Does Profit Sharing Effect Productivity - Coursework Example

Does Profit Sharing Effect Productivity? Profit sharing is used by organizations as an incentive to improve the performance of employees. It is used to demonstrate the commitment of the owners and management towards rewarding the hard work of employees. Profit sharing enhances the cooperation of all the stakeholders in prosperity and profitability of the organization. Some scholars argue that rewarding the employees for their contribution to the profitability of an organization has caused controversies among scholars and business managers. Others argue that it gives the employee the impression that the organization is only dependent on their input to make profits (Cable and Nicholas, 10). However, a broad consensus indicates that effective rewarding of employees through profit sharing improves the productivity of the workforce. This paper seeks to explore both sides of the perceptions to come up with the most sensible side of the views. The research is focused on identifying the effects of profit sharing on the performance of the employees as well as the factors affecting productivity in profit-sharing firms. Profit sharing is supported by the theory that profit sharing reduces the cost of supervision. By letting the employees improve its performance due to the rewards ahead of them, the management will spend little time supervising the employees. Metzger (34) indicates that the method will create and nurture an organization culture that emphasizes on the self-drive of the employees (Jana and Petera, 8). Since the workforce requires minimal supervision, the organization requires fewer employees in the management and supervision roles. Therefore, the organization cuts costs incurred due to management responsibilities. The employees will also contribute innovative ideas to the organizations to improve their working conditions. They can suggest on ways to improve their performance to the management which will in turn improve the performance of the organization (Long and Tony, 23). Making a part of workforce payment to be contributed by its performance can improve the performance of the workforce. Employees will be motivated to work for that extra pay thus increasing the productivity of the organization. It will also improve the cooperation of the employees to work collectively so that they can share the profit that will result from their performance (Raymond, 22-23). Profit-sharing can attract, develop, and retain competent workforce. After adapting to the profit-sharing system, the performance of employees increases gradually. Continuous improvement of the employees means that the organization will have a very competent workforce in the end (Jana and Petera, 8). Profit sharing also encourages employees to motivate each other. The motivation is because the performance of one employee has impact on the shared profit. Experienced employees will encourage, mentor, and support new employees to improve their performance. The process enables new employees to settle very quickly in their job due to the guidance and support by the experienced workforce (Cable and Nicholas, 12-16). The notion that all employees will adopt organization, culture, and values is based on assumption that all employees will be supportive of the rewarding system. On the contrary, some employees may not adopt the organization culture and will be a liability to the hard work of the other employees. It is complicated to measure the individual contribution to the profit of the organization. Cruise (7) states that “Profit sharing is generally measured as a dummy, dollar figure or, percent of compensation”. Developing techniques to measure the performance of an individual is also challenging (Cruise, 5-8). Therefore, some employees may enjoy the rewards at the expense of the top performers. The method of sharing the profit can also be challenging since employees are on different payments. Moreover, profit sharing may cost the organization since the managements must spend time and funds to develop and implement the rewarding scheme. It would also require effective evaluation of the performance of the employees (Helper and Morris, 48). Profit sharing can reduce the productivity of the workforce of an organization. The most discouraging fact about profit sharing is that any extra effort by an individual will be shared equally with all other employees who might fake their performance. For this reason, employees will not input any extra effort than their colleagues. The performance of the workforce may not be optimal because of this fact. In other cases, some employees may be dissatisfied with the profit sharing methods used by the organization thus become demotivated (Cable and Nicholas, 12-16). Some employees might be working harder than other employees yet they get smaller rewards than those who work less hard (Kruse, 11). Other employees may take advantage of the reward scheme and device ways to inflate their performance so that they get huge fractions of the shared profit. In other cases, some employees sabotage the rewarding system by distorting the performance of other employees. This is because the profit sharing system may exert high pressure on the employees. Too much work pressure might demotivate the employees. Moreover, the rewarding system might not reflect the entire effort put by the employees in the profitability of the organization. Therefore, employees might become demotivated leading to poor performance and less productivity for the organization (Kruse, 15). The problem of shirking is associated with profit-sharing payment methods. The larger the organization, the greater the problem of shirking becomes. Large organizations have greater work interdependencies thus hire cases of shirking. Shirking in firms that have adopted profit-sharing compensation systems, costs the firms heavily since the firms cannot account for the free-riders. Team production is affected by shirking especially if there is less cooperation among the team members. Team production is effective is if the costs of shirking are internalized to the employees. Otherwise, the