1922 Encyclopædia Britannica/Profit-Sharing and Co-Partnership

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27379281922 Encyclopædia Britannica — Profit-Sharing and Co-PartnershipMargaret Isabel Cole

PROFIT-SHARING AND CO-PARTNERSHIP (see 22.423).—Profit-sharing was defined by the International Conference on Profit-Sharing held in Paris in 1889 in the following formula: “The International Congress is of opinion that the agreement, freely entered into, by which the employee receives a share, fixed in advance, of the profits, is in harmony with equity and with the essential principles underlying all legislation.” This definition, which is accepted by nearly all writers on profit-sharing, excludes on the one hand distributions made by a firm to its employees, say at Christmas, the amount of which is not fixed in advance, and to which the employees have no definite right. Such distributions are to industry what the Squire's coal and blankets are to village life, but they are not profit-sharing. It also excludes forms of “output bonus,” etc., under which the individual employee (or the squad or gang) gets, or is supposed to get, a share of the money which he individually saves to the firm by working faster or better; this was formerly classed with it under the general term gain-sharing, and profit-sharing is still sometimes incorrectly used to cover such forms of bonus. Under true profit-sharing the share of the employees varies with the prosperity of the firm, and depends therefore not on their exertions solely but on the competence of managers and directors, the state of the market, and other considerations.

The Labour Co-Partnership Association in 1911 expressed its view that the co-partnership of labour with capital involved: (1) “That the worker should receive, in addition to the standard wages of the trade, some share in the final profits of the business, or the economy of production. (2) That the worker should accumulate his share of the profits, or part thereof in the capital of the business employing him, thus gaining the ordinary rights and responsibilities of a shareholder.” To this in 1919 the Association added a further clause: (3) “That the worker shall acquire some share in the control of the business in the two following ways:—(a) By acquiring share capital, and thus gaining the ordinary rights and responsibilities of a share-holder, (b) By the formation of a co-partnership committee of workers having a voice in the internal management.” The addition of the last clause is due to the belief, now rapidly gaining credence, that the smaller shareholders in the ordinary firm have in reality little or no voice in its management, and that other means are necessary to provide the employee co-partners with their share in control. It has not, however, been adopted by all, or nearly all, of the firms which have co-partnership schemes.

Profit-sharing and co-partnership are thus seen to differ in theory by the fact that the profit-sharer has a share only in the cash profits of his employer over a given period, and may take his share away in his pocket entire, whereas the co-partner must take some of his profit in the form of investment in the business, and receives also some share in the management. In some cases the co-partner does not actually have to invest, but is offered shares at par or at reduced rates, or even free, these shares generally carrying with them all shareholders' rights. In practice, however, there are so many possible variations that no general distinction is possible, and the terms are frequently interchanged. It will also be observed that both forms assume the existence in industry of two parties, the “firm” and its “employees.” They are therefore not connected with the various coöperative experiments which have been made from time to time by groups of workers, forming themselves into a firm and dividing amongst themselves the profits or losses, with the coöperative colonies of Robert Owen in England, or the ateliers or self-governing workshops of Louis Blanc in France. Co-partnership, as now understood, is distinctly a “paternal” movement, the dominant “partner” in industry being moved to confer a favour on its junior; and though the ideals of Owen, Fourier and the Christian Socialists may have had some influence on the minds of the earliest co-partners, a truer descendant than the co-partnership of to-day is the working-class Coöperative Movement, which aims at the supersession of capitalism.

The earliest example of co-partnership comes from France. In 1843 a master painter of Paris, Edmé-Jean Leclaire, divided among his permanent hands (43 out of about 300 employed) the sum of 12,266 francs. The scheme met with approval and up till 1870 this “kernel,” as he called it, of permanent workmen, who were members of the firm's mutual provident society, continued to take their share of the increasing profits. At no time did the members of the mutual provident society amount to more than a third of those employed. In 1870 the profit-sharing was extended to all the men employed, for however short a time, and upon this basis it has continued as “Brugniot, Cros et Cie. (ancienne maison Leclaire).” The arrangement for division of profits is as follows:—5% is first paid on the capital; of the remainder 15% goes to the managing partners (who according to French law have unlimited liability), 50% as a dividend to all workers in proportion to their time wages, and 35% to the mutual provident society—the “kernel”—which is now a partner in the business. The managing partners also receive a salary. This experiment, as it was the first, is also peculiar in the amount of control entrusted to the permanent workmen, the “kernel,” who are very carefully chosen. Among their other privileges it falls to them to elect new managing directors among the employees, a privilege not, as far as the writer is aware, granted under any English scheme of co-partnership. The whole business, however, employs only between one and two thousand workers; its interest is, therefore, chiefly as an experiment. (For fuller accounts of this and other French schemes, including the Familistère of Guise, consult the publications mentioned at the end of this article.)

