1911 Encyclopædia Britannica/Profit-sharing
PROFIT-SHARING (i.e. between employer and employed), a method of remunerating labour, under which the employees receive, in addition to ordinary wages, a share of the profit which the business realizes. The term is not infrequently used loosely to include many forms of addition to ordinary wages, such as bonus on output or quality, gain-sharing and product bearing. Yet strictly, where an employee or a group works for a share of the product, or is paid so muchin addition to ordinary wages in proportion as the product exceeds a certain quantity, or the quality exceeds a certain standard, in neither of these cases have we profit-sharing, for the net result of the business may be a large profit or a small one or a loss, and the employee’s claim is unaffected. In the same way if a Workman is employed on the basis that if in doing a particular job he saves something out of a stipulated time of labour, or a stipulated amount of materials, he shall receive in addition to ordinary wages a proportion of the value so saved, that is technically gain-sharing, not profit-sharing. Even where the bonus depends strictly on profit, it is not reckoned as profit-sharing, if it is confined to the leading employees.
An agreement is of the essence of the matter. It is not profit sharing where an employer takes something from his profits at his own will and pleasure, and gives it to his employees. Strictly such gifts in cash are gratuities, while, when they take other forms, such as better houses, libraries, recreation rooms, provision for sickness and old age, all given at the will of the employer, we have paternalism. Such benefits thus taken expressly from profits and varying more or less with the amount of profit certainly approach true profit-sharing: they are sometimes called “indeterminate” profit-sharing. Though many of the above methods of remunerating, or benefiting, the employed are from time to time included under profit-sharing even by writers of repute, the strict sense of the term was defined by the international congress on profit-sharing in 1889 as “an agreement freely entered into by which the employed receives a share of profits determined in advance.” It does not follow that the agreement must be actually enforceable at law; some employers to protect themselves from litigation stipulate that it shall not be.
Profit-sharing, in the loose sense, must be of untold antiquity; the first great example of profit-sharing in the strict sense is that of the Parisian house-painter, Edme-Jean Leclaire, “The Father of Profit-Sharing.” In 1842 he was employing 300 men on day wages. By greater zeal and intelligence and less waste, not necessarily by harder work, he reckoned they could save £3000 a year; and he made it their interest to do so by arranging that they should receive the greater part of the saving themselves. This arrangement proved a very great success; the material gain to the men and the improvement in their morale were marked; and Leclaire, who began life with nothing and died worth £48,000, always maintained that, without the zeal drawn out in his men by profit-sharing, he never could have made so large a business or gained so much wealth. In 1908 the system was still in active operation in the firm. Its main features are as follows: after paying 5% interest on the capital, and small sums as wages of superintendence to the two managing partners, the remaining profit is divided into four parts, one of which goes to the managing partners, one to the Mutual Aid Society, and the remaining half to the employees as a dividend on their ordinary wages, exclusive of piece-work and overtime, on which no dividend is paid. The Mutual Aid Society is a registered body, and is a limited partner in the firm, the liability of the two managing partners being unlimited and the control resting entirely in their hands. The benefits of the Mutual Aid Society, and of the profit-sharing generally, are enjoyed in the main by all the employees of the business, but certain advantages are confined to a limited number of permanent employees.
Leclaire’s system attracted the marked interest of John Stuart Mill and other English economists, and in 1865–1867 a number of experiments in profit-sharing, or as it was then called, industrial partnership, were made in England, the most noted being that of Henry Briggs, Son & Co., at their collieries in Yorkshire. The main object in this case was to detach the workmen from the trade union and attach them to the iirm. In other ways the experiment was very successful, and £40,000 was divided as bonus on wages in nine years, but the main object was not attained; and when the price of coal fell heavily after the inflation of 1873 Briggs’s men joined the strike to resist a reduction of wages, and the experiment came to an end. The present extent of profit-sharing, though in itself considerable, is but small in comparison with the vast extent of the world’s commerce and industry, and except in one of its developments, co-partnership, it can hardly be said to be making progress. In 1906 there were in the United Kingdom and its colonies 65 ordinary firms practising profit-sharing in its strictest sense, and 17 others known to have adopted and not known to have discontinued it, making 82 in all as against 92 in 1901, and 101 in 1894. On the other hand the number of employees had grown from 28,000 in 1894 to 48,000 in 1906. In addition about one-fourth of the workmen’s co-operative societies in Great Britain (see Co-operation) practise profit-sharing with perhaps 30,000 employees.
In 1894 it was found that there were more profit-sharing firms in the British Empire than in any other country, and this is probably still true. The only rival is France, where, however, the term “participation aux bénéfices” is used in a wider sense. There are also important examples in Germany, the United States, Switzerland (where the state once applied the system in the postal service, and still does in the telegraphs), in Holland, in the socialist co-operative societies of Belgium, and elsewhere.
Profit-sharing has been quickly abandoned in many instances, for various reasons; there were no profits to divide; the small bonus given seemed to have no effect; the hope of detaching the men from their union, or contenting them with lower wages, was not realized; or the business passed into unsympathetic hands. On the other hand, one lasting success in such a matter proves more than many short experiments which failed; and profit-sharing has been splendidly successful where some high minded man has breathed into it the spirit of partnership. Often it has been a step to actual partnership; the workman has not only received a share of profit, as added remuneration of his labour, but been led on to invest in the capital of the business, and as a shareholder, to take his share of the profits paid on capital, as well as of responsibility, of loss if any, and of control. This system of profit-sharing plus shareholding is now known as co-partnership (see Co-operation), and is making undoubted progress. It is exemplified in nearly all profit-sharing cooperative societies, and in a growing number of businesses of non-co-operative origin which accumulate part or the whole of labour’s profit in shares. In 1908, in the Familistère of Guise the whole capital of £200,000 belonged to the workers and a few retired workers, in Leclaire’s old business the Mutual Aid Fund owned half, in the Laroche-Joubert paper-works the employees owned more than two-thirds. In the South Metropolitan Gas Co. the employees owned £327,000 and elected three of the nine directors. It would seem to be in this direction, as a step to full partnership, that profit-sharing has a great future before it.
Bibliography.—A large number of works are noted in the International Co-operative Bibliography (London, 1906; International Co-operative Alliance). The following may be specially mentioned: Sedley Taylor, Profit-sharing between Capital and Labour (London, 1884; New York, 1886); N. P. Gilman, Profit-sharing between Employer and Employed (London and New York, 1892); and N. P. Gilman, A Dividend to Labour (London and Boston, 1900); Board of Trade Report by D. F. Schloss, on Profit-sharing (London, 1894; with yearly a denda in the Labour Gazette); D. F. Schloss, Methods of Industrial Remuneration (London, 1894);Victor Böhmert, Die Gewinnbeteiligung (Leipzig, 1878, and Dresden 1903); Publications of the Société pour l’étude de la participation (Paris, 1879 and onwards); Albert Trombert, Guide pratique de la participation (Paris, 1892); International Co-operative Alliance publications, especially Report of Fifth Congress (London, 1902); Labour Co-partnership Association Reports and Publications (London, 1883, and onwards). (A. Wl.*)