This article starts by describing the extent of profit-sharing schemes in OECD countries. It suggests that firms have increasingly introduced profit-sharing schemes not only because of the tax breaks they involve, but also because of accumulating information on the link between profit-sharing and productivity. It concludes with a summary of new research among UK manufacturing companies, which shows a productivity improvement of about 6% in cases where profit-sharing bonuses were of order 5-10% of market wages.
There has been a rapid increase in the extent of profit-sharing in Europe in the past decade. For example, in the United Kingdom in the late 1970s, according to estimates by the Wider Ownership Council, only 2% of employees benefited from profit-sharing; following tax relief in various Finance Acts and the introduction of profit-related pay (PRP) in 1987, Blanchflower and Oswald (1989) reported that some 40% of private manufacturing establishments operated some sort of scheme, while by 1993 PRP covered more than 10% of private sector employees in nearly 5,000 schemes. In France, Ministry of Labour figures indicate that the number of firms operating voluntary profit-sharing schemes grew from about 3,500 in the late 1970s to over 10,000, covering 2m employees, by 1992. After French legislation was simplified in 1986, the growth in the number of schemes markedly accelerated.
Our primary purpose in this paper is to review the scope of profit-sharing in OECD economies, and to categorise countries according to the scale and extent of profit-sharing arrangements. We go on to discuss the expected benefits to companies from introducing profit-sharing, in terms of improved productivity. In the final section, we report empirical evidence from the UK which confirms that profit-sharing does raise company productivity.
What is Profit-Sharing?
Many companies use pay systems which they call "profit-sharing". But to achieve the benefits we discuss below, schemes must conform with specific definitions. For our purposes, a profit-sharing scheme has some portion of all employees' remuneration variable and is tied to overall company performance. The rules determining the share of profit to be allocated to employees and its distribution must be set and known in advance. The employees' share of profits may be split equally among employees or individual bonuses may depend on wages, absenteeism, length of service, etc. Bonuses may be paid in shares or cash and/or may be deferred for several years (as with participation in …