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Profit-Sharing Plans

Profit-sharing plans share profits with the employees. When these plans work well, they create trust and a feeling of a common fate among workers and management. Usually profit plans reserve a percentage of the firm’s overall profits or a percentage above a threshold and distribute those monies to employees. The distribution formulas vary, though many give a flat bonus to each employee based on the employee’s job category or tenure. Some plans give employeesa percentage of their annual pay. AT&T, for example, uses economic  value added (EVA)-which is net profits after a deduction for the capital used-paying bonuses of 15 percent for middle managers and up to 30 percent for executives who reach their EVA targets.” Research by Rutgers economist Douglas Kruse suggests that:

An estimated 16% of employees in medium-size and large companies share in the gains, and some 25% of small firms offer profit sharing.
His initial findings: Productivity increases 3.5% to 5% on average after companies adopt profit-sharing programs. Cash plans have more than twice the impact of deferred- payments plans, and those that tie contributions to a percentage of employee pay rather than profits are the least effective.” The effectiveness of these plans may suffer because profitability is not always related to the employee’s performance, as is the case when a recession or new competitors affect the results. Or employees may not perceive their efforts as making much difference because of the way profits are distributed. Some plans, for example, divert the payouts into retirement plans, reducing the immediate reinforcement value.” Since each individual worker has little impact on overall profits, profit sharing is more common among senior managers.

Nucor, the Charlotte, North Carolina, steel producer … rewards 14 of its plant managers based on the company’s overall performance. Plant managers earn between  $80,000 and $150,000 a year, which is about 25% less than managers at competing plants get. But the managers can also earn huge bonuses if Nucor achieves a 10% return on equity, high for the steel industry.

John A. Doherty, boss of Nucor’s mill in Norfolk, Nebraska, pocketed an extra $80,000 in cash and $40,000 in stock. “These bonuses aren’t entitlements,” he says. “We’re running our own businesses, and we’d better perform

Posted on September 4, 2014 in Incentives and Gain sharing

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