Profit sharing, its principles and practice, a collaboration

Preface

Moved by a common interest in the subject, the authors in 1915 undertook jointly to make a careful and comprehensive investigation of the subject of profit sharing. The purpose of this effort has been to mark out the proper scope of profit 1 sharing, to determine the hmits, if any, within which it is practicable, and to discover the results which ’ may be expected from its use, as well as the most effective method of utihzing the profit sharing principle. In doing this work the profit sharing methods of a large number of employers have been studied and analyzed, a first-hand investigation has been made of a considerable number of profit sharing plants, many employers and employees have been interviewed, and much correspondence has been conducted. The effort has been not to prove the vahdity of any particular theory regarding profit sharing, but rather to learn the whole truth regard¬ ing the subject. This volume is the outgrowth of these joint efforts. The members of the group approached the study from somewhat different points of view and with different ideas as to the practicability of profit sharing, but all undertook the inquiry with an open mind, and all are in sub¬ stantial agreement upon the conclusions embodied in these pages.

VI

PKEFACE

This volume has a plan different from that of other pubhcations upon this subject, most of which are compilations of descriptions of profit sharing plans in operation. Its purpose is to serve as a guide to those who wish to learn the varied possi¬ bilities of this method of compensation. Many employers have been reaching more or less bhndly for methods of compensation which wifi increase the prosperity of their business, and which will also advance the well-being of their employees. It is believed that by the aid of this volume such em¬ ployers may inform themselves as to what circum¬ stances will prove most favorable for the adoption of profit sharing, and from what groups of employees the largest results may be expected. It is hoped that the book will further the understanding of the merits and advantages of profit sharing, as well as of its dangers and pitfalls. There is here no recom¬ mendation of a ready-made plan of profit sharing, since no plan is uniformly applicable to all classes of business, but there are indicated those factors, a consideration of which will enable the management of a business to determine whether profit sharing might profitably be introduced among any portion of its employees, and what rpethods would prove most practicable.

Profit sharing has been studied not only as a method of compensating effort, but also as a means of advancing the broader interests of employees. Em¬ ployees will find a frank consideration of the dangers to them which exist in particular forms of profit sharing, a frank recognition of the undesirabihty of

PREFACE

Vll certain types of restrictions, and counsel as to what forms will best promote their interests. The search throughout has been for methods which would prove mutually advantageous to employers and employees.

The result of the study has been to convince the authors of the essential soundness of the profit sharing principle, when wisely applied. The con¬ clusions are pubhshed with the hope that they may make clearer the way for the extension of profit sharing on carefully thought out hues and under appropriate circumstances.

It should be stated as fundamental to the whole discussion that profit sharing cannot be considered as a social panacea. It is not an instrument for making over or revolutionizing the present economic system, but presupposes the regime of private prop¬ erty and the wage system. This book merely en¬ deavors to mark out the place of profit sharing within that system.

Contents

CHAPTEK PAGE

I. Introduction . 1

II. Fundamental Principles of Profit Sharing . 4

Introduction

EARLY EXPERIMENTS IN PROFIT SHARING

For a period after 1870 profit sharing was given much thought by American philan¬ thropists and social reformers, whose interest had been attracted by the profit sharing estabhshments of England and Europe. Numerous articles and several books appeared upon the subject. Many professed to see in profit sharing a solution for all phases of the labor problem. In 1892 there was formed the Association for the Promotion of Profit Sharing. During this period a number of American establishments introduced profit sharing in various forms. N. P. Gilman, in his volume “Profit Sharing between Employer and Employee,” published in 1889, fisted thirty-two American firms practicing profit sharing. The subject had attracted attention abroad even earlier than in this country. The French Profit Sharing Society (Society pour FEtude de la Participation aux Benefices) was founded in 1879. It issued regular quarterly bulletins upon

' the subject. Some of the early European plans are still in successful operation, notably by the Maison Leclaire and the Bon Marche of Paris. But while there were some exceptions, upon the whole it must be said that the early history of profit sharing was not such as to justify the hopes of its advocates. The greater number of schemes introduced were sooner or later discontinued. The sharing of profits came to be regarded as of interest chiefly to the theorist or idealist, but of httle value to the employer concerned with efficiency and profits. In general "the attitude of employers and employees towards profit sharing during the past decade has been one of lack of interest rather than of opposition.