company may experience reduced productivity by externalizing the cost of shirking. Internalizations forced the employees to punish free-riders to reduce liabilities in their teams. The teams could be based on the organization’s departments and the heads of departments have the responsibility of assessing the performance of free-riders and taking punitive measures against them (Kruse, 6-14). Richard and Tony indicate that “Working in a team setting may encourage anti-shirking behavior in a variety of ways”. Team production is essential in the encouragement of anti-shirking behavior in firms hence increasing the productivity of employees in a profit-sharing payment scheme. Shirking is easily identifiable in teams than it is when employees are working individually in isolated contexts. Working individually increases interdependence of the workforce thus higher incidences of shirking (Raymond, 22-23). Therefore, shirking employees increase the workload of other employees. This reduces the productivity of the overburdened employees as well as the productivity of the entire team. In a team production, the team is forced to develop working norms to reduce incidences of shirking. The cooperation of a team increases chances of formal and information training through coaching, mentoring, and support among the team members (Long and Tony, 26). Profit-sharing does not solely increase the productivity of an organization. There are other factors affect profit-sharing as well as the productivity of an organization. The size of an organization is the major factor affecting its productivity in profit-sharing firms. Large organizations have many performing and non-performing employees. The effort contributed to the profitability of the organization is divided with the number of employees equally. Therefore, if there are many free-riders the profit shared will reduce since fewer employees are contributing the profitability of the organization (Metzger, 34-37). Motivation is another factor affecting the productivity of the workforce in profit-sharing firms. The fact that an employee’s payment is faced with uncertainty and instability demotivates the working force. Once a firm makes loses due to other factors, employees will be demotivated by the reduction in their payment. The demotivation will reduce the productivity of the employees which will in turn reduce the profitability of the firm. Reduction in profits of the firm will create an impression that the firm is poised to make losses for longer a period hence continuous decrease in the productivity of the workforce (Berger, 18). Profit-sharing can increase the productivity of a firm if the human capital employed is effective. Organizations that pay above market wages are likely to attract competent and motivated employees. If the fixed pay is high enough, an employee will not be demotivated by reduced profits in case of tough economic times. The fixed payment will serve as the break-even point of the employee’s returns from the employment (Conte and Jan, 13-16). The firm will also benefit from the competent human capital thus more profitability. By hiring and maintaining highly skilled human resource due to high wages, a firm is assured of productivity of its human resource. If other factors remain constant, the organization will have a highly productive workforce. The firm will thus make more profits which will in turn motivate its human resource to be more productive (Long and Tony, 25). From the views by scholarly and no-scholarly sources, it is evident that profit-sharing does not guarantee productivity of the workforce. There are other factors that affect the productivity of the workforce that should be considered before implementing a profit-sharing compensation method. The major factor that affects the profit-sharing compensation method is the size of a firm. Large firms are less likely to experience productivity of their human resource department when they implement profit-sharing compensation methods. This is because of the higher effects of shirking and free-riding caused by the large workforce. Moreover, free-riders might be concealed by the large workforce where responsibilities are interconnected. Teams can solve the problems of shirking and free riding since they can weed out the poor performers from the teams. Cooperation among the team members will increase their productivity hence profitability of the organization. It can be deduced that small organizations can benefit from profit-sharing compensation methods. Profit-sharing motivates employees to work harder thus increasing their productivity. The employees will develop cooperation thus working as a team. Formal and informal training of employees increases the performance of new employees. The training is facilitated by the motivation of increasing the new employees who will become more productive thus increasing the shared profit. It can also increase the chances of hiring and maintaining competent employees if the organization pays higher than other organizations. In that case, the organization will make huge profits due to the productivity of the employees. It can be concluded that profit-sharing is not an assurance of productivity by employees as identified in this paper. Productivity of employees is dependent on other factors apart from profit sharing. Work Cited Berger, Lance A. The Compensation Handbook: A State-of-the-art Guide to Compensation Strategy and Design. 5th ed. New York: McGraw-Hill, 2008. Print. Cable, John, and Nicholas Wilson. "Profit-Sharing and Productivity: Some Further Evidence." The Economic Journal: 550. Print. Conte, Michael A., and Jan Svejnar. "Productivity Effects of Worker Participation in Management, Profit-sharing, Worker Ownership of Assets and Unionization in U.S. Firms." International Journal of Industrial Organization: 139-51. Print. Cruise, Douglas L. "Does Profit Sharing Affect Prodcutivity." NBER WORKING PAPER SERIES. NBER. Web. 21 Nov. 2014. . Helper, Susan, and Morris M. Kleiner.International Differences in Lean Production, Productivity and Empoyee Attitudes. 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