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. 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. For example, suppose the profits are <math>x</math>, which might be a random variable.
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. In the United Kingdom, profit-sharing became prominent in the 1860s. In 1889, economist Nicholas Paine Gilman documented 135 cases of profit-sharing in the United States and Europe.
Economists debated profit-sharing in major economic journals in the 1880s. William Cooper Procter established a profit-sharing plan in Procter & Gamble in 1887.
Profit-sharing has historically been a prevalent practice in the Hollywood motion picture industry. Profit-sharing partnerships are also prevalent in industries such as law, accounting, medicine, investment banking, architecture, advertising, and consulting.
The Harvard economist Martin L. Weitzman was a prominent proponent of profit-sharing in the 1980s, influencing governments to incentivize the practice. Weitzman argued that profit-sharing could be a way to reduce unemployment without increasing inflation.
France
Since 1967, French firms with more than 100 employees have been required to have profit-sharing with workers. Since 1990, this applies to all firms with more than 50 workers. 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.
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.