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

2.5 Profitsharing and gainsharing in Brazil

Profitsharing in Brazil first appeared in the Federal Constitution of 1946. The constitutional texts of 1946 to 1969 refer to the sharing of workers in companies' profits, but the law was not regulated.

The regulation took place through Provisional Measure 794 of 12/29/1994. After the successive publication of various Provisional Measures, the government ratified the text by Law 10101 of 12/19/2000. This Law provides that (BOLETIM IOB, 2001; PARRAS, 2002):

1. Profitsharing and gainsharing will be subject to negotiation between the company and a committee formed of employees and a union representative,

2. The criteria can be indexes of productivity, quality or profitability,

3. The rules should be clear and objective,

4. The agreement should be filed at the union entity of the workers,

5. The program does not constitute a basis for the incidence of any labor charge,

6. The participation received by employees will be taxed at source, and the company will be responsible for their withholding and payment,

7. Companies can deduct distributed participation as operating expenses,

8. The payment periodicity cannot be less than semi-annual.

Brazilian legislation makes no distinction between profitsharing and gainsharing. The definition depends on the company's objectives in adopting the program, lf it was understood as a legal imposition, or an instrument capable of reducing union pressures, the tendency will be for the deployment of a profit-based model (GONCALVES, 1996).

If the objective is to intensify the motivation of workers, the choice will be for a gainsharing plan. In this case, the company chooses one or more indicators best suited to its strategic objectives (GONCALVES, 1996).

2.6 Creation of value

The VBM or Value Based Management system constitutes a management system designed to create value for shareholders. A company creates value when the obtained returns are higher than the cost of capital used to produce these returns (WAHBA, 2002)

It is important for the success of the VBM, to evaluate and remunerate employees with base in the value created for shareholders (ALCANTARA, 1997). According to Peterson & Peterson (1996), a company should consider the following factors when choosing a performance measure:

1. The chosen measure should not be influenced by accounting methods,

2. The measures should take into consideration results expected in the future,

3. The measures should take into consideration the risks,

4. The measures should contemplate factors that are not under the control of employees.

2.6.1 Traditional performance measures. Traditional performance measures are based on accounting data. Their advantages include the fact that information is available in financial reports and they can be easily calculated and construed (PETERSON & PETERSON, 1996).

The main traditional performance measures are (FRIEDLOB et al., 1996; KASSAI et al., 2000): ROI (return on investments), ROA (return on assets), ROE (return on equity), RONA (return on net assets), EPS (earnings per share) and PIE (price/earnings ratio).