With so many challenges to business, how do economic incentives like profit-sharing help to build-up and develop human assets?
In spite of the challenges a business may face, it has been established that by making the business profitable to the employees, the company can experience tremendous growth through increased employee loyalty, sense of ownership in the firm, efficient workforce, and reduced turnover rate. By sharing profit with employees, the business would benefit from employees’ increased feelings of ownership and stake in the firm making them work hard to enhance the profitability of the company. Profit sharing lowers turnover rate, leading to a more experienced and more efficient workforce which produces competitive value offering that allows the company to gain greater market share.
Because employees’ share in the company is dependent on the productivity of all other employees, profit sharing initiates a self-supporting process of increased cooperation among employees. This dependency creates an incentive for employees to encourage an increase in the productivity of fellow employees resulting in greater output and job satisfaction. Thus, both the firm and the employees gain through profit sharing. More firms recognize that employees are more likely to choose a company and stay there if they believe that it offers a high quality of work life.
A good quality of work life is related to job satisfaction, which, in turn, is a strong predictor of absenteeism and turnover. Employees who are enrolled in their firm’s profit sharing programs are more likely to identify themselves with the business and increase their commitment to it. Many consider the sharing of profits between the firm’s owners and workers as a just distribution of income in a capitalistic society.
Are these incentives long-term in nature, or short-term?
Almost all studies have found a positive relationship between profit sharing and productivity. Profit sharing often appear painless to the company in the short run, either because funds are not paid out to employees until retirement or because employees are paid in “paper” (company stock). In the short term, they may experience increased productivity and positive gains. However, to make profit sharing permanent or long term, it is advisable to design it in a way that should there be a recession, the firm would still be able to continue the program. This way, in a booming economy, they can retain more profit which will be needed when paying out dividends and retirement payments.
In order not to erode the gains made in the short term (when the profit sharing program was introduced), firms should continue the program indefinitely, if it can afford to do so. Stopping the program will signal to the employees that the company is undergoing financial troubles, and this can lead to a reduction in morale and an increase in job dissatisfaction.
A long-term pay policy that protects workers from layoffs, structures compensation so that profit sharing or variable pay makes up a significant portion of employees’ total compensation (around 15 to 20 percent). Thus, when the business cycle hits a low point, the company can save up to about 20 percent of the payroll by not paying out profit sharing or variable pay, but still, retain its employees by paying them the salary portion of their total compensation.
Long-term business success depends on management’s business acumen and commitment, and management’s capability to make the firm profitable, not only to shareholders but more importantly for the employees in the long run.
Are these types of incentives only good for businesses that are well-established, or are they good for all companies?
Profit sharing is not only for well-established companies but also for start-ups, as in the case of Dancing Deer, where, although as a start-up company, it provided stock options and profit sharing benefits to all its employees from their hire dates. Dancing Deer’s management believed it was the right thing to do to share its profit with its employees, which in turn led to increased earnings and healthy growth.
The key to a successful profit sharing program is to ensure that employees are adequately paid, the profit sharing plan is made very easy for everyone to understand, and employees receive regular updates and notifications about the performance of the profit sharing plan.
From an incentive viewpoint, profit sharing is considered an organizational reward system, as it motivates employees to work harder to enhance organizational performance. Invariably, every company can benefit from motivated and hard working employees.