In recent years a growing number of Western governments have been attracted by proposals to link workers’ remuneration more closely to their company’s performance. Martin Weitzman and James Meade and others argue that the ‘fixed wage system’ helps to create both excessive unemployment and excessive fluctuations in economic activity. They conclude that macroeconomic performance would be improved by the encouragement of payment systems where part of employee compensation is linked to the performance of the firm, thereby improving worker productivity and the firm’s competitiveness.
There are a number of ways to have workers’ remuneration linked more readily with firms’ commercial performance. One is to link wages to profits by using cash-based profit sharing (where workers are made cash payments which vary with employer’s profitability). A second is to have workers paid partly in their firms’ own shares. A third, and more extreme alternative, is producer co-operatives where workers participate in profits, ownership and decision-making. Such sharing schemes involve workers accepting a degree of market risk; the more successful the organisation, the higher are the payments employees will receive. We will not be concerned herewith individual incentive schemes such as payment-by-results and commission which do not directly involve market risk, but are determined more directly by the performance of the worker.
In this article we examine both the theoretical and empirical evidence in support of such schemes. We concentrate upon the evidence for Great Britain. Section1 presents a series of new estimates of the extent of profit.sharing in Great Britain. Section 2 surveys the empirical evidence. It describes tests done — by myself and others— of the various theories. It also presents new evidence on the attitudes of individuals in receipt of various types of profit shares. Section 3 contains the conclusions.Read Article