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In 1912, there were 133 profit-sharing schemes in the UK, involving
106,000 workers. Britain therefore has extensive experience of
profit-sharing schemes, but this has been completely ignored in the
recent debates on profit-sharing, Tim Hatton told a lunchtime
meeting on February 19. Hatton reported the results of his latest
research, the first quantitative analysis of the reports on
profit-sharing schemes published by the Board of Trade between 1891 and
1912. This suggested that the introduction of profit-sharing had
initially beneficial effects which wore off over time, and in most cases
the schemes only operated successfully where there already existed an
atmosphere of mutual trust and cooperation. The idea of linking employees' pay directly to the profits of the enterprise in which they work has received growing attention among economists. Martin Weitzman, for example, has argued that profit sharing could increase wage flexibility and reduce unemployment for the economy as a whole. For the individual firm, it could increase productivity and improve industrial relations. Hatton maintained that these theoretical and empirical studies have ignored the long experience of profit-sharing in Britain and Continental Europe. The first profit-sharing scheme to attract widespread attention was introduced in France in 1842, but it was not until 1865 that profit-sharing schemes were introduced in Britain. Profit-sharing grew unevenly in the UK after 1865: the number of schemes grew rapidly in the years 1889-92 and again in the five years before 1914, though it was only in the gas industry that they became widespread. Did these schemes yield returns large enough to alter the incentives facing workers? According to survey data collected by the Board of Trade, payment from profits added 5.5% to the wages of eligible employees in reporting companies. Thus for the eligible worker, profit-sharing typically amounted to over two weeks' extra wages each year comparable to recent schemes. Although these additions to wages were significant, however, they could easily be eliminated if profit-sharing firms paid correspondingly lower wages, as some trade unions claimed at the time. If firms were to benefit from profit-sharing, then labour productivity would have had to increase by at least as much as the average increase in worker's incomes. Evidence from a questionnaire sent to employers in 1912 indicated increased worker effort in a few of the firms with profit-sharing schemes. More often, employers stressed that profit-sharing had helped cement goodwill and harmony between them and their employees. Many of the early schemes were short-lived and by 1912, of the 299 schemes which had been started, only 133 were still in existence. This is often seen as telling evidence against the viability of profit-sharing, but Hatton disagreed. In perhaps 20% of cases, the schemes collapsed because the firm itself went out of business. He therefore carried out a more detailed analysis, using the Board of Trade data. He constructed a model in which the probability that a scheme would fail in a given year depended on the age of the scheme and on other factors, such as the size of the firm concerned. Hatton used this model to investigate several hypotheses. One was that profit-sharing would be more successful if workers were more skilled, and thus more motivated and harder to supervise. A second question concerned the type of scheme: a cash bonus might provide a more direct stimulus to productivity, while `provident' schemes and employee stock ownership plans might engender greater loyalty to the firm. The size of firm might also be important: the `free-rider' problem might be less serious in small units, although the greater stability and more formal organization of larger firms could also favour profit-sharing. Hatton's analysis indicated that the nature of the industry was relatively unimportant in explaining the survival of schemes. The size of firm and type of scheme were important, however: profit-sharing typically lasted longer in larger firms and in those which had provident and (to a lesser extent) cash-based schemes. The results also indicated that older schemes were more likely to be abandoned, suggesting that schemes yielded initial benefits which wore off over time. The growth in profit-sharing in 1865-7, 1889-92, 1912-14 and 1919-20 coincided with growing unionism and industrial unrest. Several historians have therefore characterized profit-sharing as a strategy to combat unionism. In his statistical analysis, Hatton found no evidence that schemes launched during the turbulent years of `new unionism' between 1889 and 1892 fared differently from those started at other times. Hatton concluded that while profitsharing could and often did improve industrial relations, it did not provide a solution to poor industrial relations. The historical record therefore showed that profit-sharing can work, but that it has not been a universal success. Many participants at the talk wanted more details on the effects of profit-sharing schemes on wages and profitability. Some trade unionists at the turn of the century had claimed that wages in companies with schemes were lower, but the Board of Trade had pointed out that many companies, both those with schemes and those without, paid wages below the industry standard. The evidence also suggests that schemes had little effect on lay-offs and employment. Unfortunately, Hatton observed, we have no information on the effects of profit-sharing on company profitability; the best source we have for such data are the very few detailed business histories from the period, which may reward further investigation. One member of the audience noted that most modern schemes seemed to run out of steam after about 10 years. This was consistent with the early twentieth century experience of such schemes, according to Hatton: these lasted an average of 10 to 12 years. |