Introduction to Profit Sharing and Loss Participation

When candidates and politicians like Hillary Clinton propose that companies should share profits with employees, their intent is often to address a more equitable distribution of benefits. However, the concept of sharing losses can be more contentious. This article explores whether profit sharing includes sharing losses, and the practical implications for both employees and companies.

Impact of Business Failures on Employees

Business failures or even a decline in performance have disproportionately negative effects on employees. When a company is struggling, raises and bonuses diminish or are eliminated, employees may face layoffs or reduced hours. Historically, such financial difficulties have a ripple effect on employee morale and job security.

A Personal Reflection: Experiences at McDonald's

During my tenure at McDonald's, I personally experienced the demands of a busy lunch rush. As the sole producer of 550 items per hour and making less than the average of a Big Mac, which was priced at $2, the discrepancy between my earnings and the sales price was starkly apparent. This example illustrates how profitability directly influences the earnings of employees, emphasizing the need for a more balanced approach.

Corporate Incentive Plans and Their Role in Profit Sharing

Many companies use corporate incentive plans to align employee performance with business goals. These plans typically withhold a portion of the market rate pay and pay it out later if certain performance targets are met. While often referred to as "bonuses," the true bonus only arises when employees exceed their performance expectations. This design aims to incentivize high performance and align employee interests with those of the company.

Examples of Incentive Plans

Some companies opt for a hybrid approach, aiming for market-level pay on average and above-market pay in exceptional years. However, this model faces scrutiny as employees may perceive their individual contributions as negligible in determining incentive pay. Therefore, they often prefer a guaranteed level of market pay over a risky bonus system.

Sharing in Losses: A Rare Practice

The idea of sharing losses among employees is less common than profit sharing due to its significant impact on employee morale and retention. Companies that do implement loss-sharing models usually do so as part of a broader strategy to enhance loyalty and work culture. However, this approach comes with a cost in terms of attracting and retaining top talent.

Successful Implementation of Loss Sharing

A notable instance is the case of Steve Easterbrook, former CEO of McDonald's. Despite high-profile issues, it was later revealed that he returned 105 million dollars in stock and payouts. This move demonstrated the company's commitment to integrity, but it also highlighted the substantial financial cost associated with any loss-sharing arrangement for top management.

Conclusion: Balancing Employee Benefits and Company Health

The concept of profit sharing versus loss participation highlights a critical tension between company health and employee benefits. While profit sharing can boost morale and incentivize high performance, the idea of sharing losses, while less common, can serve as a powerful tool for fostering loyalty and work culture. However, the implementation of such practices must navigate the complexities of retaining talent and maintaining business performance.