“Show me the incentive and I will show you the outcome.” – Charlie Munger
As a tight labor supply squeezes the American economy, employers are searching high and low for mechanisms to wring more productivity from their workforces.
The silver bullet depends on the consultant you ask. Many organizations default to financial incentives. Who does not welcome a bigger paycheck?
For many organizations, across-the-board wage increases are not feasible. The answer, increasingly, is to tie higher compensation to company performance. Employees do better as the company does, too.
The question becomes one of systems: Which one incentivizes workers to earnestly exert more effort?
Examining the Options
Profit sharing – where employees get a percentage of the company’s profits – has been around for decades. Payout is in cash or company stock.
ESOPs are a distant cousin to profit sharing. What is an ESOP?
Employee stock ownership plans (ESOPs) grant blocks of company stock to workers, making them company owners. ESOP companies haven’t been around as long and are growing in popularity.
Let us dive into profit sharing.
Profiling Profit Sharing
On its face, profit sharing makes sense. The greater the profit, the more compensation workers receive. Dig in deeper, and the productivity argument wanes.
The decisions and forces affecting a company’s profitability are often beyond average workers’ control. Large capital equipment or real estate purchases, for example, can affect the numbers. So can a slow economy. Or, if you really want to create furor in the ranks, hand out large executive bonuses, which workers might perceive as lessening the profit in which they share.
Profit sharing plans have an almost unsolvable conundrum built within, too. If the profit-sharing pool is divided equally among employees, it is hardly an incentive to work harder. Why, when it will not gain one a larger share than a slovenly co-worker?
Similarly, if certain classes of employees are granted larger slices of the pool than others, why should those further down the food chain work harder? To fund the bonus of someone else?
This is not to say that profit sharing is bad. Certainly not. Any incentive that organizations use to drive productivity, managed properly, can help at a time when every worker is absolutely needed.
ESOPs are a different animal. While operational oversight typically remains in a management team, the employees have a real, tangible stake in ownership. It is an ongoing benefit not tied to annual performance.
Profit Sharing vs. ESOP – which will help organizations get more out of their workforces? Our next post from Excel Legacy Group will dive further into this question.
It is a critical one, too, as organizations increasingly wonder how to maintain staffing. If you are searching for answers to this dilemma, don’t miss it. Charlie Munger, after all, is an awfully hard guy to argue with.