account?

Several considerations should be taken into account when establishing an agreement. 

➤ First and foremost, it is important to clearly define the goals and objectives of the profit sharing program. Consider whether the primary focus is to reward individual performance, encourage team collaboration, or align employee interests with the overall success of the company.
➤ Additionally, factors such as the financial stability and profitability of the organization should be considered to ensure the feasibility of profit sharing. Determining the appropriate distribution formula or methodology is crucial, taking into account variables such as tenure, job role, or individual performance.
➤ It is also important to establish eligibility criteria and set clear expectations for employees regarding their participation in the profit sharing program. Legal and regulatory compliance should be carefully examined to ensure adherence to relevant laws, tax regulations, and any contractual obligations.
➤ Finally, fostering transparency and effective communication with employees is vital, as it promotes understanding, trust, and engagement in the profit sharing process.

By considering these factors, organizations can create a well-designed profit sharing agreement that supports their objectives while being fair and motivating for all parties involved.

Can the Profit sharing agreement  be modified or terminated in Indonesia?

A profit sharing agreement can be modified or terminated in Indonesia, but the specific conditions and procedures for doing so should be clearly outlined in the agreement itself. Typically, modifications would require the mutual consent of all parties involved, and any changes should be documented in a written amendment to the agreement.

Termination of a profit sharing agreement may occur under certain conditions, such as a breach of the agreement by one party, the expiration of the agreement’s term, or mutual agreement between the parties. The agreement should specify the procedures for termination, including any notice requirements and the handling of post-termination matters.

It’s important to note that the termination of a profit sharing agreement must be followed by a complete settlement, also known as a “clean break”, which may be signified by written evidence that the existing parties do not object to the termination of the agreement.

Share information

Why Themis Partner ?

Make documents forhundreds of purposes

Hundreds of documents

Instant access to our entire library of documents for Indonesia.

24/7 legal support

Free legal advice from our network of qualified lawyers.

Easily customized

Editable Word documents, unlimited revisions and copies.

Legal and Reliable

Documents written by lawyers that you can use with confidence.

DOWNLOAD NOW