Profit Sharing Gooses Productivity For A While

A number of studies by economists tell the same inspiring story: Other things being equal, companies with profit-sharing plans for their employees tend to have higher labor productivity than those without such plans. But is profit-sharing itself responsible for this effect, or does it occur because enlightened companies with good employee relations often have profit-sharing schemes?

To throw light on the issue, economist Douglas L. Kruse of Rutgers University drew on a survey of some 500 companies to assess productivity growth before and after the adoption of profit-sharing plans. He found that implementing profit-sharing was associated with a significant 4% to 5% rise in productivity, within a year of such action, though productivity growth in subsequent years was unaffected.

In line with the presumed incentive effects of profit-sharing arrangements, Kruse found that companies making payments in cash rather than via deferred compensation had the strongest productivity gains, particularly smaller concerns. So did companies with highly generous profit-sharing plans. But as many as a third of those adopting profit-sharing experienced no unusual productivity rise at all.

In sum, many--but far from all--companies that set up profit-sharing schemes seem to enjoy a modest one-time productivity gain.

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