Despite considerable interest in the adoption of profit-sharing plans in small firms in China, there lacks a comprehensive theoretical framework to explore why these plans are adopted. Much of the literature on profit-sharing originates from a pure economic perspective based upon agency theory. However, when profit-sharing is adopted in small firms at the discretion of the CEO, often psychological mechanisms become an important factor. This paper provides an integrated theoretical framework combining the economic perspective with the psychological perspective to investigate the reason why CEOs in Chinese private firms choose to adopt profit sharing schemes. Specifically, we develop a model examining both internal and external factors specific to the individual and the firm. We then theorize whether the reasons for using the profit-sharing plans will ultimately lead to improved firm performance.