France, as it was the original home of co-partnership, has also been the country in which it has excited the most interest, and the comparative lack of trustification in French industry has made it easier for schemes established by individual firms to be accepted. The numerical weakness of French trade unionism has also made it easier to gain the adherence of French workers, for an established trade-union movement is generally hostile to co-partnership and profit-sharing.

United Kingdom.—In the British Isles, if we except a scheme inaugurated in 1829 by Lord Wallscourt for the farmers on his Galway estates and abandoned shortly afterwards, the movement begins in 1865 with the adoption of six schemes, of which five have since been abandoned, although one (adopted by Messrs. Jolly & Son, silk mercers, of Bath) survived until 1906. One of the five was the famous Briggs scheme, of the Whitwood and Methley Collieries, to which reference is made below. The movement then progressed very slowly for some years. Between 1865 and 1888 only 66 schemes in all were launched, of which all but fourteen had disappeared by 1920.

The International Congress on Profit-Sharing which drew up the definition quoted at the head of this article was held in 1889. In that year also the South Metropolitan Gas Co. adopted profit-sharing, and thus initiated it in the only British industry in which it has obtained any considerable hold. These two facts combined to stimulate an interest in profit-sharing, and during the four years 1880-92, 83 schemes were adopted, of which only 12 survive. A long decline in profit-sharing, owing partly no doubt to the trade depression which began in 1892, led up to rather less vigorous revivals during 1908-10 and 1912-4. The World War then practically put an end to the development of the system, until the phenomenal profits of the early months of the peace and the willingness of many firms to share some of them with their employees, led to an outburst of 42 schemes in 1919. The boom continued during the early months of 1920 (19 during the first six months); but during the subsequent industrial depression there was a marked slackening of interest in this direction.

Up to the end of 1919 the British Isles had given birth to 417 schemes, of which 198, or slightly less than half, have been abandoned for one cause or another. Of the remainder, 36 were run by gas companies (see below). These figures alone, however, would give a misleading impression of the size of the movement. Of the 144 schemes started up to 1918, only 15 are returned as affecting more than a thousand employees, while no fewer than 54 affect less than a hundred. Out of the 15 again, four are run by gas companies (the South Metropolitan, the South Suburban, the Gas Light and Coke Co., and the Liverpool Gas Co.), and of the remaining 11, four of the largest affect only a portion of the workpeople in the firm's employ. These are:—Messrs. Armstrong Whitworth & Co., (12,215 out of 69,000 employed); Messrs. Pease and Partners, of Darlington (2,243 out of 11,000); Messrs. Lever Bros. (3,542 out of 8,833); and the Bradford Dyers' Assn. (3,600 out of 9,800). The only really large concern whose profit-sharing affects nearly the whole of its workpeople is the Prudential Assurance Co., 18,500 of whose 20,000 employees participate in its scheme. Details of the number participating are not available for schemes started since 1918, but as out of the 42 firms only eight have a pay-roll of over 1,000, while ten employ less than 100, it would seem that the proportions would not be materially altered if they were all included. Neither do all the smaller firms include by any means all their employees in their profit-sharing schemes. The proportion varies from case to case, falling as low, in the case of one firm of manufacturers, whose scheme dates from 1889, as 50 out of 1,500, or 3⅓ per cent. It is clear that in this and similar cases the co-partnership is really a tiny experiment carried on with a few picked employees and is of infinitesimal significance in the industrial life of the country. Nor is it only the successful experiments that are of this type; the abandoned schemes tell the same tale, except that the number of participants is lower.

Apart from the gas companies, then, co-partnership in British industry has been confined, with one or two exceptions, to small firms, and these for the most part in minor industries. The food trades, such as cocoa, confectionery, jam, chocolate, etc., and the distributive houses provide a large number of experiments; tailoring, dress-making, boot and shoe manufacture, and printing and stationery are also considerable groups. In the great basic industries of the country, (mining, cotton, engineering and shipbuilding) and in transport, co-partnership has made practically no progress, nor does it seem to be making any.

