Profit-sharing programs provide a portion of company proceeds over a specific period of time (usually either quarterly or annually) to the employees of the firm through a bonus payment. The programs are designed to cause everyone in the company to focus on total organizational profitability.
This sounds like a good opportunity for the employee to get a share of the returns that the company receives from their work, right? But how well does it work? What if the company does not have any profit during a particular period? If this is the case, then there is no profit to be shared. If the company doesn’t have any profits, employees may not be motivated to work harder. But how can a company have no profit? It is actually pretty easy for the company to have no profit, or a minimal amount of profit, in any given year.
The company can, and frequently does, manipulate net profit in many ways in order to pay less in tax on corporate profits at the end of the year, and in some cases to minimize profit sharing. Management might put profits back into the company by buying new equipment or other assets. It can decide to pay management an unscheduled bonus, acquire another business, or increase finished goods inventory. However, if the company is manipulating expenses or other cost factors to decrease profit sharing and employees find out, the plan will certainly not be a performance motivator and most likely will cause other problems.
Another issue with profit sharing as a motivator is that it is focused on total organizational profitability. How can the average employee affect company-wide profitability? If the employee doesn’t know what to do in order to increase profits, what will they do differently in their job? The answer is “absolutely nothing.” Remember that we need to be able to personally affect the desired result in order to be motivated to do anything different. So profit sharing in many cases does not provide the company with the expected boost in productivity.
To motivate employees, we need to be sure that management is not manipulating factors to minimize profits so it doesn’t have to pay much in profit sharing. This allows the employees to see how their efforts are affecting profitability of the firm overall. It can also allow interim payments of incentives, which can assist the company in maintaining high worker efficiency over longer periods of time.
