Profit Sharing: Meaning, Features, Aims, Merits and Demerits

Profit sharing helps in increasing output by making the workers more responsible, by securing their co-operation and by providing them an incentive to work hard for the concern and their own betterment. But as an incentive scheme, profit- sharing has dubious value.

It is argued in favour of profit-sharing scheme that it would eliminate strife and conflict between the workers and the management and would maintain industrial peace. But the experience shows that far from becoming a source of industrial peace, it has become a cause of conflict.

Profit sharing should take the form of “co partnership” if the workers are to be taken as equal partners in the industrial enterprises. But actual experience shows that most of the workers’ directors do not count for much in the management of these enterprises.

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Learn about:- 1. Meaning of Profit Sharing 2. Main Features of Profit Sharing 3. Aims 4. Basis 5. Merits 6. Demerits.

Profit Sharing: Meaning, Aims, Features, Basis, Merits and Demerits

Profit Sharing – Meaning

Profit sharing helps in increasing the output by making the workers more responsible, by securing their co-operation and by providing them some inducement to work hard. But as an incentive scheme, profit sharing has no practical value. It has a number of inherent defects such as no relation between the reward and the efforts, equal treatment to both the efficient and the inefficient, payment of reward after a long interval etc. Therefore, it cannot stimulate the workers to put in best of their efforts.

Because disputes arise regarding the determination of profit, correctness of accounts, determination of the share of profit to be made available for workers. Mode of distribution of this profit among the workers etc. Profit-sharing scheme therefore cannot be a cure for industrial disease. It can only be one of the steps towards the establishment of industrial democracy.

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Profit-sharing helps in increasing output by making the workers more responsible, by securing their co-operation and by providing them an incentive to work hard for the concern and their own betterment. But as an incentive scheme, profit- sharing has dubious value.

The reward is not related to the effort, the efficient and the inefficient are treated alike, and the reward comes at too long an interval after the effort under schemes of profit-sharing. For these reasons, it cannot act as an effective stimulus to the worker. In actual practice, too, the small amount of money, which the workers have been receiving at the end of the year as their share of profit in a concern, has not brought about any spectacular increase in output or efficiency of labour.

Profit sharing eliminates industrial conflict by creating an identity of interests between workers and employers. But in actual practice, profit-sharing causes more strife and disputes than it resolves. Workers usually do not have a basic faith in the honesty of the management, and take the amount of profit announced by it with a pinch of salt.

There may be disputes about the correctness of the amount of profit and about the workers’ share in it. The atmosphere of co-operation and goodwill usually visualised by the advocates of profit-sharing may remain a mere dream and the conflict between the working class and the capitalists may only get intensified. The trade unions see in profit-sharing a move to isolate some workers from their fold.

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As far as the efficacy of profit-sharing as a step towards industrial democracy is concerned, it may be pointed out that profit-sharing in the form of an addition to the cash- packet of the worker will not be enough to achieve this objective. Profit- sharing should take the form of “co partnership” if the workers are to be taken as equal partners in the industrial enterprises. But actual experience shows that most of the workers’ directors do not count for much in the management of these enterprises.

Profit Sharing – 6 Main Features

The following are the main features of profit sharing:

1. Profits of the organization are shared between employers and workers on the basis of an agreement between them.

2. The payment arising from profit sharing is over and above the normal wages paid to workers.

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3. The payment is made after ascertaining the net profits of the organization. Thus, it is not a part of the cost of production or a charge on profits.

4. The payment is made only when the profits exceed a certain level. Even so, it is generally paid every year.

5. The payment is based on seniority and/or wage level of individual workers.

6. The payment represents a reward for group effort and efficiency, and it is made to all grades of workers.

Profit Sharing – 3 Main Aims

The aim of profit sharing is to give workers an incentive to increase their output, as also to bring about healthy and mutually beneficial employer- employee relationship.

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The aims of profit sharing may be summarized as follows:

1. It seeks to supplement the earnings of workers and also partly bridge the gap between fair and actual wage.

2. It gives workers a share in the prosperity of the organization to which they have also contributed.

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3. It seeks to reconcile the interests of the management and workers and promote a mutually beneficial partnership between them.

Profit Sharing – 5 Important Basis

Profit-sharing may be on-

(a) Industry Basis:

Here the profit of a number of industrial units in the same industry may be pooled together to determine the share of labourers. Such a scheme has the advantage of putting the whole labour force in a particular industry on a uniform basis. Moreover, if a certain industrial unit somehow shows a loss in a particular year, its workers are not deprived of their remuneration because other units have made a good profit.

(b) Locality Basis:

Industrial units in a particular locality may pool their profits to determine labour’s remuneration by way of profit-sharing. However, if there are heterogeneous industrial units in a locality, where labour’s work is of a widely divergent nature, there may be great difficulties in bringing about an adjustment in their share.

(c) Unit Basis:

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This is the simplest way of giving a labourer a share in the profits of the individual undertaking in which he is employed. This mode of profit-sharing establishes a close relationship between the efforts of the labour and the rewards he receives. In the first two schemes, the reward of workers depends on the combined efforts of all in a number of units.

