Profit Sharing and Public Policy

By Kruse, Douglas | Journal of Economic Issues, June 1994 | Go to article overview

Profit Sharing and Public Policy


Kruse, Douglas, Journal of Economic Issues


The structure of American workplaces, and the relation of this structure to economic performance, has received increased attention from researchers and policymakers [e.g., Reich 1993; U.S. Department of Labor 1993]. In contrast to the prediction that firms in competitive markets will have a homogeneous set of efficient policies, a number of studies have discovered substantial variation in human resource and compensation policies, with strong links to workplace performance [Ichniowski 1990, 1992; Huselid 1993; Kruse 1993; Blasi et al. 1993; U.S. Department of Labor 1993]. Such findings raise the issue of whether there is a role for public policy in fostering more productive human resource and compensation policies in American workplaces.

Employee profit-sharing plans have attracted attention as a compensation scheme with significant potential to improve both microeconomic and macroeconomic performance. The microeconomic potential is based on the theory that group incentive plans such as profit sharing can result in higher quantity and quality of output by encouraging worker effort, cooperation, and sharing of ideas and information. The macroeconomic potential is based on the "share economy" theory (developed primarily by Weitzman [1983, 1984, 1985, 1986]) that, by changing employer incentives to hire and retain employees, profit sharing leads to lower unemployment and greater employment and output stability for firms and the economy as a whole. This paper will briefly review evidence on both theories and discuss the rationales for public policy. (Public policy options for the related issues of employee ownership and employee involvement are reviewed in Blasi and Kruse [1993] and Levine [1992].)

Profit sharing with employees has long existed. While ideology was a major source of support for the approach, particularly in the 1800s, current interest is more closely tied to the direct economic benefits that profit sharing may offer to workers and firms.

Is there enough evidence about the practice of profit sharing to make it worthy of attention? Roughly one-sixth to one-fourth of American businesses and employees participate in some form of explicit profit sharing in which a portion of employee compensation is tied to the current profitability of the firm (U.S. BLS; U.S. Chamber of Commerce; these and other sources are summarized in Kruse [1993]). The prevalence does not vary greatly by firm size or occupational group but is lower among unionized employees and higher in companies with publicly traded stock (presumably cause profitability is already public information in these companies, whereas private companies may be reluctant to establish profit sharing for fear of disclosing profitability to competitors and union organizers). Several sources indicate slow growth of profit sharing in the early 1980s (often tied to union wage concessions) but report stabilization since that time. Internationally, there has been substantial interest in profit sharing in Europe and elsewhere, but few data exist on actual incidence [Blanchflower 1991; Florkowski 1991; Uvalic 1990].

Evidence on Economic Effects of Profit Sharing

There has been an upsurge of empirical research on profit sharing in the past decade, focusing on the theories that profit sharing enhances productivity and employment stability. Interest in the productivity theory followed the slowdown in productivity growth in the United States (which averaged only 1.2 percent per year in the 1970s and 1980s, following growth of almost 3.0 percent per year between World War II and 1970)[Economic Report of the President 1992]. The accumulating research has provided some support for the idea that profit sharing improves corporate performance. Of the 27 econometric studies (both published and unpublished) that include a profit-sharing variable in a productivity equation, almost all profit-sharing coefficients have been positive, and sampling error around a true coefficient of zero can be rejected for the majority of these estimates (p[is less than]. …

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