Profit Sharing Pays Off

Profit sharing boosts corporate productivity and profitability.

That's the finding of a study by Douglas Kruse, an economist with the Institute of Management and Labor Relations at Rutgers University, New Brunswick, N.J. It uses new data from a survey of 500 United States public companies, half with profit-sharing plans and half without.

Introduction of a profit-sharing plan is associated with an average increase in productivity of 4 to 5 percent, according to Professor Kruse. Though unique in some aspects, this study, reported in a National Bureau of Economic Research paper, agrees in its basic finding with a variety of earlier studies.

In the US today, an estimated one-sixth to one-fourth of employees participate in some form of workplace profit sharing. Outside the US, profit sharing has been attracting strong interest.

The productivity impact of profit sharing is found to be larger with small companies and for those paying cash rather than deferred compensation, the study finds. Companies that tied compensation directly to bottom-line profits had the most successful plans.

The size of the profit sharing in relation to an employee's compensation also seems to be an important factor in motivating employee productivity improvements.

The theory behind profit sharing is that by tying incentives for employees more closely to those of owners and managers, it stimulates better worker performance. Employees will ``work harder'' or ``work smarter.'' There will be peer pressure on employees to do a good job, reducing the need for supervision.

However, Kruse cautions that the study has not identified company characteristics that help profit sharing work. The study shows a range of results for those companies adapting profit sharing. So, he writes, it may be that the plans interact, perhaps in subtle ways, with ``a myriad of other influences on productivity to shift overall results slightly in a positive direction.''