REVIVAL OF INTEREST IN THE SUBJECT

Recent years have witnessed a marked revival of attention to the subject. Popular, scientific, and trade periodicals have pubhshed many articles deal¬ ing with it. Conferences of employers have been held to consider it. Private and public agencies have conducted investigations and have issued reports describing the methods of profit sharing actually in use. Among the most important of the recent reports may be mentioned: “Profit Sharing by American Employers,” published by the Welfare Department of the National Civic Federation (New York) in 1916; “Industrial Profit Sharing and .Welfare Work,” a report of the Committee on Industrial Welfare of the Cleveland Chamber of Commerce (1916); “Profit Sharing and Labor Co- Partnership in the United Kingdom” (1912); and

INTRODUCTION

“Profit Sharing and Co-Partnership Abroad” (1914), both of the latter pubhshed by the Board of Trade of Great Britain; “Profit Sharing in the United States” (1917), issued by the United States Bureau of Labor Statistics, and frequent bulletins on the subject issued by Babson’s Statistical Organization. The fact that a number of firms have introduced profit sharing within the past few years, and that many others are seeking information upon the subject, is further evidence of the genuine growth of interest.

CAUSES FOR RENEWED INTEREST

Industrial unrest and agitation have probably been factors in producing this awakened interest. Another factor has no doubt been the developing perception that frequently there are methods of compensating labor more effective than the flat wage or salary. Whatever the causes may be, the quickened interest in profit sharing is widespread and fully justifies its reexamination in the light of present-day business practice. /

Chapter II What Profit Sharing Is

The term “profit sharing” is used to indicate many different methods of payment. There is little uniformity in plans going under this name, but in all cases they provide for certain payments to employees in addition to their regular wages or salaries. It is these additional payments which are ordinarily regarded as the participation in profits. But there are many plans for extra remu¬ neration which cannot properly be called profit shar¬ ing. Perhaps the best definition of profit sharing is that used by the British Board of Trade, in its special report on “Profit Sharing and Labor Co- Partnership in the United Kingdom” (1912). This report states, “Profit sharing is understood to in¬ volve an agreement between an employer and his workpeople under which the latter receive, in addi¬ tion to their wages, a share, fixed beforehand, in the profits of the undertaking.” In other words, the essence of profit sharing is that the amount of the special payments received by employees is directly contingent upon the earnings for a specified period, and varies directly with those earnings, upon a prearranged basis.

TYPES OP PROFIT SHARING The most usual form of the plan involves a dis¬ tribution of a portion of the profits of the business as a whole. This may be termed general profit sharing, because it is the general or total profits, arising from all sources, which are divided. But profit sharing does not necessarily take this form. The profits to be shared may be those arising from a part or separate unit of the business, as for example, when the manager of a department in a retail estab¬ lishment shares in the profits of his department, or when the manager of a branch store shares in the profits yielded by that store. Such an arrangement may be called unit profit sharing. Again the profits to be divided may be those attributed exclusively to the individuars own efforts, as for example, when traveling salesmen share in the profits shown upon the orders they secure. This may be termed in¬ dividual profit sharing. Although the last two forms are not so common as the first, they are none the less true profit sharing. Profit sharing, let us repeat, is an arrangement whereby any 'portion of the employees’ remuneration varies directly with the net profits of the business, or any part or unit of the business. The essential feature of profit sharing is that the employees’ earnings are not definitely fixed, and that the basis upon which they vary is net profits, — as distinguished from output, total sales, or any other factor.

