Debunking myths about profit sharing

Contrary to what firms believe, studies have shown that shared capitalism helps boost employee productivity and job satisfaction

Debunking myths about profit sharing

Before the mid-2000s, studies done on how incentives affect employee performance were mostly done about an individual employee’s motivations.

But today’s reality is different, argued social science professor Alex Bryson and economics professor Richard Freeman at Harvard Business Review.

“Broad-based shared capitalist programmes – in other words, programmes where firms offer profit sharing and employee ownership to non-managers as well as managers – have spread to cover more employees than traditional forms of individual performance-based pay in Europe and the United States,” they said. 

Historically, they said, most firms were organised in a “top-down hierarchical fashion” where most tasks were broken down to its smallest components, thus, making more sense to individualise incentive programmes.

“Why link financial incentives to groups, teams, or organisational performance when production wasn’t set up in that way? What if it risked enticing workers to ‘free-ride’ on the efforts of more industrious co-workers?” they said were some of the concerns about giving out group incentives.

The 1980s brought about a change in organisational dynamics when firms started utilising team productions, they said, and with it came the idea of profit sharing or co-ownership.

“They saw it as part of “stakeholder capitalism,” in which corporations started responding to the interests of workers and other stakeholders beyond investors.” 

But does it really work and does it boost productivity, they asked.

They cited a study done by the National Bureau of Economic Research that came to the conclusion that when couple with supportive management practices, “prevailing concerns about the efficacy of team incentives were more myth than reality”.

They said there are three misconceptions firms have about profit sharing:

1)    The ‘free-rider’ problem – Studies found that employees tended to informally monitor their co-workers to ensure equal efforts are put forth within the group;
2)    The “line of sight” problem – Workers under an all-employee share ownership plan (ESOP) tended to strongly identify with the organisation’s goals and as a result, work harder than those on standard fixed-pay contracts; and
3)    Fluctuations in earnings – Studies have shown that there is no association between “risk aversion and the propensity of workers to enter into shared capitalism”.

In addition to these, Bryson and Freeman said that most workers view profit sharing as a ‘gift exchange’ and can generate organisational commitment better than a simple bonus or raise.

However, the authors concede that while these studies put a positive spin on profit sharing, there is still much to be learned about the practice.

“For example, we don’t know whether it’s simply that ‘good’ firms and ‘good’ workers participate in shared capitalism, leaving open the possibility that it may not increase productivity everywhere,” they said.

“As our society seeks to build better ways to incentivise employees, economists and policy makers alike should spend more time and energy experimenting with shared capitalist incentive systems to further our understanding of what works and why.”

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