What term refers to the compensation plan where employees receive payment based on company profit margins?

The term that describes a compensation plan where employees receive payment based on company profit margins is profit sharing. This strategy is designed to align employees’ interests with the overall success of the company by rewarding them when the organization performs well financially. By linking a portion of an employee's compensation directly to the company’s profit margins, organizations aim to encourage employees to work together towards common goals. Profit sharing not only incentivizes individual performance but also fosters a sense of ownership among employees regarding the success of the company, as they directly benefit from higher profits.

The other options provided do not accurately capture this specific arrangement. Performance pay refers to compensation linked to individual or team performance metrics rather than overall company profits. Equity compensation typically involves offering employees stock or stock options as part of their remuneration, which might benefit them if the company performs well but does not directly correlate to profit margins in the same clear manner as profit sharing. Salary increment simply suggests a raise in pay for an employee, often based on performance or time served, without a direct tie to company profits. Thus, profit sharing specifically highlights compensation based on the company’s financial performance, making it the most suitable choice.