PSEUDO PROFIT SHARING PLANS

This conception of profit sharing is much narrower than the popular one. In common terminology the term “profit sharing’’ is frequently applied loosely to all forms of compensation which represent an addition to guaranteed wages or salaries. An increasingly large number of employers are paying a periodic bonus consisting of a certain percentage upon wages. Such payments are frequently called profit sharing, although they represent merely a form of wage, or deferred wage payment, the amount of which has no direct relation to the profits earned during the period. Other firms announce that they will pay a bonus upon all wages at the end of the year, the employees being given to understand that the amount of the bonus will depend somewhat upon the prosperity of the business for the year. Under this plan the percentage of bonus to wages is not announced in advance, but remains entirely at the company’s discretion. The Youngstown Sheet and Tube Company used this method for several years. It was abandoned after the violent labor outbreaks experienced by this corporation in 1916. Other firms occasionally pay a bonus on wages without having announced in advance their intention of so doing, and without having obhgated themselves to do so. It is clear that such plans do not come within the meaning of the term “profit sharing” as here defined, or within any strict inter¬ pretation of that term. Unless the method of computing the amount of profits available for the individual participant is definitely established at the outset, he does not systematically “share” in profits. The employer may arbitrarily grant an extra payment. Such bonus grants in addition to regular wages presumably come out of what might otherwise go to profits. But they do not represent profit sharing in any real sense, since the amount of additional compensation obtained by each employee does not vary directly, and upon a pre-arranged basis, with the profits earned during the period.

Other firms have introduced stock purchasing or stock distribution plans for their employees, which are mistakenly regarded as profit sharing. In some of them the “profit sharing” feature consists simply in the fact that the stock is sold to employees at less than its market value, or that it is sold to them upon installments. It is noticeable that some corporations are more anxious to make the employees feel that a profit sharing plan is in effect than they are to introduce a genuine profit sharing arrange¬ ment. ’

SUCH PLANS ALSO CONSIDERED

In spite of the fact that these various plans of compensation additional to fixed wages do not represent true profit sharing, it has seemed best, for the purposes of this study, not to exclude them from consideration. Important results may be pro¬ duced by some of these pseudo profit sharing plans. But whatever the results obtained, they are not the results of profit sharing. When such plans are discussed it should be understood that they do not constitute profit sharing in the technical sense of that term. But the advantages and disadvantages of these methods of making additional payments will be considered and compared with those of true profit sharing.

MARKET WAGES MUST BE PAID

It would be difficult if not impossible to formulate any generahzation regarding the probable success or effectiveness of profit sharing which would be uniformly apphcable to all businesses and to all groups of employees. But it is beheved that there are certain general principles regarding profit sharing which are fundamental, and which apply with equal force, whether it is introduced to stimulate efficiency or to promote social justice.

The first principle is that effective profit sharing must ordinarily presuppose the payment of the full going rate of wages to participants. If profit sharing is primarily introduced to improve the conditions of the workers, it must clearly begin by the payment of full wages, for the economic condition of employees cannot be advanced by lessening the amount of wages upon which they can definitely rely. Likewise, if the business point of view prevails, the full market wages must be guaranteed. For the object in this case is to induce a special degree of effort, efficiency, cooperation, or some other desirable result, not usually obtainable by the payment of a flat wage. Obviously these special results cannot be expected unless the rewards which call them forth can be counted on to exceed the regular and usual wage.

If the profit sharing employer fails to pay a fixed wage at least as great as that paid by his non-profit sharing competitors, the resentment among his employees caused by this act may more than coun¬ teract any desirable results which might have been secured. It may be confidently asserted that no employer can secure important results through profit sharing unless the profits which he distributes represent a payment over and above the market wages of the district and industry. As has been pointed out by Babson’s Statistical Organization in a special report upon this subject, as on the farm it is the top bushels that count, so in industrial enterprises it is the amounts over and above the usual that secure the unusual devotion of em¬ ployees.

