Profit sharing boosts employee productivity and satisfaction

We all know that people respond to incentives. Economics 101 teaches that workers put forth greater effort when these efforts are rewarded financially, and top talent tends to gravitate toward jobs and firms where rewards are geared to performance.

For the most part, however, the research that has led us to these conclusions has focused on performance incentives for individual workers, such as piece rates, merit pay, individual commissions and bonuses.

Today’s reality is different. Since the mid-2000s, broad-based shared capitalist programs — in other words, programs in which firms offer profit-sharing and employee ownership to nonmanagers as well as managers — have spread to cover more employees than traditional forms of individual performance-based pay in Europe and the United States. The research has taken time to catch up. But we’re finally starting to get a better picture of the impact these incentive programs have on rewarding workers for the good performance of firms or teams.

Some questions remain: Does shared capitalism actually work? And, more specific, does it boost productivity? To help answer these questions, the National Bureau of Economic Research undertook a huge program of research with companies using such practices to try to understand why firms adopted them, what they expected from them and what they got. The conclusion from this body of work, together with similar work conducted in the U.K. and elsewhere, is that such plans can and do work, often when combined with supportive management practices.

Our own recent research also indicates that shared capitalism can improve job satisfaction. This is the case even when controlling for the additional income a worker can derive from group incentive plans, suggesting that workers derive value from sharing ownership in their firm over and above the value they get from making additional money. The effect is partly related to the warm glow employees feel in response to the “gift” of free or discounted shares, and partly to the effect employee share ownership plans have in dampening the “bad” aspects of a job. Importantly, individual performance-related pay plans do not have this positive well-being effect — they can incentivize through income, but they don’t affect worker well-being in the same way as shared capitalism programs.

While we’re learning a lot more about how group incentive programs work, there is still a lot we don’t know. For example, we don’t know whether it’s simply that “good” firms and “good” workers participate in shared capitalism, leaving open the possibility that it may not increase productivity everywhere. As our society seeks to build better ways to incentivize employees, economists and policymakers alike should spend more time and energy experimenting with shared capitalist incentive systems to further our understanding of what works and why.