What is the reason of this? An analysis of the reasons given for the abandonment of dead schemes may provide part of the answer. Forty-nine schemes were abandoned “for financial reasons,” i.e. because there had ceased to be any profit to be shared. In 16 cases no cause can be assigned; and in about 40 the abandonment was due to changes connected with administration. There remain 91 schemes which were abandoned owing to the dissatisfaction of owners or men with their results. The men's dissatisfaction can generally be traced to a simple cause—the smallness of the dividend distributed. The average rate of bonus paid to workmen under all schemes varies within narrow limits and is generally about 5% per annum on the total of their wages. Translated into cash, this meant in 1918 that 105 firms paid to their workmen an average of £3 13s. 3d. per head, or, if the firms which paid nothing at all be excluded, of £5 15s. 2d. In 1919, the average bonus paid per head was £4 18s. 10d. It will readily be understood that so exiguous a cash benefit causes considerable disappointment to the worker who has been led to expect material advantages from being provided with an interest in the business; and this fact may also go some way towards explaining the failure of schemes which employers gave up owing to the “apathy” of their workmen. £3 13s. 3d. per annum, especially when paid in a lump at the end of twelve months, during which the workers have been working at ordinary rates, is hardly likely to provide a very strong incentive to better work.

This may account for the high mortality among profit-sharing schemes which have actually come into existence. More reasons, however, are needed to explain the smallness of their numbers and their comparative insignificance. This is undoubtedly due in part to the hostility of the consuming public, which tends to regard profit-sharing schemes as designed to keep within the industry money which should be used to reduce the price to itself. Thus the distributive Coöperative Movement, which is an association of consumers, has done very little in the way of profit-sharing or co-partnership, and that little is steadily growing less, and the English and Scottish Coöperative Wholesale Societies have both abandoned their schemes of profit-sharing, the former in 1886, and the latter in 1915.

The gas companies, to which reference has already been made, are not open to this criticism owing to their peculiar statutory position. All gas companies are regulated by Act of Parliament, and in most cases they are not allowed to increase their dividends unless the price of gas is correspondingly reduced. (In the other cases the dividend is limited to a fixed maximum percentage.) Thus the gas companies have never been able to make enormous profits at the expense of their customers, and moreover, since their accounts of capital and dividend must be regularly rendered to the Government, there is little or no cause for the suspicions which occasionally develop in co-partnership concerns, of “watered” capital and the like. Further, there was frequently before the war a considerable surplus which the companies did not wish to use in reduction of price, which, therefore, not being available for shareholders' dividend, could be distributed among the employees. This, by keeping up the workers' dividend, served to render the profit-sharing scheme popular. Since the war, surpluses have largely disappeared.

But the greatest bar to the success of the co-partnership movement has undoubtedly been the hostility of the organized labour movement. The trade unions are almost uniformly opposed to it as a policy, and in some cases even expel any member joining a co-partnership or profit-sharing scheme. This was the case in 1920 with the Amalgamated Society of Woodworkers, whose right to expel members joining Lord Leverhulme's scheme at Port Sunlight was contested in the courts, though the decision finally went against them. The earliest firms to adopt profit-sharing did little to allay the suspicions of the unions. They were generally as unfavourable to the unions as the unions were to them. The well-known experiment of Messrs. Henry Briggs & Co., which was launched in 1865, was avowedly intended to draw the men away from their union,and came to an end ten years later, after a somewhat stormy career, because the employees chose rather to uphold their union in resisting an attempt by the employers to reduce wages than to remain in the firm's employ and get what they could. The scheme of the South Metropolitan Gas Co., which nearly came to grief in its first year owing to the company's insistence that every workman should sign a yearly contract, dating from different days in each case (which would have rendered any concerted strike punishable at law), also required, until 1902, every workman to sign a declaration that he was not a member of the Gasworkers' union. Recently this attitude has been modified, and the most distinguished advocates of co-partnership, such as Mr. Aneurin Williams, now insist on the recognition of trade unions: but the unions nevertheless hold that it gives the workers in a single firm a sectional interest and so tends to divide them from their fellows in the same trade, and, further, that there is always a danger that workers in a profit-sharing firm may, in return for the profit-sharing, be induced to accept less than the rates of wages which it is the unions' business to maintain. As far as one can see, this attitude is not likely to be easily changed in the near future, and the co-partnership movement, therefore, is unlikely to spread beyond the small firms and the minor industries in which trade unionism is weak.

