profit sharing-can it

8/11/2019 Profit Sharing-Can It

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~Presented by

Aakanksha Vats (061)

Hriniya Bose (107)

Balaji .S (148)

Can ItWork?

~David G. BlanchflowerAndrew J. Oswald


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David G . B lanch f lower

Lead ing Labor economis t , cu r ren t ly a tP ro fesso r a t Dar tmouth Co l l ege , NewHampsh i re .

Areas o f r e sea rc h : unemployment ,we l l -be ing , and wage macro po l i cy ;wr i t t en ex tens ive ly on wages ,unemployment , e spec ia l ly you thunemployment , s e l f - employment , c red i tcons t r a in t s , and we l l -be ing .

The Wage Curve ( 1 9 9 4 , M I T P r e s s ) , c oau thored wi th Andrew J . Oswald , wasawarded Pr ince ton Unive r s i ty ' s R icha rdA. Les te r P r i ze fo r the Out s t and ingBook in Indus t r i a l Re la t ions and LabourEconomics .

Andrew J . Oswald

Professo r o f economics a t Un ive r s i tyo f Wa r w i c k , U K .

Resea rch a reas : App l i ed Economics ,Quan t i t a t ive Soc ia l Sc ience and a l soSeven ma in a reas ( t r ade un ions ,l abor con t rac t s , t he wage cu rve ,en t rep reneursh ip , home ownersh ip ,and unemployment , t heconsequences o f h igh o i l p r i ces andthe economics o f happ iness andmenta l hea l th ) .

ABOUT THE AUTHORS


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Severe discrepancies observed in the Wage System where employeesare paid fixed wages and unemployment fluctuates severely.

Adopting Remuneration method to introduce flexibili ty in the pay.

Two ways suggested:Link wages to profits using Cash Based Profit Sharing (cash payments thatvary with employers profitability) Workers to be paid partly from firms own shares (ESOP)

Addition: Producer Cooperatives where workers participate in profits,ownership and decision making . It involves workers acceptinggreater degree of market risk .

(Source : The Economic Effec t s o f P ro f i t Shar ing in Grea t Br i t a in~ David G .Blanchf lower )

INTRODUCTION


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Mart in Weitzman , crucial contributor in the area ofremuneration systems based partly on profit sharing .

Belief: Workers wage to be associated with employers profit levels

Three ways to make a macroeconomic case for profit sharing:

The Morale and Productivity argument

The Wage Flexibility argument

Weitzmans Macroeconomic argument

MACROECONOMIC ROLE FOR PROFITSHARING


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Principal idea: Create the Constant Excess Demand for Labor .

Assumption: Similar on the lines of shortage of goods, therewould be dearth of labor forces.

How do we create the economy where shortag e of laborexists?

Make Labor extremely cheap, which would increasing the hiring

Weizmanns Solution: Remuneration to be sum of twocomponents:Component 1 : Base wage paid under normal remuneration system

Component 2 : Profit-related amount share which is per capita profitearned by the company

Weitzmans Macroeconomic argument


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Sharing Economy concept : Success lies only if the base pay issufficiently low so th at firms are unable to find as manyemployees as they would like.

Unemployment would disappear in this arrangement

Rationale for profit sharing: Either induce wage flexibility orraise productivity by changing worker s attitude .

Weitzmans Macroeconomic Argument


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Introduction of profit sharing policy might encourage eachindividual to work harder as the ef fort might impact the wholeorganizations productivity . (for smaller organizations)

This might not work for the large organizations as the effe ct isminimal on their gains, could never affect the companys profits.

The only way to counter the above point would be if there is anattitudinal change in the behavior of the workers after theimplementation of the profit sharing scheme.

If the indi viduals do not behave in a rational or selfish way,chances are high to increase the productivity.

The Morale & Productivity Argument


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1. Sharing Programs expose workers to a significant amount ofincome risk. (ignored by all the approaches, but vital to all theincome sharing arrangements)

2. Under profit sharing, Current workers wi ll wish to prevent the firmto hire the extra individuals as i t would affect their remuneration.

3. Need to subsidize the profit sharing deal?4. Weitzmans argument: "excess demand for labor is not very much

practical.5. Practical Objections: If wage system is efficient, cosmetic sharing

schemes may grow up.6. Unions in agreement to profit sharing would like some control of

the workplace, would assume the role of partners in theenterprise.

7. It seems undesirable to encourage workers to invest in their ownfirms shares as their human capital is already tied up in theenterprise.

Theoretical Objections


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Profit Sharing i mplementation:

Sam Waltons Rule 2 : Share Success with those who have helped you.(Walmarts 10 rules for building a Business)

Associate Profit Sharing to propel Walmarts Rocket to Success.

Profit Sharing Plan & the Associate stock purchase plan had resulted in associatesbecoming the owners of almarts Stock.

Sam Waltons philosophy: Individuals dont win , teams do! and for Walmart tosucceed required the efforts from everyone on the payroll.

Profit Sharing at Walmart resulted in the team of highly motivated and loyal businesspartners, adding to that Walmart found its place at the top of the Fortune 5 list.


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Jack Stack, CEO of Springfield, Missouri, base dremanufacturer SRC Holdings on profit sharing: Bonus plansimilar to a cash profit sharing plan.

Allocation of a slightly different maximum for hourly and salariedemployees.

Distribution of profits usually occurs annually, but not always.

the company distributes quarterly, which serves as a moreimmediate reminder of the benefits of the program for employees.

Profit Sharing implementation:


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Empirical Evidence

1. Profit Sharing

2. Employee Share Ownership

In United Kingdom - Finance Act 1972-19853 kinds of Employee Share Scheme which attracts Tax relief

1. Share Schemes introduced in 1978 Finance Act covering allemployees

2. Savings related share option schemes for all employees in1980 Act

3. Discretionary share option schemes in 1985 Act


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Research

Important in chemicals, retail food, mining, quarrying &construction, printing & banking

Unusual in shipbuilding, telecom & paper


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Quantifiable Research

Blanchflower & Oswald To verify if share ownershipschemes have beneficial ef fects on employment andinvestment.

Estrin & Wilson Introduction of profit sharing increasedemployment in sample firms by 13%. Remuneration intheses firms were on average 4% lower than others

Richardson & Nejad Companies which introduced thescheme had 5% higher share appreciation than those th atdid not.


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Qualitative Research

Wallace & Hanson Profit sharing si gnificantly improvesemployee attitudes & views of the company

Wider Share Ownership Council Has resu lted in employeeloyalty or attitudes

Effects of s cheme on productivity, staff turnover, recruitmentis present but still unclear


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CONCLUSION


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Thank You

profit sharing-can it

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