THIS PRINCIPLE NOT ALWAYS OBSERVED

Some employers and corporations have sought to use profit sharing for the purpose of keeping wages down or of paying wages less than would otherwise have been necessary. For example, the head of one profit sharing concern writes; “On January first of each year our profits are distributed, and wages adjusted. On that day we consider the question of the wages of employees. Any who insist on securing an advance in salary are dropped from the profit sharing list.” The owner of a retail store conducted on a profit sharing basis, when asked to enumerate the results achieved by his profit sharing plan, stated that “It has succeeded ' in keeping the salaries the same as they were when the plan was introduced several years ago, in spite of the fact that the general scale of salaries, the prices of commodities, and everything else has gone up.” The president of a corporation employ¬ ing over five thousand men indicated a similar attitude of mind. This corporation had for several years practiced what it regarded as profit sharing, but what was in reahty an annual bonus distribution. The bonus was the same percentage upon wages for all employees, but the percentage was determined at the company's discretion, although understood to be in relation to earnings. The president of this concern, in an interview during our investiga¬ tions, said: “My idea is to pay men as regular wages an amount slightly less than the actual value of their services, and then to make additional pay¬ ments to them, dependent in amount upon the success of the business and the earnings of the company.”

RESULTS OF VIOLATING IT

If the employer endeavors to use profit sharing to “nibble off” the existing wage scale, or to depress wages, he will find, sooner or later, that it fails to produce the hoped-for results. , It is significant to note that only a few months before the above remark was made by the president who favored paying men “less than they are worth,” his corporation experi¬ enced one of the most violent strikes and labor disturbances in the history of the industry. A New England manufacturer lamented the fact that his profit sharing plan did not prove sufficient to secure stability of his labor force, and that his female profit sharers were regularly leaving his employ. Inquiry revealed that the wage he was paying to these young women was much less than the usual wage for such labor. In this instance, as in others, it is apparent that profit sharing used to depress wages, instead of being an evidence of good manage¬ ment, is a sign of poor business judgment. A profit sharing plan cannot be operated with this purpose for any length of time before the design will be perceived, and the result will be other than bene¬ ficial.

EXCEPTION IN THE CASE OP MANAGERIAL EMPLOYEES

In the above discussion the existence of a “going wage” or “market wage” has been assumed. But for some higher paid employees there is no easily ascertainable “market wage,” because the work, and therefore the pay, cannot be standardized. This is particularly true of those whose functions partake of the managerial nature and among whom there are wide variations in salary. For these it may not prove equally necessary or possible to establish a fixed “market” salary. For example, profit sharing is sometimes applied to important employees in the managerial group who are placed upon comparatively small salaries, which merely serve the purpose of a drawing and expense account, with an arrangement under which they derive a large portion of their income from profits. This plan is not open to the objections which apply to cutting wages among the lower paid groups. For under such circumstances the participants become, in a limited sense, partners in the business. They contribute their managerial abihty, the owners contribute the capital, and both share in the profits. Furthermore, since such participants actually exercise functions of management, it is not improper that they should be permitted to assume some of the risks of the enterprise, if they care to do so, and frequently they are glad to do it. Therefore, when profit sharing is applied to the discretionary or managerial group, where httle standardization of results or salaries is possible, it is not absolutely necessary that it shall begin with the payment of the “market wage.” Clearly such an arrangement would be inapplicable when, as is sometimes the case, it is understood that a substantial or large proportion of the total income of the participant is to come from profits.

