Profit sharing enterprise Flashcards
Profit sharing enterprise?
- Various forms – common characteristic that residual claims held by people other than outside shareholders
- ‘ Any enterprise that distributes to its workforce, or to any group other than capital holders, a share of the residual is engaged in profit sharing
- Could include joint stock companies and a range of others
- Usually quite small firms – collective responsibility
Types - management owned firm?
- All residual claims held by several monitors of a team
- Management buy-outs – equity held by a subset of workers – residual may not be equally distributed
Types - professional partnership?
- Residual claims held by sub set of workers (lawyers, consultants, accountants)
- Partners not primarily managers, but practitioners
- Other workers can be hired in and paid a wage
- Earnings of partnership distributed equally between partners
Types - worker ownership?
- All workers share residual and either elect managers or appoint managers on separate contracts
- Workers can decide to collectively sell firm to single proprietor – if price is right
- Residual may be equally distributed, may be distributed according to output
- Plywood industry in US – equal distribution to team as individual effort not easy to measure – managerial skills purchased from salaried managers
- John Lewis example
Types - Worker co-operative?
- Pure form distributes net revenue – no deduction for wages – equally amongst team
Theory and behaviour of PSEs?
- Theory – behaviour of such differently structured organisations will be dissimilar, even though may all be said to embody an element of profit sharing
- Generalisation difficult across types of organisations
Critical issues in persistence of form?
What factors influence ability of PSEs to survive
* Economic environment? Conducive? – governments tend to be more rewarding towards those that try to reward workers
* Are monitoring costs high? – if high might be better to incentivise you to do what is wanted, giving a profit share
* Group interests : are they homogenous? – will only usually work if similar, similar experience, interests, qualifications – links towards the monitoring costs
* Are conditions appropriate for mutual monitoring to be effective? – if can see someone is slacking off, what can be done? – if have a profit share, likely to also ensure managers are working correctly
* Are large quantities of capital required? – need to convince banks – what is human capital like, what type of resources are needed?
PSEs more likely where?
- Large monitoring effort by an investor doesn’t really highlight worker effort
- Less risk averse workers means PSE more attractive
- Where need to reduce high monitoring costs
- Investors risk averse – want assurance of success
Issue 1 - monitoring effort in PSE?
- May be no need to induce effort bc is in workers interests to work hard
- But still need to reduce costs and increase effectiveness of monitoring both manager and effort – How?
- Workers may monitor one another
- Workers will feel loyalty to firm and one another
- Encourages managers and workers to monitor one another
Issue 2 - leverage?
- If firm closed to outside equity may be highly leveraged – greater likelihood of bankruptcy? - debt generally cheaper than equity, but as take on more and more debt, suppliers of finance see you as becoming riskier
- In pure worker owned firm, they only get residual which gives comfort for lender
- But workers are free agents – fleeing from poor results – lender risk rises
- Given there is an agency problem when is risk greatest for lender?
Issue 2 leverage - agency problems outside of debt?
- Danger greatest when workers nor firm dependent and would take greater risks with lenders capital
- So more mobile non-dependent workers will be able to form a worker owned firm only when capital requirements smaller and can be raised internally
- Or where physical capital nonspecific
- If equipment very firm specific, likely will be more expensive to finance as bank will have limited usage of firm goes bankrupt
- Conclusions –
- Worker owned firms and coops more likely where human capital firm specific whilst physical capital non-specific
- Firms needing highly specific capital assets likely to be more labour intensive with equity supplied by members
Issue 3 - bargaining?
- Easier?
- Conflicts of interest between workers and investors reduced
- Info more evenly distributed reducing adverse selection
- But –
- Costs of democracy – efficiency of gaining collective decisions
- Heterogenous workforces – some may be affected more than others by certain decisions e.g., close to retirement
- Short termism for some
Issue 4 - employment size of PSE - labour managed firm?
- Will PSE be larger in employment terms
- Labour managed firm – will determine firm size to maximise value of surplus per worker
- Implies new people taken on provided revenue generated > cost – else losing out on shares
- But where market value of marginal output < surplus per worker are incentives to reduce workforce
- Employment will tend to be stable – loyal and responsible to each other
Empirical insights - Fung 1994?
- Compares profit sharing with non-profit sharing
- Theoretically – expect profit sharing to outperform others (on employment, consumer welfare, joint welfare of workers and industry economic efficiency), particularly under unions and oligopoly
- Profit sharing reduces likelihood of collusion and reduces union militancy
- In general profit sharing firms outperformed non-profit sharing firms
Empirical insights - Kruse 1992?
- Profit sharing and productivity in US companies
- Positive relationship
- Profit sharing increases productivity around 3% - size of effect increases with proportion of employee participation
- Level of profit share not important
- Firm should therefore have profit sharing but as low a level as possible
