is paid sometimes in whole or in part in stock instead of cash. This definition excludes many forms of wage payment commonly associated and confused with profit-sharing, such as the bonuses sometimes measured by individual or collective output, length of service, attendance at work or employee savings, and sometimes given as Christmas gratuities, and such as sundry stock-purchasing schemes, none of which fluctuate directly with the net profits.
The term “co-partnership” is not generally used in the United States in this connexion, since the implied constituents, profit-sharing, stock-ownership and participation in management, are not often found in the same establishment. Many profit-sharing plans arrange for distribution of stock as a part of, or as an addition to, profit-sharing. There are also more than 60 known stock-purchasing schemes, besides many arrangements for “managerial” or “limited” profit-sharing, affecting less than one-third of the total employees. Probably fewer than ten of these varied plans provide for workers' committees as an integral part of the arrangement.
Related to the idea of co-partnership, but quite apart from profit-sharing, are a considerable number of schemes for labour's participation in management which have sprung up during and since the World War. These schemes vary all the way from representation on boards of directors, in a very few cases, to joint management through industrial and works councils, shop committees, grievance and welfare committees, shop chairmen and voluntary arbitration boards. The distinguishing characteristic of these management-sharing plans is that under them the management does not depend upon organized labour, but deals with its own employees collectively. They are distinct from profit-sharing, in that the employer retains all of the profits he makes, though the workers are given collectively a voice in determining the wages, hours and working conditions which to some extent affect the profits account. Without doubt labour's participation in management in such a sense is more usual than profit-sharing and co-partnership.
The pioneers of true profit-sharing in the United States, dating from 1886, are the Ballard and Mallard Co. of Louisville, Ky., engaged in flour-milling, and the N. O. Nelson Manufacturing Co. of St. Louis, Mo., manufacturers of plumbers' and steamfitters' supplies. The years of greatest installation of new projects were 1901, 1906, 1909-11, 1914-6, and 1919. Fully 70% of all the known plans were started after 1910. These variations in the progress of profit-sharing in the United States correspond with those in England, where profit-sharing plans found favour during periods of ample employment and labour unrest. It is only natural, however, that periods of low profits should check the spread of profit-sharing and cause the abandonment of many plans, the average life of abandoned plans being two to three years. For this reason, and since no comprehensive study had been made in the five years preceding 1921, it is difficult to state with confidence the exact number of profit-sharing arrangements existing in that year, one of general business depression. On the basis of the Government report in 1916 and subsequent semi-official studies it is estimated that 86 true profit-sharing plans were in operation at the end of 1920. Of these plans more than one-half (53%) were in manufacturing establishments, 16% in mercantile concerns, 11% in banking institutions, 9% in public utilities and the remainder scattered. Approximately two-thirds of these concerns employed less than 300 people, and only one-seventh employed more than 1,000, so that the total number of employees was less than 50,000. The number of arrangements solely for stock purchasing is not accurately known but the inclusion of several large corporations, as the United States Steel Corp. and the International Harvester Co., raises the number of participating employees to a million or more.
In the determination of the divisible fund of profits, two general methods, subject to individual variations, are followed: (1) Setting aside a specific percentage of profits after all ordinary expenses of the business, such as depreciation reserves and interest on invested capital, are taken care of; (2) fixing a rate of dividend on employees' earnings coördinate with the rate of dividend oh capital. Assume a corporation capitalized at $1,000,000 with an annual payroll of $100,000 and net profits of $220,000 a year. In most plans using the first method, the preferred and common stockholders first receive dividends (not to exceed a certain per cent, say 10%, or $100,000). The remainder of the profits fund ($120,000) is divisible and is shared with labour according to a fixed percentage, perhaps 50% to labour and 50% to capital, or 40% to labour and 60% to capital. Four of the more recent plans allow employee beneficiaries to send an accountant on their behalf to verify the company's computations. Under the second method, the divisible fund depends on dividends declared. Thus if a 10% dividend is declared, a fund equal to 5% or 7½% of the total payroll ($5,000 or $7,500) is distributed among workers. The advantage to the management of this method is that it may be found desirable to pass all dividends and use this amount for strengthening the business.
When the amount of divisible profits has been determined, there remains the apportionment of the respective shares to capital and labour. In most instances the employer determines this apportionment at the outset, announcing that perhaps 50% or 40% or 33⅓% of the divisible profits will be distributed among employees according to their earnings. Often, however, divisible profits are distributed according to the ratio of (1) total invested capital to total payroll or (2) interest on invested capital to total payroll. Assuming, in the example given above, that $120,000 remains to be divided, the ratio in the first instance is $1,000,000 (capital) to $100,000 (payroll) or ten to one, which allots $10,909 to labour and $109,091 to capital. In the second case, assuming 6% as a fair return on the investment, the ratio is $60,000 (interest) to $100,000 (payroll) or six-tenths to one, in which event labour's share is $75,000 and capital's share is $45,000. This latter method of division in 1921 was known to obtain in only one establishment.
An almost universal rule is that length of service shall be a condition of the eligibility of participants. In one or two cases the employee benefits as soon as hired. But most schemes require from three months to three years of continuous employment as qualification for a share in profits. Concessions from the specification of “continuous” employment are sometimes made to provide for such contingencies as sickness, unavoidable lay-off and accidents. Discharge for cause or quitting employment entails an automatic forfeiture of all claims to accumulated or accruing shares in profits; in one plan discharge for cause is the only occasion for forfeiture. The obvious intent of such regulations is to reduce labour turnover by rewarding the faithful. In this respect profit-sharing indirectly acts as a length-of-service bonus. A further rule as to eligibility in some plans is to require a written application from the employee who wishes to participate. In one such case employees are obligated to share in possible losses, not to exceed 10% of their earnings, 10% of their pay being held back by the employer each week to provide for this contingency. Loss-sharing in addition to profit-sharing is incorporated in four schemes. Still another restriction is as to the class of work performed, as shown by the amount of salary or wages or by classification of employment. Firms using this restriction evidently feel that the type of their workingmen is such that only a sharing limited to some of their employees would produce the desired results. Yet there is also the wish to experiment fully and the desire to extend the benefits of the plan, should limited participation be successful.
The form and time of payment of shares to employees are also important variants. Over three-fourths of the firms studied in 1916 paid their shares fully in cash, annually, semi-annually or quarterly. The others paid part in cash, part in company stock, or paid part into a common welfare fund or savings account. The stock-sharing or co-partnership plans provided many restrictions designed to encourage thrift, and to discourage speculation and absentee ownership. These restrictions take the form of prohibitions of sale of stock, sometimes only with the consent of an official of the company, or holding the stock in trust for the employee and paying him only the dividends, or of forfeiture of participating rights if such stock be sold.
