There are many advantages for both a company, and the employees of that company, when participating in a profit sharing plan. Industry statistics demonstrate that employees of companies that have profit sharing plans interact with the company and management in a very productive and cooperative style. In these companies the employees know and understand that their individual efforts contribute to both the bottom line of the company and their own remuneration. Consequently all actions are taken with this understanding. Employees of companies with profit sharing plans believe that they are part owners of the company and enthusiastically embrace any and all actions required to achieve bottom line results.

Statistically, employees at all levels of companies that have profit sharing plans are more productive. This productivity pays off where it counts, on the bottom line of the income statement. These companies generally have a higher output per employee, fewer quality problems, and higher levels of on time shipping performance. This translates into higher gross margins. Employees of profit sharing companies perform their tasks with both the needs of the company and their own needs inexorably intertwined. Profit sharing employees are compensated in the short term by their pay cheque but also understand that long-term when the company generates a profit they will participate in this profit. This is a very productive situation.

There are circumstances whereby profit sharing can offer cash flow benefits to the company as well as offering potential stable employment opportunities to employees. If structured correctly a company may be able to negotiate a compensation plan with employees that permits flexible employment conditions.

It is recognized that there are some very cyclical industries that offer a high rate of pay but at the expense of continuous employment. Perhaps the most visible industry that possesses this pattern is the oil and gas industry. Hourly paid employees are paid at the high end of the compensation scale in the oil and gas industry. The downside is that they may work exhaustively for two to two and a half years and then get a six-month lay off as the demand cycle weakens. Following a six-month layoff demand will increase and then these employees will return to work. When the actual pay rate is averaged over the complete cycle the true income is significantly less than the posted hourly rate.

This cyclical employment pattern has another shortcoming in that generally when the rehiring does occur these employees do not return to their previous employer. There is a tremendous mobility in the oil and gas sector with employees switching employers frequently. This style has many drawbacks for both employers and employees but is accepted in this industry sector as normal. This pattern may be taking root in the more traditional manufacturing sectors. From this an opportunity may emerge for some companies to offer an alternate compensation plan for the long term.

The situation of long term and short term employment and more importantly long term and short term employees may be the opportunity for companies to structure new compensation systems. Some short-term employees are only interested in the immediate rate of pay and generally are not interested in the company’s survivability, pensions plans, and continuity of employment. Older employees and those with insight may be willing to consider a different type of compensation structure.

The nucleus of the proposal is that employees may be willing to accept a wage rate below the industry standard in exchange for profit share in the good years with some assurances of no layoffs when the economy deteriorates. If this logic is accepted a company will realize all of the productive benefits of being a company with a profit sharing plan. An absolute guarantee of no downsizing and therefore no layoffs is not reasonable. There cannot be any absolute guarantees on this issue. However it can be assumed that a company with a lower wage rate should be able to survive a downturn better than those companies with higher wage rates. This lower base rate is then combined with the superior productivity demonstrated by companies that have profit sharing plans.

This appears to be a radical departure from past employee compensation initiatives but appearances are deceiving. In the current recession many employee groups are accepting wage rollbacks, some as much as 50%, to preserve their jobs and to ensure the survivability of the company. This appears to suggest that some employees are willing to make short-term sacrifices to ensure that long-term employment will continue. This can be the perfect opportunity to implement profit sharing and initiate a different compensation plan.

The business case being explored here is that to survive and grow a company must become a low cost producer, particularly in difficult times. A major element of being the low cost producer is to have relatively low labor costs. These low labor costs can be achieved with a combination of lower pay rates and a significant profit sharing plan, combined with high productivity. With these elements in place this company should always be busy and able to maintain employment levels even in a recession.

This may be viewed as a radical idea that may only work in a few selected instances. Still wage rollbacks are occurring these days and perhaps a new style of compensation is supportable. Will employees accept short-term pain for long-term gain is the key question? With good reasons and a corresponding benefit to the employees it may be possible to lower wage costs, improve productivity, and implement profit sharing at some companies.



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