VIEWPOINTS : Profit-Sharing Plans Lack Key Motivation

Profit sharing is in vogue. General Motors, Ford and Pacific Telesis recently have negotiated profit-sharing plans with their unions.

So have many other major firms. They have acted because, when successful, profit sharing is a good employee motivator.

By linking compensation to a company’s performance, profit sharing can encourage workers to find ways to help their firms. And with profit sharing, a company’s labor costs dovetail with its ability to pay.

But profit sharing is certainly no quick fix for corporate ills. On its own, it’s unlikely to improve a company’s performance or satisfy employee desires for a good work environment.

For example, some large organizations such as Kodak have had poor results with year-end profit-sharing plans, which tend to be less effective than monthly programs, particularly ones that are based on an individual plant’s or department’s performance.

The problem is that many employees don’t see how they can influence profitability. Indeed, many don’t even understand how corporate profitability is calculated. In such cases, the opportunity to get bonuses that are based on profitability doesn’t motivate.

To make profit sharing work, employee involvement and education are essential.

Not only do employees need to be educated in the economics of their businesses so that they can understand how profits are measured and achieved, they also need to learn how their own organization works.

Courses Offered

At some companies--Herman Miller, a Michigan-based furniture maker, for instance--regular meetings are held and courses are offered.

Offering knowledge-based or skill-based pay also helps inspire workers to become more familiar with their organizations.

Under such a pay system, people are paid according to the number of the jobs they can do, and everyone is required to learn various kinds of work.

Training is available, and employees are encouraged to rotate positions. Thus, employees get a better understanding of their organization, and their commitment to improving performance increases. Proctor & Gamble has installed this type of pay system successfully in more than 25 plants.

Sharing decision-making power is critical for profit-sharing programs because without any authority, employees cannot influence profits.

Teams, problem-solving groups and programs that push decision-making downward must accompany profit sharing to stimulate better performance.

Motorola clearly has recognized this and always makes worker participation a part of its program, which links bonuses to the financial performance of departments and plants.

A guarantee of stable employment also can be crucial. If employees fear that they’ll lose their jobs if companywide performance improves, they naturally won’t be motivated to improve performance.

Employees at least need to be guaranteed that they will not be laid off because of increased efficiency resulting from their efforts.

Last Approach

If possible, it also helps to be able to assure employees that layoffs are one of the last approaches the organization will use to reduce costs during hard times.

With an employment guarantee, employees see a fair trade-off: stable employment in exchange for the fluctuating compensation inherent in profit sharing.

It is important to recognize that profit sharing can disrupt people’s lives through income fluctuations.

Employees may not know how to budget and manage their expenses when they have a variable income.

Although profit sharing is not as disruptive as the layoffs that many companies use to cut costs, personal financial counseling and other steps should be taken to help employees cope.

Years ago, Kaiser Steel failed to do this when it introduced a profit-sharing plan; the result was considerable hardship when profits dropped. People had foolishly made financial commitments they could not keep.

Flexible benefits are a nice complement to profit sharing. They allow employees to adjust the mix of cash and benefits they receive to fit their needs.

Employees are given an amount of money that they can spend on any combination of cash and the usual array of company benefits.

For example, companies such as TRW give employees some choice in selecting health insurance and retirement plans, among other benefits.

With variable income, people’s needs obviously are going to change, and it makes sense to let them adjust their pay and benefits package.

So far, few companies have combined flexible benefits and profit sharing, but flexible benefit plans are increasingly popular because of their many advantages.

Profit sharing can help American companies and their employees--but only if organizations take some important extra steps. Some basic practices have to change.