A Myth About Profit Sharing

The following article extracted from www.sirota.com (/Knowledge Centre/White Papers/ “33 Beliefs About Work and Workers”) adds weight to the views on profit sharing I expressed in last month’s eNews.  The last paragraph is a thought-provoker.

The Myth:
Traditional merit pay systems work;  profit sharing is a major motivator of employee performance

The Findings:
Large numbers of employees working under a traditional “merit pay” system feel that, contrary to the promises of the system, their pay increases have little to do with their performance. By definition, then, the system is not working for these employees because unless employees believe there is a connection between what they do and what they earn there is none! There are a number of reasons for these results, such as the fluctuating nature of salary increase budgets and the levelling of salary increases – no matter what the employee’s performance – as pay grows.

For many types of work the most effective pay-for-performance method is “gain-sharing,” through which a group of employees share in achieving the performance goals of their group (eg, increases in efficiency or profit).

The research shows improvements of 5% to 78% under gain-sharing, the average improvement being about 25% while profit-sharing, though superficially similar, often does not produce discernible improvements, and when it does, are in the neighborhood of 2-6%.

This might be a good point at which to stop reading and give some thought to what makes the members of your team “happy”, and how you might arrange the affairs of the business to increase the likelihood of their finding some of those elements in their work (see past articles on Maslow’s Hierarchy of Needs).