Profit sharing

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Profit sharing refers to various incentive plans introduced by businesses which provide direct or indirect payments to employees, often depending on the company's profitability, employees' regular salaries, and bonuses. [1] [2] [3] In publicly traded companies, these plans typically amount to allocation of shares to employees.

Contents

The profit sharing plans are based on predetermined economic sharing rules that define the split of gains between the company as a principal and the employee as an agent. [4] For example, suppose the profits are , which might be a random variable. [4] Before knowing the profits, the principal and agent might agree on a sharing rule . [4] Here, the agent will receive and the principal will receive the residual gain . [4]

Profit-sharing tends to lead to less conflict and more cooperation between labor and their employers. [5] [6]

History

American politician Albert Gallatin had profit-sharing institutions on his glass works in the 1790s. Another of early pioneers of profit sharing was English politician Theodore Taylor, who is known to have introduced the practice in his woollen mills during the late 1800s. [7] In the United Kingdom, profit-sharing became prominent in the 1860s. [8] [9]

Economists debated profit-sharing in major economic journals in the 1880s. [10] [11] William Cooper Procter established a profit-sharing plan in Procter & Gamble in 1887. [12]

Profit-sharing has historically been a prevalent practice in the Hollywood motion picture industry. [13] Profit-sharing partnerships are also prevalent in industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting. [14]

The Harvard economist Martin L. Weitzman was a prominent proponent of profit-sharing in the 1980s, influencing governments to incentivize the practice. [15] Weitzman argued that profit-sharing could be a way to reduce unemployment without increasing inflation. [15] Economists have debated the effects of profit-sharing on different outcomes. [16] [17] [18] [19] [20] [21]

Europe

Management's share of profits

The share of profits paid to the management or to the board of directors is sometimes called the tantième.[ citation needed ] This French term is generally applied in describing the business and finance practices of certain European countries, including Germany, France, Belgium, and Sweden. It is usually paid in addition to the manager's (or director's) fixed salary and bonuses (bonuses usually depend on profits as well, and often bonuses and tantieme are treated as the same thing); laws vary from country to country.

United States

In the United States, a profit sharing plan can be set up where all or some of the employee's profit sharing amount can be contributed to a retirement plan. These are often used in conjunction with 401(k) plans.

Gainsharing

Gainsharing is a program that returns cost savings to the employees, usually as a lump-sum bonus. It is a productivity measure, as opposed to profit-sharing which is a profitability measure. There are three major types of gainsharing:

See also

Further reading

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References

  1. ↑ Monroe, Paul (1896). "Profit Sharing in the United States". American Journal of Sociology. 1 (6): 685–709. ISSN   0002-9602.
  2. ↑ Monroe, Paul (1899). "Profit-Sharing and Cooperation. I". American Journal of Sociology. 4 (5): 593–602. ISSN   0002-9602.
  3. ↑ Monroe, Paul (1899). "Profit-Sharing and Cooperation. II". American Journal of Sociology. 4 (6): 788–806. ISSN   0002-9602.
  4. 1 2 3 4 Moffatt, Mike. (2008) About.com Sharing Rule Archived 2016-03-03 at the Wayback Machine Economics Glossary; Terms Beginning with S. Accessed June 19, 2008.
  5. ↑ Dean, Adam (2015). "The Gilded Wage: Profit-Sharing Institutions and the Political Economy of Trade". International Studies Quarterly. 59 (2): 316–329. doi:10.1111/isqu.12200. ISSN   0020-8833.
  6. ↑ Dean, Adam (2016). From Conflict to Coalition. Cambridge University Press. ISBN   978-1-107-16880-0.
  7. ↑ "Obituary - Mr Theodore Taylor, a Pioneer of Profit Sharing". The Times. 21 October 1952.
  8. ↑ Church, R. A. (1971). "Profit-Sharing and Labour Relations in England in the Nineteenth Century". International Review of Social History. 16 (1): 2–16. doi:10.1017/S0020859000003989. ISSN   1469-512X.
  9. ↑ Perks, Robert B. (1982). "Real Profit-Sharing: William Thomson & Sons of Huddersfield, 1886–1925". Business History. 24 (2): 156–174. doi:10.1080/00076798200000025. ISSN   0007-6791.
  10. ↑ Giddings, Franklin H. (1887). "The Theory of Profit-Sharing". The Quarterly Journal of Economics. 1 (3): 367–376. doi:10.2307/1882764. ISSN   0033-5533.
  11. ↑ Aldrich, Richard (1887). "Some Objections to Profit-Sharing". The Quarterly Journal of Economics. 1 (2): 232–242. doi:10.2307/1880773. ISSN   0033-5533.
  12. ↑ William Cooper Procter at the Encyclopædia Britannica
  13. ↑ Weinstein, Mark (1998). "Profit‐Sharing Contracts in Hollywood: Evolution and Analysis". The Journal of Legal Studies. 27 (1): 67–112. doi:10.1086/468014. ISSN   0047-2530.
  14. ↑ Levin, Jonathan D.; Tadelis, Steven (2005). "Profit Sharing and the Role of Professional Partnerships". The Quarterly Journal of Economics. doi:10.1162/0033553053327506.
  15. 1 2 Matthews, Derek (1989). "The British Experience of Profit-Sharing". The Economic History Review. 42 (4): 439–464. doi:10.2307/2597095. ISSN   0013-0117.
  16. ↑ Cahuc, Pierre; Dormont, Brigitte (1997). "Profit-sharing: Does it increase productivity and employment? A theoretical model and empirical evidence on French micro data". Labour Economics. 4 (3): 293–319. doi:10.1016/S0927-5371(97)00008-0. ISSN   0927-5371.
  17. ↑ BLANCHFLOWER, DAVID G.; OSWALD, ANDREW J. (1987). "PROFIT SHARING—CAN IT WORK?". Oxford Economic Papers. 39 (1): 1–19. doi:10.1093/oxfordjournals.oep.a041771. ISSN   1464-3812.
  18. ↑ Meade, J. E. (1972). "The Theory of Labour-Managed Firms and of Profit Sharing". The Economic Journal. 82 (325): 402. doi:10.2307/2229945. ISSN   0013-0133.
  19. ↑ Kruse, Douglas L. (1992). "Profit Sharing and Productivity: Microeconomic Evidence from the United States". The Economic Journal. 102 (410): 24. doi:10.2307/2234849. ISSN   0013-0133.
  20. ↑ Azfar, Omar; Danninger, Stephan (2001). "Profit-Sharing, Employment Stability, and Wage Growth". ILR Review. 54 (3): 619–630. doi:10.1177/001979390105400305. ISSN   0019-7939.
  21. ↑ FitzRoy, Felix R.; Kraft, Kornelius (1986). "Profitability and Profit-Sharing". The Journal of Industrial Economics. 35 (2): 113–130. doi:10.2307/2098353. ISSN   0022-1821.
  22. ↑ Rucker, A. W. et al., Re: "Management's Attitude toward Wage Incentive Systems", ILR Review, Vol. 5, No. 3 (April 1952), pp. 422-425, accessed 29 March 2023
  23. ↑ Gomez-Mejia, Luis R.; Balkin, David B. (2007), Managing Human Resources (Fifth ed.), Upper Saddle River, New Jersey: Pearson Prentice Hall, ISBN   978-0-13-187067-3
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