Companies use profit sharing as employee incentive device
Published: 3 February 2008
On 20 December 2007, the Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln, IW Köln [1]) published the results of a study (in German) [2] on the incidence and determinants of profit-sharing schemes in companies. The representative survey was conducted among about 3,200 companies in manufacturing and affiliated industries. It shows that 11% of companies have implemented a profit-sharing scheme from which the majority of employees benefit. Therefore, the IW results are mostly in line with figures that are based on the 2007 Establishment Panel (/IAB-Betriebspanel/) of the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB [3]) (*DE0709029I* [4]).[1] http://www.iwkoeln.de/[2] http://www.iwkoeln.de/default.aspx?p=pub&i=2137&pn=2&n=n2137&m=pub&f=4&ber=Informationen&a=20789[3] http://iab.de/de/[4] www.eurofound.europa.eu/ef/observatories/eurwork/articles/low-incidence-of-financial-participation-schemes-in-companies
A representative survey conducted by the Cologne Institute for Economic Research reveals that companies have implemented profit-sharing schemes mainly in an attempt to boost employee efforts, creativity and willingness to adapt. However, only 11% of companies in manufacturing and affiliated industries share their profits directly with the majority of staff. Adherence to multi-employer collective agreements reduces the likelihood of a profit-sharing scheme being introduced.
On 20 December 2007, the Cologne Institute for Economic Research (Institut der deutschen Wirtschaft Köln, IW Köln) published the results of a study (in German) on the incidence and determinants of profit-sharing schemes in companies. The representative survey was conducted among about 3,200 companies in manufacturing and affiliated industries. It shows that 11% of companies have implemented a profit-sharing scheme from which the majority of employees benefit. Therefore, the IW results are mostly in line with figures that are based on the 2007 Establishment Panel (IAB-Betriebspanel) of the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB) (DE0709029I).
In addition, a further 11.5% of companies provide wage components linked to the firm’s revenues only for selected individuals. A smaller percentage of companies (3%) reserve profit-sharing schemes for smaller groups of employees.
Reasons for implementing profit-sharing schemes
According to the responses of some 700 companies which have implemented a profit-sharing scheme, financial participation, in particular, serves as an incentive device for workers. A large majority of almost 85% of companies aim to raise effort, productivity and/or creativity levels of their employees (see table). Moreover, profit sharing is used as a tool to increase the willingness of workers to adapt to organisational change.
| Reasons for profit sharing | % of companies |
|---|---|
| Incentive device | 84.7 |
| Recruitment of and retaining (specific) employees | 25.2 |
| Wage fairness considerations | 19.5 |
| Improving workplace atmosphere | 16.9 |
| Management by objectives | 11.5 |
| Safeguarding jobs | 8.8 |
Note: Multiple responses given; 704 companies responded to the survey item on ‘reason’ for introducing profit sharing.
Source: IW Köln, 2007
Overall, over a quarter of the companies surveyed use profit sharing as a device to recruit or to retain employees. Not surprisingly, this applies particularly to companies with schemes that are exclusively provided for selected individuals, such as managers. One out of five respondents aims to constitute a fair wage structure, as well as a reasonable distribution of revenues between owners and employees. Interestingly, the motive of ‘safeguarding jobs’ is of minor significance. This implies that companies are not primarily interested in transferring risks which arise from a volatile environment to their employees.
Industrial relations and likelihood of profit sharing
More in-depth research reveals that adhering to a multi-employer collective agreement turns out to be an obstacle for implementing profit-sharing schemes from which the majority of workers benefit. This is also the case even if collective agreements in a few industries allow the amount of annual bonus payments to be made partly conditional on the company’s profits. Such opening clauses exist, for example, in sectors such as the manufacture of food products and beverages, chemicals and chemical products, ceramic goods, plastic goods, wood and plastic products, and commercial banking.
The existence of works councils does not significantly influence the likelihood of implementing a profit-sharing scheme in a company. Involving employees directly in decision-making processes and voluntarily establishing committees, in which management and workers’ representatives discuss and jointly decide company policies (DE0707049I), raise the possibility that a profit-sharing scheme for the majority of workers will be introduced.
Social partner position on profit sharing
The Confederation of German Employers’ Associations (Bundesvereinigung der Deutschen Arbeitgeberverbände, BDA) and several employer organisations at sectoral level, including those – such as Gesamtmetall – representing the metalworking and electrical industry, emphasise that multi-employer agreements should contain an increasing proportion of variable payments which should be agreed at company level.
In a position statement (in German) on the issue, the Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB) highlights that it is only in favour of profit-sharing schemes which complement regular, collectively agreed wages. According to DGB, companies could otherwise be inclined to report inaccurate profit levels. However, in the 2006 collective bargaining round (in German, 319Kb PDF), the German Metalworkers’ Union (Industriegewerkschaft Metall, IG Metall) emphasised their preference for regular wage increases compared with variable payment systems, such as profit sharing. IG Metall rejected any policies that aim to extend the significance of variable pay as a proportion of wages within multi-employer agreements.
Oliver Stettes, Cologne Institute for Economic Research (IW Köln)
Eurofound recommends citing this publication in the following way.
Eurofound (2008), Companies use profit sharing as employee incentive device, article.
