(Illustration by iStock/narvo vexar)
What happens to companies when owners are required to give a percentage of their profits to employees? A new study of French firms finds that profit sharing is an effective way to get more money into the hands of workers on the lower end of the pay scale without affecting operations.
“Mandated profit-sharing redistributes excess profits to lower-skilled workers in the firm without generating significant distortions or productivity effects,” the authors write. Not everybody wins, however. The money that workers receive from profit sharing, the study finds, comes directly from shareholders and the government. The companies studied had tax payments lowered by some 20 cents per dollar paid to workers.
The authors, Elio Nimier-David, an assistant professor of economics in the School of Industrial and Labor Relations at Cornell University; David Sraer, a professor at the University of California, Berkeley’s Haas School of Business; and David Thesmar, a professor of financial economics at MIT’s Sloan School of Management, analyzed governmental tax-filing data from French firms to see how they were affected by profit-sharing policies.
In France, profit sharing has been mandatory for firms since 1967, when Charles de Gaulle backed it as a national policy to situate the country’s economy somewhere between the capitalism of the United States and the communism of the Soviet Union. The idea was to give workers a stake in firms’ success and to align their incentives with those of the shareholders. Today, French workers tend to get bonuses based on their firm’s overall profits, with a typical payout of 4 to 5 percent of a worker’s wages.
Originally, the law required profit sharing when a firm had more than 100 employees, but in 1990, the threshold was lowered to 50 workers. That change created a way for the researchers to measure the effects of profit sharing at firms that were not subject to the earlier requirements but fell under the new rules.
“Profit sharing really acts as a redistributive tool, taking some profits from entrepreneurs and redistributing them to workers,” Nimier-David says. “Beyond that there is little effect on productivity or growth of the firm.”
There is also the effect on pay levels. Lower-skilled workers experience profit sharing as a bonus on top of their usual wages, while for higher-skilled workers, “there’s a little more substitution between their base wage and this bonus,” he says. This means that their total compensation generally stays the same whether or not they receive a profit share under the law.
The policy does, however, force business owners to calculate the marginal cost of hiring when the company comes close to the employee headcount threshold. “When there’s profit sharing binding after some threshold, the cost of a new worker isn’t just the wage of the new worker, but also the profit sharing you’ll have to give everyone,” Nimier-David says. “The gains in terms of productivity versus the cost of paying productivity to everyone is not worth it to these firms.”
Although the study looked only at France, the results are useful elsewhere as well, Nimier-David says. Mexico has a similar rule for mandatory profit sharing, while in other countries, including the United States and European nations, companies often choose an organizational form that pays out profits to workers. (The next research question Nimier-David is studying involves employee stock-ownership plans, which affect some 12 million workers, he says.)
Previous research on profit sharing has found that it causes productivity to rise, but those papers looked at companies that had voluntarily chosen to split profits with employees, says Douglas Kruse, a professor at the Rutgers New Brunswick School of Management and Labor Relations, who runs a research center on employee ownership and profit sharing. Because this study used the natural experiment of the profit-sharing law’s rule changes, it avoided any potential sampling issues, he says.
“I’m not surprised that mandated profit sharing doesn’t appear to make a difference in productivity, since positive productivity effects depend on creating a climate of cooperation within the firm,” Kruse says. “But it is remarkably interesting that mandated profit sharing seems to increase the compensation of low-skilled workers, without negative productivity effects.”
The study moves the field forward, Kruse says, by expanding on prior work that showed profit sharing adding to market-level pay. “These new results suggest that government and company policies to increase profit sharing may be one way to mitigate growing inequality by sharing economic rewards more widely without hurting economic performance,” he says.
Find the full study: “The Effects of Mandatory Profit-Sharing on Workers and Firms: Evidence from France” by Elio Nimier-David, David Sraer, and David Thesmar, Quarterly Journal of Economics, forthcoming.
Read more stories by Chana R. Schoenberger.