The relationship between profit-sharing/gain-sharing plans, productivity and economic value added

Journal of the Academy of Business and Economics, Jan, 2004 by Elizabeth Krauter, Leonardo Fernando Cruz Basso, Herbert Kimura

ABSTRACT

The influence of profitsharing/gainsharing plans on the performance of value drivers employed by EVA[R] 's methodology was the theme of this study. The financial drivers evaluated in this survey were: growth in sales, investment in working capital, investment in fixed capital, operating profit margins, income tax rate, cost of equity and cost of debt. And the non-financial drivers considered were: productivity, customer satisfaction, quality of the product or service, training of employee, satisfaction of employee, product innovation, process innovation, market share and safety of employee. This is a descriptive survey studied in a quantitative fashion. The data were collected through questionnaire and the statistical software SPSS was used for tabulation. The companies of the sample were of medium and large size, from the industrial sector, of different branches of activity, located in the State of Sao Paulo. The results suggest that the profitsharing and gainsharing programs have a favorable influence on the performance of value drivers. The favorable influence on the non-financial drivers was greater than on financial drivers. Productivity was the driver subject to the greatest favorable of all the drivers evaluated in this study.

1. INTRODUCTION

The influence of profitsharing/gainsharing plans on the performance of value drivers employed by EVA[R] 's methodology was the theme of this study. The financial drivers evaluated were: growth of sales, investment in working capital, investment in fixed capital, operating profit margin, income tax rate, cost of equity and cost of debt. And the non-financial drivers considered were: productivity, customer satisfaction, quality of the product or service, training of employee, satisfaction of employee, product innovation, process innovation, market share and safety of employee.

To some drivers a favorable influence signifies an improvement of the driver, such as the case of productivity. To others, it signifies a decrease in the driver, like in the case of cost of capital. The results suggest that profitsharing/gainsharing plans have a favorable influence on the performance of value drivers. Productivity was the driver subject to the greatest favorable of all the drivers evaluated in this study. This study can be a valuable instrument for the companies, when demonstrating that the deployment of sharing plans can bring benefits so much for the companies as for the employees.

2. THEORETICAL REFERENTIAL

2.1 Remuneration

According to Young & O'Byrne (2001, p. 114-115), a remuneration policy has four fundamental objectives:

1. Alignment: motivate employees to choose strategies and investments that maximize shareholder value,

2. Wealth leverage: stimulate employees to make unpleasant decisions, to take risks and to work long hours,

3. Retention: give employees sufficient total compensation to retain them, particularly during periods of poor performance caused by market or industry factors,

4. Shareholder cost: limit the cost of compensation to levels that will maximize the wealth of shareholders.

The remuneration system should be aligned to the strategy of the company (YOUNG & O'BYRNE, 2001). The two types of strategy more used are strategy of cost leadership and differentiation strategy.

For Martocchio (1998), the companies can reach their objectives the pursuit of low costs and/or differentiation through the implantation of participation plans.

The companies' leaders in costs use financial measures for evaluate and remunerate their employees, while the companies with differentiation strategy use non-financial measures (YOUNG & O'BYRNE, 2001; ITTNER et al., 1997).

2.2 Variable remuneration

The objective of variable remuneration is to improve business performance (BELCHER, 1996) and to make the company more competitive (MARTINS & BARBOSA, 2001), conditioning part of the employees' payment to the attainment of goals and objectives (XAVIER et al., 1999).

The variable remuneration program must take strategies, structure, values, processes and people into account. The program must be flexible and sufficiently mobile to adjust to the dynamic circumstances of the environment (XAVIER et al., 1999). Many companies adopt plans that have been successfully deployed at other companies, without taking the particular strategies and characteristics of each company into consideration. Indicators that are valid for one company might not prove valid for another.

Profit-sharing and gain-sharing plans are variable remuneration alternatives more used by Brazilian companies.

2.3 Profitsharing

In profitsharing plans, the sums paid by companies to their employees are taken from the company's income. These plans can be based on a measure of return or of income.

The profit sharing plans are an incentive form for the workers to act in agreement with the best interests of the company, instead of looking for the satisfaction of their own interests. These plans allow the companies to align their labor costs with their ability of paying wages. Like this, in recession periods in the businesses, the fixed costs of labor can be smaller (HATTIANGADI, 1998).