New NCEO Paper Looks at How ESOP Companies Share Profits with Employees

Employees in companies with ESOPs share the rewards of work through ownership, but most ESOP companies also share some of their annual profits with employees. My new paper "How ESOP Companies Share Profits with Employees," found in the Culture and Communications section of our Document Library (NCEO member login required), explores the many approaches ESOP companies use to do this.

The paper explores 10 different approaches from ESOP companies. At the simplest level, a company may just pay a percentage of profits to all eligible employees based on pay, tenure, equally for all employees, or a combination of factors. But other companies have more complex systems, such as:

• A bonus based on a mix of metrics that is paid out to all employees, with different levels receiving different amounts and using somewhat different metrics.
• A profit-sharing plan that is designed to cushion the company from ups and downs in its performance.
• A profit-sharing plan that gives every employee the same dollar amount.
• A bonus based on units sold and service quality measurements that is paid to all staff, with the percentage of goals paid out increasing as various thresholds are met.
• A profit-sharing system that bases allocations on salary, tenure, and any initiatives that employees have brought up in the company’s Kaizen process (Kaizen is a popular continuous improvement process).
• Equal bonuses that are paid based on meeting progressive revenue targets.
• A plan that provides part of the profits to business units to divide, with the rest being divided among all employees.

The paper includes a detailed description by Rich Armstrong of the Great Game of Business of the iconic and highly effective gain-sharing system at employee-owned SRC Holdings, whose stock as an ESOP company has gone up over one million percent in 42 years of ESOP ownership.

The paper also explores research on profit sharing, finding it has a small but positive impact on productivity, although it is difficult to disentangle whether employees perform better because of profit sharing or whether better-performing firms are more likely to provide it. But there are also potential downsides to incentive pay. Intrinsic motivation might get replaced by extrinsic motivation that can disappear in a bad year, or incentives might lead people to focus too much on specific goals rather than overall company performance.

The paper, which is free to NCEO members, provides more details on all these issues, while the detailed examples can provide roadmaps for creating or redesigning your own programs.