(d) Department Basis:

Sometimes, the various departments of an industrial unit may have their separate profit-sharing schemes. The workers in a particular department share in the profits made by that department. This aims at bringing about an even closer relationship between a worker’s efforts and the reward he receives.

(e) Individual Basis:

A worker receives a proportion of the profit which may have been earned by a business through the efforts of that particular worker. This aims at bringing about a direct and most intimate relationship between individual effort and reward. In practice, it is impossible to determine such profits.

Profit Sharing – Merits (With Advantages of Profit Sharing Schemes)

(1) Higher Productivity and Efficiency- This scheme creates an interest and involvement among the workers to work, which ultimately, resulted in higher productivity and efficiency.

(2) Healthy and Industrial Relations- Profit sharing helps in improving better and healthy relations between management and workers.

(3) Better and High Earnings for Worker- Workers are getting a share of profit in addition to their remuneration, this improves the earnings of the employees and makes them financially sound.

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(4) Stable Workforce- This scheme reduces the rate of labor turnover and ultimately company can enjoy the stable workforce.

(5) Increased Motivation and Morale- This scheme treats the worker as partners and shares with them profit of the organisation, this motivates the employees and enhances their work.

(6) Develop a sense of responsibility, belonging- This scheme motivates the workers. They are now self-motivated and works as responsible worker and believes in the prosperity of the organisation.

(7) Improved Supervision and Administration- Self-motivated, interested employees do not need direct close and strict supervision. These workers are highly disciplined. And to handle such discipline workers less administrative skill is required.

(8) Realisation of Social Justice- Basically social justice demand equitable distribution of wealth in society. Profit sharing achieves some measure of social justice by improving earning of the workers according to the financial position of the concern.

(9) Increased National Income- Business organisation which earns profit would prosper and improves the national income and national economy.

(10) Benefits to Society and Nation- The workers who are getting profit share would handle all other resources carefully, avoid or eliminates wastages, reduces cost of production, produce quality goods and services minimum disputes and grievances ail this ultimately benefited to the society and nation.

(11) Happy and Satisfied Workmen- Under this scheme employees would be more happy.

(12) Smooth and Efficient Working- It helps to run business organisation smoothly, efficiently and profitably.

Advantages of Profit-Sharing Scheme:

The profit-scheme is advocated on the following grounds:

1. Increased Productivity and Efficiency:

The Profit-sharing scheme serves as an incentive to the workers to put in best of their efforts in their work. As the workers realise that their share in the profits depends upon the prosperity of the enterprise, they will always try to produce more. This will increase their productivity and efficiency.

2. Less Labour-Turnover:

Since the profit-sharing scheme is applicable to workers who have put in a certain minimum service in the concern, workers generally prefer to stick up to their jobs in the concern. This results in less labour turnover.

3. More Earnings for Workers:

Under this scheme, as workers are given a share in the profits of the firm in addition to their normal wages, their total earnings would increase. This means more material welfare and greater economic security for them.

4. Better Industrial Relations:

The profit-sharing scheme improves the relations between the management and the workers because of the community of interest in maximizing profits. It is claimed that labour management relationships are firmly cemented by the sincerity, simplicity and honesty of the plan.

It contributes to the building-up and development of loyalty in the personnel, not because it affords an increased income but because it indicates that the management is trying to do its duty towards the workers.

5. Reduction in Costs of Supervision:

The profit-sharing scheme generates an atmosphere of co-partnership between the employer and the employees. This will build up and raise the morale of the workers. It will also create a sense of responsibility in the minds of the workers and thus encourage them to work willingly without supervision.

6. Team Spirit:

The profit-sharing scheme aims at bringing about co-operation between the employer and employees and integrates the interests of employees with those of the employer. Therefore the frictions between the two are eliminated. It further tends to bridge the gap between the labour and management and develops team spirit among them.

7. Economy:

In order to maximize profits, workers will take utmost care of the tools, machines and materials, avoid waste and spoilage, eliminate their idleness and thus try to reduce cost of production.

8. Social Justice:

The profit-sharing scheme achieves social justice through equitable distribution of the surplus between workers and employers. It creates a feeling of partnership in business in the minds of the workers. The co-partnership ensures the reduction of disparities in income and wealth.

Profit Sharing – Demerits (With Disadvantages of Profit Sharing Schemes)

(1) Equal Share of Profits- A share of profits is given to all the workers, irrespective of their efficiency. This brings discouragement to efficient workers. Moreover a loss if any is not shared by the employees.

(2) No Sound Base- Profit is not resulted merely from the availability of capital and efforts of workers. In fact there are several factors such as contribution and efficiency of management team, market condition, competition available, company’s policies, plans, prospects etc. This scheme does not have direct relationship between effort and reward.

(3) Resistance by Trade Unions- This scheme creates more faith and trust in employees than in the activities of trade unions. Workers may lose their interest in trade union movement and in its membership.

