Profit sharing, gain sharing

Profit sharing is an agreement between a company and its employees that entitles employees to receive a portion of the company’s earned PROFITS. The first profit-sharing plan was introduced in a Pennsylvania glass works in 1794. Approximately one in eight workers in industrialized countries around the world participate in some form of profit sharing. Some profit-sharing plans pay cash distributions, but most plans provide variable annual distributions contingent on the company’s success. Many plans deposit employees’ distributions into tax-deferred accounts, which may be invested in stocks, BONDS, or other securities. Often profit-sharing plans allow employees to borrow against their accounts for major purchases such as homes or spending for dependents’ education. Economists suggest profit sharing provides three major benefits. First, it can increase employee motivation and productivity as workers see their INCOME tied to the success of the company. Second, profit sharing increases the flexibility of wages. One of the arguments in KEYNESIAN ECONOMICS is that wages and prices tend to be “sticky,” not adjusting quickly to changes in SUPPLY and DEMAND. By paying workers in part based on profits, a company’s COSTS adjust more rapidly to changing market conditions. Third, economists suggest profit sharing can increase EMPLOYMENT because the marginal cost of hiring another worker is the MINIMUM WAGE guaranteed, not the wage plus shared profits. Studies show profit sharing tends to increase productivity, and in the United States this increases wage flexibility. There is only limited evidence that it influences employment. Gain sharing is similar to profit sharing, except that it is based on cost savings to the company—that is, employee contributions to reducing the cost of PRODUCTION. Most gain-sharing plans are instituted in companies where groups of workers have a “shared economic fate,” or combined efforts that influence productivity and costs. Gainsharing programs typically pay monthly cash bonuses. Stock-option plans provide similar incentives for executives and managers in CORPORATIONs. Logically, as a company’s profits increase, the share price of its stock will also increase. In the United States during the 1990s, STOCK OPTIONS became an increasingly popular incentive program.