PAYMENTS MUST BE SUBSTANTIAL

A second principle essential to the success of any profit sharing plan relates to the size of the prospec¬ tive profit distribution. The payments provided must be adequate. It is impossible to prescribe any particular percentage which will prove most stimulating. But in profit sharing for business purposes there must be the prospect that the profits to be obtained under normally successful conditions will represent an appreciable addition to wages. The employer must not lose sight of the fact that he expects to obtain certain valuable results in larger degree than under a straight wage system. If these results are worth having they are worth paying for. Indeed, he cannot secure them without paying for them. He must offer an in¬ centive which appeals to the participants as worth while. The payments over and above wages or salaries must be commensurate with the additional interest or effort expected from and displayed by the participants. This does not mean that a profit sharing plan will fail if, under unusual circumstances, the profits available for distribution prove to be small or non-existent. For example, the N. O. Nelson Manufacturing Company was compelled to suspend wage dividends entirely for several years after the panic of 1893, but continued its plan in operation. Such circumstances, however, must be recognized as distinctly unusual and extraordinary. A profit sharing plan which is to prove permanently successful as a business arrangement must be de¬ signed so that in normal times there may be an expectancy of a fair and adequate distribution of profits. Although, as has been stated, no exact percentage can be prescribed that is applicable to all concerns, yet experience indicates that an addi¬ tional share amounting as a minimum to five or six per cent of wages is required to excite and sustain the interest and effort of any group of employees. Similarly, if social purposes are paramount in the employer’s mind, the profit share must be con¬ siderable, in order to advance the standard of living, to promote thrift and savings, and to improve the conditions of life.

PLAN SHOULD BE DEFINITE

Further, profit sharing will not achieve its greatest effectiveness unless there be a definite plan or agreement under which the proportion or share of profits to be distributed is determined and estab¬ lished in advance. There are many concerns using so-called “profit sharing” plans under which, at the end of the year, the employer simply determines in the exercise of his own discretion the amount or proportion of profits which shall be paid out. A contracting firm in Ohio, in the announcement of its profit sharing plan, states: “Out of the net profits of the business for said fiscal year, beginning February first, 1915, remaining after deducting aU costs and expense incident to said business, including payment of wages as shown by said payroll, there shall be first set aside such sum as the Board of Directors may determine to be a fair return upon capital invested, and that out of the balance remain¬ ing, one-half thereof shall be distributed among such employees as may be deemed worthy by the Board of Directors.”

INDEFINITE PLANS ARE OP QUESTIONABLE VALUE

Such plans are of questionable value viewed as instruments either for the promotion of efficiency or of social welfare. The arbitrary decision of the management, made after and not before the extra exertion, robs the plans of a large part of their stimulating power. It is not to be expected that men will concern themselves to increase profits and keep down costs, when they have no knowledge as to what portion of the profits, if any, they will receive. From the standpoint of social betterment such arbitrary distributions are also to be con¬ demned. When the money is paid out simply as a voluntary and discretionary payment, the amount of which depends upon the judgment, whim, caprice, or generosity of the employer, it is diflacult to regard it as anything other than charity. A widespread use of profit sharing of this character would inevit¬ ably work undesirable social results among members of the employed class, by making them more de¬ pendent upon the bounty and charity of employers than upon their own initiative and bargaining . power.

NATURE OF THE PLAN MUST VARY WITH ITS

PURPOSE

Another of the fundamental principles regarding profit sharing, a principle never to be lost sight of, is that the nature of the plan must be arranged in accordance with the special purpose or purposes which it is expected will be promoted. A system which may be well devised to promote one purpose may be ill adapted to promote another purpose. Profit sharing aiming at length and stabihty of service might fail to promote increased efficiency.

A plan organized to assist savings for old age might not be so successful in elevating the standard of hving. The specific purpose or purposes must first be decided upon, and then the details of the plan must be arranged accordingly. A manufacturing establishment in New York recently announced that henceforth it would distribute twenty per cent of its net profit to employees. At the time this announcement was made no arrangements had been made as to any of the details of the plan. This is placing the cart before the horse. If the inaugura¬ tion of profit sharing is contemplated, it is necessary that the employer should first decide what he wishes to accomphsh by the additional payment, and then he should adopt the method which appears most hkely to achieve this purpose.