(4) Delay in Profit Sharing- A share of profit would be distributed after a specified period, therefore it reduces the eagerness and interest in profit, for their hard effort. There is a big span of period between the effort and its reward in the form of profit.

(5) Difficulty in Determination of Profit- It is difficult to calculate the profit deductions therefrom, it requires competent persons. Sometimes workers may be suspicious about it because they do not understand it properly.

(6) Elimination of Industrial Disputes is not possible- Profit sharing scheme only minimizes the industrial disputes total elimination is not possible. Moreover where a company suffer a loss or earn less profit, in such situation a company is not able to pay the share of profit may cause the industrial disputes. Credit of profit earn asked by both employer and employees.

(7) Mutual Trust and Faith- Profit sharing scheme requires mutual trust and faith between the employee and employers otherwise it must be totally failed.

(8) Lack of Motivation- A share of profit goes to individual worker so small, which is not enough to motivate him to more efforts.

(9) Salvation of Workers- Some economist criticized that this scheme is just salvation of workers. Employers may take employees efforts force ably because profit will be shared with them.

(10) Lower Wages- It is observed that wherever this scheme is applied, they paid low wages to the workers.

Thus, profit sharing does not lead to greater worker involvement in the wellbeing of the organisation. It reminds the worker that to the extend there is slack in his work, to the extend the wastes raw material produces defective pieces, he is harming his own interest, for ultimately profits depends on efficient work done by each member of the work force. Thus profit sharing makes workers more responsible and co-operative.

Disadvantages of Profit-Sharing Scheme:

Profit-sharing has been criticised on the following grounds:

1. Not Well-Founded:

The profit-sharing scheme is basically not well-founded. Because profits are earned not merely because of the efforts of the workers or the availability of capital. They depend upon various other factors such as the ability of the management, business and economic conditions, taxation policy of the government, market conditions, economies of size and location etc. which are all beyond the control of the workers. Profits may not be earned depending upon these factors.

2. Fair Weather Plan:

The profit-sharing scheme is in practice a fair-weather plan, because workers are able to get a share in the profits, only when the firm is earning profits. But they do not get this when the firm’s profits are very low or when the firm is incurring losses due to depression and adverse market conditions.

3. Uncertainty:

Sharing in profits by the workers is uncertain. Because earning of profits by the firm depends upon so many factors. The availability of profits may be vitiated by uncertainty of business conditions, mismanagement and financial-cum-administrative pit-falls. Even though workers might have worked very hard, sincerely and honestly, the firm may fail to earn sufficient profits due to defective management, business hazards, financial and administrative pit-falls etc.

4. Manipulation of Accounts:

Determination of the exact amount of profit and the share of workers in that profit have always been a bone of contention between the workers and the management. The management will tend to manipulate the accounts in order to narrow down the amount of profit to be allocated to the workers. Trade unions always doubt the correctness of the accounts and it is very difficult to eliminate such doubts easily.

5. Payment after Long Interval:

The incentive aspect of the profit-sharing scheme is not of much use because the payment is made after a long interval of one year or so and therefore, it loses its incentive value. Workers are generally interested in the immediate benefit. Therefore, the profit-sharing scheme fails to inspire the workers to produce more.

6. No Distinction between Efficient and Inefficient Workers:

The profit-sharing scheme does not make any distinction between the efficient and meritorious workers and the inefficient and the idle workers. Because all of them are entitled to an equal share of profit without any reference to each one’s efficiency or output. Therefore, it does not serve as an equitable system of payment. Workers are generally interested in getting a higher wage rate regularly instead of getting a share in the profits once a year.

7. Trade Unions’ Opposition:

Trade unions strongly offer their opposition to the profit-sharing scheme on the ground that it is a mischievous move on the part of the management to create disunity in the ranks of the working class. The trade unions contend that the workers working in concerns earning good profits are likely to lose their interest in the trade union movement and may not co-operate with the trade unions to show their sympathy with their less fortunate colleagues working in concerns which are not earning profits.

8. Source of Dispute:

It is argued that the profit-sharing scheme has not been able to improve the industrial relations. In concerns where this scheme has not been introduced, there are no disputes involving profit-sharing. But in concerns where this scheme has been introduced, it has always been a source of disputes.

Disputes arise because of differences of opinion in the calculation of profit, suspicion of worker regarding the correctness of accounts, determination of workers’ share in the profit and the mode of distribution of this profit among the workers and such other factors.

9. Profit – A Reward for Risk-Bearing:

The employers also do not accept the principle underlying the profit-sharing scheme. They argue that profit is partly a regard for the risk borne by the employer. But since the workers do not bear any risk they are not entitled to any share in the profit. Workers are willing to share only the profits but they are never prepared to share the losses. Hence, the employers argue that the workers’ claim to a share in the profit is not justified.

10. Difficult for New Firms:

The profit-sharing scheme can be adopted only by the well established firms which are able to earn a good amount of profits. But it cannot be adopted by newly established firms which are not able to earn adequate profits.