This article is about a type of business incentive plan for employees. For a method of finance used in Islamic banking, see
Profit and loss sharing. For the retirement plan, see
Profit-sharing pension plan.
The profit sharing plans are based on predetermined
economic sharing rules that define the split of gains between the company as a principal and the employee as an agent.[4] For example, suppose the profits are , which might be a random variable.[4] Before knowing the profits, the principal and agent might agree on a sharing rule .[4] Here, the agent will receive and the principal will receive the residual gain .[4]
Profit-sharing tends to lead to less conflict and more cooperation between labor and their employers.[5][6]
History
Profit sharing has been common among traditional fishing communities in Indonesia.[7] In the West it was introduced by American politician
Albert Gallatin on his glass works in the 1790s, but the modern type of profit-sharing plans was developed later in the 19th century.[8]William Cooper Procter established a profit-sharing plan in
Procter & Gamble in 1887.[9] Another of early pioneers of profit sharing was English politician
Theodore Taylor, who is known to have introduced the practice in his woollen mills during the late 1800s.[10]
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Europe
Management's share of profits
The share of profits paid to the management or to the
board of directors is sometimes called the tantième.[citation needed] This
French term is generally applied in describing the business and finance practices of certain European countries, including Germany, France, Belgium, and Sweden. It is usually paid in addition to the manager's (or director's) fixed salary and bonuses (bonuses usually depend on profits as well, and often bonuses and tantieme are treated as the same thing); laws vary from country to country.
United States
In the United States, a
profit sharing plan can be set up where all or some of the employee's profit sharing amount can be contributed to a
retirement plan. These are often used in conjunction with
401(k) plans.
Gainsharing
Gainsharing is a program that returns cost savings to the employees, usually as a lump-sum bonus. It is a productivity measure, as opposed to profit-sharing which is a profitability measure. There are three major types of gainsharing:
Scanlon plan: This program dates back to the 1930s and relies on committees to create cost-sharing ideas. Designed to lower labor costs without lowering the level of a firm's activity. The incentives are derived as a function of the ratio between labor costs and sales value of production (SVOP).
Rucker plan: This plan also uses committees, but although the committee structure is simpler the cost-saving calculations are more complex.[11] A ratio is calculated that expresses the value of production required for each dollar of total wage bill.
Improshare: Improshare stands for "Improved productivity through sharing" and is a more recent development. With this plan, a standard is developed that identifies the expected number of hours to produce something, and any savings between this standard and actual production are shared between the company and the workers.[12]