Profit sharing

Short description: Plan where employees share in profits

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.

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 x, which might be a random variable.[4] Before knowing the profits, the principal and agent might agree on a sharing rule s(x).[4] Here, the agent will receive s(x) and the principal will receive the residual gain x−s(x).[4]

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

## Contents

* 1 History
* 1.1 France
* 1.2 United States
* 2 Gainsharing
* 3 See also
* 4 Further reading
* 5 References
* 6 External links

## 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] In 1889, economist Nicholas Paine Gilman documented 135 cases of profit-sharing in the United States and Europe.[10]

Economists debated profit-sharing in major economic journals in the 1880s.[11][12] William Cooper Procter established a profit-sharing plan in Procter & Gamble in 1887.[13]

Profit-sharing has historically been a prevalent practice in the Hollywood motion picture industry.[14] Profit-sharing partnerships are also prevalent in industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting.[15]

The Harvard economist Martin L. Weitzman was a prominent proponent of profit-sharing in the 1980s, influencing governments to incentivize the practice.[16] Weitzman argued that profit-sharing could be a way to reduce unemployment without increasing inflation.[16] Economists have debated the effects of profit-sharing on different outcomes.[17][18][19][20][21][22]

### France

Since 1967, French firms with more than 100 employees have been required to have profit-sharing with workers.[23] Since 1990, this applies to all firms with more than 50 workers.[23]

### 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:

* Scanlon plan: This program dates back to the 1930s and relies on committees to create cost-sharing ideas. Designed to lower labor costs without lowering the level of a firm's activity. The incentives are derived as a function of the ratio between labor costs and sales value of production (SVOP).
* Rucker plan: This plan also uses committees, but although the committee structure is simpler the cost-saving calculations are more complex.[24] A ratio is calculated that expresses the value of production required for each dollar of total wage bill.
* Improshare: Improshare stands for "Improved productivity through sharing" and is a more recent development. With this plan, a standard is developed that identifies the expected number of hours to produce something, and any savings between this standard and actual production are shared between the company and the workers.[25]

## See also

* Co-determination
* Employee stock ownership
* Joint venture
* Mutualization
* Retirement plans in the United States
* Social dividend

## Further reading

* Weitzman, Martin L. (1985). "The Simple Macroeconomics of Profit Sharing". The American Economic Review. 75 (5): 937–953. ISSN 0002-8282.
* Weitzman, Martin L. (1985). "Profit Sharing as Macroeconomic Policy". The American Economic Review. 75 (2): 41–45. ISSN 0002-8282.
* Weitzman, Martin L. (1987). "Steady State Unemployment Under Profit Sharing". The Economic Journal. 97 (385): 86–105. doi:10.2307/2233324. ISSN 0013-0133.

## References

1. ↑ Monroe, Paul (1896). "Profit Sharing in the United States". American Journal of Sociology 1 (6): 685–709. doi:10.1086/210565. ISSN 0002-9602. https://www.jstor.org/stable/2761478.
2. ↑ Monroe, Paul (1899). "Profit-Sharing and Cooperation. I". American Journal of Sociology 4 (5): 593–602. doi:10.1086/210833. ISSN 0002-9602. https://www.jstor.org/stable/2761583.
3. ↑ Monroe, Paul (1899). "Profit-Sharing and Cooperation. II". American Journal of Sociology 4 (6): 788–806. doi:10.1086/210857. ISSN 0002-9602. https://www.jstor.org/stable/2761863.
4. ↑ 4.0 4.1 4.2 4.3 Moffatt, Mike. (2008) About.com Sharing Rule 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. https://doi.org/10.1111/isqu.12200.
6. ↑ Dean, Adam (2016) (in en). From Conflict to Coalition. Cambridge University Press. ISBN 978-1-107-16880-0. https://books.google.com/books?id=eV3WDAAAQBAJ.
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" (in en). International Review of Social History 16 (1): 2–16. doi:10.1017/S0020859000003989. ISSN 1469-512X. https://www.cambridge.org/core/journals/international-review-of-social-history/article/profitsharing-and-labour-relations-in-england-in-the-nineteenth-century/FB43D6E430C55200D027F9BCCB37B5CD.
9. ↑ Perks, Robert B. (1982). "Real Profit-Sharing: William Thomson & Sons of Huddersfield, 1886–1925" (in en). Business History 24 (2): 156–174. doi:10.1080/00076798200000025. ISSN 0007-6791. https://www.tandfonline.com/doi/full/10.1080/00076798200000025.
10. ↑ Gilman, Nicholas Paine (1889) (in en). Profit Sharing Between Employer and Employee: A Study in the Evolution of the Wages System. Houghton, Mifflin and Company. https://books.google.com/books?id=C1xHAAAAYAAJ.
11. ↑ 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. https://www.jstor.org/stable/1882764.
12. ↑ Aldrich, Richard (1887). "Some Objections to Profit-Sharing". The Quarterly Journal of Economics 1 (2): 232–242. doi:10.2307/1880773. ISSN 0033-5533. https://www.jstor.org/stable/1880773.
13. ↑ William Cooper Procter at the Encyclopædia Britannica
14. ↑ Weinstein, Mark (1998). "Profit-Sharing Contracts in Hollywood: Evolution and Analysis" (in en). The Journal of Legal Studies 27 (1): 67–112. doi:10.1086/468014. ISSN 0047-2530. https://www.journals.uchicago.edu/doi/10.1086/468014.
15. ↑ Levin, Jonathan D.; Tadelis, Steven (2005). "Profit Sharing and the Role of Professional Partnerships". The Quarterly Journal of Economics 120: 131–171. doi:10.1162/0033553053327506. https://doi.org/10.1162/0033553053327506.
16. ↑ 16.0 16.1 Matthews, Derek (1989). "The British Experience of Profit-Sharing". The Economic History Review 42 (4): 439–464. doi:10.2307/2597095. ISSN 0013-0117. https://www.jstor.org/stable/2597095.
17. ↑ 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. https://www.sciencedirect.com/science/article/pii/S0927537197000080.
18. ↑ 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. http://dx.doi.org/10.1093/oxfordjournals.oep.a041771.
19. ↑ Meade, J. E. (1972). "The Theory of Labour-Managed Firms and of Profit Sharing". The Economic Journal 82 (325): 402–428. doi:10.2307/2229945. ISSN 0013-0133. http://dx.doi.org/10.2307/2229945.
20. ↑ Kruse, Douglas L. (1992). "Profit Sharing and Productivity: Microeconomic Evidence from the United States". The Economic Journal 102 (410): 24–36. doi:10.2307/2234849. ISSN 0013-0133. http://dx.doi.org/10.2307/2234849.
21. ↑ Azfar, Omar; Danninger, Stephan (2001). "Profit-Sharing, Employment Stability, and Wage Growth" (in en). ILR Review 54 (3): 619–630. doi:10.1177/001979390105400305. ISSN 0019-7939. http://journals.sagepub.com/doi/10.1177/001979390105400305.
22. ↑ 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. https://www.jstor.org/stable/2098353.
23. ↑ 23.0 23.1 Nimier-David, Elio; Sraer, David; Thesmar, David (2026). "The Effects of Mandatory Profit-Sharing on Workers and Firms: Evidence from France" (in en). The Quarterly Journal of Economics. doi:10.1093/qje/qjag022. ISSN 0033-5533. https://academic.oup.com/qje/advance-article/doi/10.1093/qje/qjag022/8662148.
24. ↑ 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
25. ↑ 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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