Profit-Sharing and Employee Share Ownership

Profit-sharing and employee share ownership Saul Estrin, Paul Grout and Sushil Wadhwani This paper evaluates the likely effects of linking a part of a worker's pay to the employer's profits. It has been suggested, by Weitzman, that this would raise employment by lowering the cost of taking on an extra worker. However, this can only happen if existing workers are willing to let their share of value added fall, and experience of those firms in the UK who already operate profit-sharing schemes suggests that the Weitzman mechanism is not operative. There is, however, some evidence that profit-related pay does boost productivity; but there are other ways of raising productivity, such as performance-related pay, which may be more effective. Productivity-enhancing effects are likely to be greatest when employees are involved in decision-making as well, but this is likely to undermine the Weitzman case still further. Even if the argument that profit-sharing raises employment is not compelling, it is sometimes suggested that it can do little harm. However, there is evidence that it may well be inflationary, in which case the government would be advised to proceed cautiously. We argue that there is very little case for the introduction of a permanent subsidy to encourage increased profit-sharing, although there may be a case for a temporary one to overcome managerial inertia. However, there is a danger that a subsidy will promote ‘cosmetic’ schemes designed to be eligible for the subsidy but which do not reflect any real change in behaviour.