In short, profit sharing to be effective, whether it be general, unit, or individual, must begin with the payment of full going market wages or salaries, unless it be appHed to those managerial employees whose compensation is not standardized. The payments must be substantial, and must be made in accordance with a definite plan, which is so worked out as to promote the particular purposes in mind. There are several important purposes which it is believed may be promoted by profit sharing. These purposes, together with suggestions as to the best methods of realizing them, are dis¬ cussed in the following chapters.

Chapter III

PROFIT SHARING TO PROMOTE EFFICIENCY WHEN THE MEASUREMENT OF INDIVIDUAL RESULTS IS IMPRACTICABLE

SUPERIORITY OF “INDIVIDUAL RESULTS” PAYMENTS

ONE of the claims frequently advanced for profit sharing is that it will increase the appli¬ cation and effort of the employee. It is thought that he will prove more productive because of the knowledge that he will receive a portion of the profit made possible by his increased efficiency. Under appropriate circumstances there is some measure of truth to this claim. But in many employments and occupations more effective means of increasing personal efficiency may be found than by permitting the participants to share in the profits of the con¬ cern. Profit sharing, as usually applied in the form of general profit sharing, is only an indirect stimulus to increased effort, since the profits received by the individual depend not only upon his own produc¬ tiveness, but upon the productiveness of all the other employees, that is upon the financial results of the business as a whole.

When the work done by the individual is capa¬ ble of definite measurement, the most effective and direct way to promote efficiency is to use some basis of pay which rests upon the measurable results.

Salesmen may be compensated upon a basis of sales made or may be given a bonus in addition to salary for pushing sales beyond a certain point. Linotype operators may be paid by the amount of printed matter set up. Machine operators may be rewarded in accordance with their individual output. Cloth¬ ing workers usually receive wages based upon gar¬ ments cut out, fitted, basted or finished. The payment of coal miners is determined by the weight of their product. Cigar makers are almost always employed at piece rates. Similar methods are used in other industries, taking the form of a straight unit price or of a bonus for the accomphshment of certain measurable results over a fixed minimum. The superiority of such methods, when appficable, is recognized by some profit sharing estabhshments. The N. 0. Nelson Manufacturing Company, one of the best known firms which shares profits with its wage earners, does not depend solely upon profit sharing as an inducement to effort. In departments where the work can be definitely measured, it uses a protected piece rate basis.

OBJECTIONS TO “INDIVIDUAL RESULTS” PAYMENTS

It may be granted that there is some force to certain objections sometimes raised against payments based upon individual results. For example, they may destroy the cooperative spirit, or they may overspeed employees, unless wisely directed and protected. They may cause workers to fail to main¬ tain the quality of product, or salesmen to neglect small customers in their anxiety to secure large ones.

They may be responsible for a lack of interest among employees in the business as a whole. In other words there may be considerations of more weight than that of increased personal efficiency, which will render the use of such methods of compensa¬ tion undesirable, even when applicable.

INDIVIDUAL RESULTS METHODS REQUIRE SAFEGUARDS

The method of “payments by results,” if in the long run it is to prove really effective as a stimulus, will ordinarily have to be accompanied by some provision or assurance for protecting the employees against a cut in the piece rate, unit price, or bonus. If such assurance or safeguard is provided, resting upon a fair and carefuUy ascertained basic rate, it will prove more advantageous to compensate the individual for his direct contribution than to give him merely a participation in the profits of the business as a whole. For each man then knows that he is paid in proportion to his own efficiency, regard¬ less of the output of other workers or the profits of the entire business.

SOME WORK CANNOT BE MEASURED

It is likely that the movement for the standardi¬ zation of work will proceed much further than it yet has. The importance of investigation and analysis for the purpose of discovering proper units of measurement is just beginning to be recognized in many industries. But some of the work of the indus¬ trial world is and will continue to be of such a nature that the result of the individuaFs efforts cannot be accurately measured in terms of output, product, sales, or any definite unit. This is because it is indistinguishably merged into a joint or collective product. Under such conditions the consideration of methods of compensation other than those based upon individual results becomes desirable or neces¬ sary. Such a consideration should include profit sharing.