Profit sharing

Plan where employees share in profits

This article is about a type of business incentive plan for employees. For a method of finance used in Islamic banking, see Profit and loss sharing. For the retirement plan, see Profit-sharing pension plan.

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

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

## History

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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]

## Europe

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### Management's share of profits

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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

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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

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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.[23] 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.[24]

## See also

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

## Further reading

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* 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

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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. JSTOR 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. JSTOR 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. JSTOR 2761863.
4. ^ a b c d 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. ^ Gilman, Nicholas Paine (1889). Profit Sharing Between Employer and Employee: A Study in the Evolution of the Wages System. Houghton, Mifflin and Company.
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. JSTOR 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. JSTOR 1880773.
13. ^ William Cooper Procter at the Encyclopædia Britannica
14. ^ 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.
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.
16. ^ a b Matthews, Derek (1989). "The British Experience of Profit-Sharing". The Economic History Review. 42 (4): 439–464\. doi:10.2307/2597095. ISSN 0013-0117. JSTOR 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.
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.
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. JSTOR 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. JSTOR 2234849.
21. ^ 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.
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. JSTOR 2098353.
23. ^ 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
24. ^ 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

## External links

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* Quotations related to Profit sharing at Wikiquote

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