Bibliography.—The Ministry of Labour's Report on Profit-Sharing and Labour Co-Partnership in the United Kingdom (Cmd. 544. 1920.) is indispensable. It contains nearly all the available information, and has an exhaustive bibliography. The best book giving the case for co-partnership is Charles Carpenter's Industrial Co-partnership. A useful book is Co-partnership and Profit-Sharings, by Aneurin Williams (Williams and Norgate, 1913); a good analysis is to be found in Methods of Industrial Remuneration, by D. F. Schloss (Williams and Norgate, 1907). Later Edition. The Labour Co-partnership Association, 6, Bloomsbury Square, London, W.C.1., published a number of brochures dealing with particular aspects and particular experiments.

For the Labour point of view the best works are two pamphlets by Edward R. Pease: Profit-Sharing and Co-Partnership; A Fraud and a Failure? (Fabian Soc., 1913) and Co-Partnership and Profit-Sharing (Labour Party. 1921). See also chapters in The World of Labour, by G. D. H. Cole. (M. I. C.)

United States.—Profit-sharing, strictly defined, is a plan for increasing the ordinary remuneration of labour by amounts varying with the profits of the business. Popularly, the term is loosely used to describe a great variety of methods of wage payment. In this article it is used to describe an arrangement by which employees, other than managerial employees, receive, in addition to wages or salaries, a share of the net profits of the business, such share being distributed at the time of the declaration of dividends to stockholders. The arrangement may be expressed either by a formal agreement or an oral promise. Although the profits are contingent, the percentage of profits to be distributed is fixed and known in advance, and, like dividends, 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.

Four plans provide for workers' co-partnership committees, though there are several strictly stock-purchasing plans which allow shareholding employees to acquire a voice in management through the exercise of the ordinary voting rights of shareholders. The extent of the co-partnership in these forms is negligible.

All these varying details (and the variations are by no means exhausted in this recapitulation) reveal in large measure the spirit and purpose of profit-sharing. As a rule the employer announces his plan without previously consulting his employees. There is virtually unanimous agreement among successful profit-sharing employers that the coöperation, loyalty and stability of working forces—the chief avowed purposes of profit-sharing—are obtained by all the plans which have been in operation for any considerable period. There are, however, varying opinions as to how far these plans attain the more specific objects of (1) economy of time and material, (2) improvements in quality and quantity of output, (3) inducement to thrift, (4) avoidance of industrial disputes, (5) attainment of social justice. On the whole there is a considerable body of employers' opinion supporting the value and practicability of profit-sharing in improving industrial relations.

On the other hand union leaders universally condemn profit-sharing for three general reasons: (1) Where profit-sharing exists, wages less than the market rates are paid; (2) workers prefer a fair, fixed wage scale rather than a part of their wages undetermined and subject wholly to the employer's decision; (3) labour organization is undermined, as obligations to the firm are made a first lien on the workers' loyalty. That these criticisms have some foundation in fact is proved by the high percentage of abandoned plans and the reasons for their failure. Most of the failures were due to apathy or open hostility on the part of the workers, expressed in strikes, to diminished profits, or to changes in ownership of the business.

The success or failure of profit-sharing plans depends on circumstances not touched by the profit-sharing principle. Where favourable results have been obtained, they were due, not to profit-sharing as a mechanical device, but to the confidence which the employees had in the management.

Bibliography.—A comprehensive bibliography will be found in Boris Emmet's report “Profit-Sharing in the United States”—United States Bureau of Labor Statistics, Bulletin No. 208, 1917. Other references are: C. D. Wright, Profit-Sharing (1886); N. P. Gilman, Profit-Sharing between Employer and Employee (London and New York, 1892); idem, A Dividend to Labour (London and Boston, 1900); A. F. Burritt, Profit-Sharing: its Principles and Practice (New York and London, 1918); National Industrial Conference Board, Research Report No. 29, “Practical Experience with Profit-Sharing in Industrial Establishments” (Boston, 1920); National Civic Federation, Profit-Sharing Department, Profit-Sharing by American Employers (New York, 1920).

(J. R. Co.)