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

Besides, the profit sharing plans give flexibility to the companies, allowing, in the good years, payments of wages above the practiced in the market, without having to cut personal in the difficult years (FLANNERY et al., 1997).

The problem with this type of plan is that the profits are influenced and affected by many variables, which are beyond the control of the employee (HATTIANGADI, 1998; BECKER & RUAS, 1997) such as the governmental policy, the economic situation of the country, competition, managerial style and investment policy. The plan could fail to act as an incentive if workers improve their performance but the company's profits drop (HATTIANGADI, 1998).

The main advantages of the profitsharing program are (ROSA, 2000):

1. The program motivates the union of efforts alleviating the pressures on departments or units, because the goal is for the whole company,

2. The program increases the demand on the part of employees for improvements on the systems of the company,

3. The program improves the quality and reduces costs,

4. If loss occurs there is no profitsharing payment.

On the other hand, the main disadvantages of the profitsharing programs are (ROSA, 2000):

1. The analysis of financial statements, of which the profit is extracted, is complex, demanding training and specific knowledge from employees, and this difficulty of comprehension can lead to lack of credibility;

2. The program requires the company to expose data that entrepreneurs are not always willing to reveal, since they consider it confidential,

3. Employees might feel discouraged if they believe that the payments were insufficient or that the result presented by the company is incorrect,

4. The statements are drawn up in accordance with the accrual basis, and the positive result might not be real on the cash basis. Like this, the payment of the participations can affect the liquidity of the company.

2.4 Gainsharing

Gainsharing plans link part of the employees' remuneration to the achievement of organizational or team performance improvements (BERGER & BERGER, 1999; GOMEZ-MEJIA et al., 2000). They are based on increases on historical performance (GOMEZ-MEJIA et al., 2000); involve a performance measure and the calculation of a bonus (BELCHER, 1996)

The three gainsharing plans used most frequently by companies are: Scanlon, Rucker and Improshare. The main advantages of gainsharing programs are (ROSA, 2000):

1. They allow companies to attain specific objectives,

2. Increase credibility as goals are within the reach of employees and results are measured on known indicators,

3. Stimulate teamwork,

4. Reduce resistance to the deployment of the program,

5. Increase the demand from employees for improvement systems,

6. Reduce costs,

7. Favor the knowledge of the performance of units or branches,

8. Emphasize quality improvement, motivating the search for innovations of products and processes,

9. Require less exposure of data by the company.

The main disadvantage of profitsharing program is that if the chosen goals are attained, there is payment of a wage variable, even if the company records loss in the year (ROSA, 2000).