Some Methods of Distributing Profits

Fred C. Lariviere June 1 1908

Some Methods of Distributing Profits

Fred C. Lariviere June 1 1908

Some Methods of Distributing Profits

Fred C. Lari viere

Different Plans on Which Division is Made in Profit Sharing—Objections Raised by Some to the Adoption of the System—Many Business Enterprises Strongly Endorse the Principle—Some of its Practical Results.

IN the matter of Profit Sharing in business, I wish to point out that there are two methods of dividing profits, first, by a fixed percentage of the general profits, forming part of a yearly contract between employers and employes ; secondly, by an optional or indefinite amount of profits, to be divided amongst workmen; at the end of the year.

These different methods are not the results of the personal views of employers, but depend on the local conditions, the nature of the industry and the intellectual development of laborers and employes.

In the application of social reforms

one must not forget, that nothing is absolutely sure in the world; the nature and degree of such reforms, should meet the social and local conditions of laborers and of the labor market.

The fixed percentage division varies considerably in its details, and these variations are due to the following factors : The relative amount of capital and labor required in one establishment; the importance of the work done by the management; the technical knowledge required, and commercial speculation and extent of the risks involved.

You will readily understand that the rate should be higher in a paint shop, where the value of tools is comparatively small, than in a printing office, a foundry or a cotton mill, where the machinery is complicated and costly, or in a store where the proprietor is closely and actively followed by his help or in a financial enterprise where the profits mostly depend on speculation, and, of course, in the management, and also where large risks are assumed.

As a rule, the fixed percentage division of profits is based on the following general principles : A percentage

of the net profits, which is the method mostly used ; a percentage of the total sales, of the gross receipts or of the full amount of business done during the year ; the profits or a part of the profits are divided between capital and labor, in proportion to the total amount, capital invested and the total

sum of salaries; the profits are divided between capital and labor in proportion to the amount of capital invested and the total sum of salaries; profit sharing takes the form of a savings institution and the amount given is equal to the sum deposited by laborers in a bank, etc.

The following factors are also considered in the division of profits between employes : Pro rata of salaries ; pro rata of salaries and of years of sendee ; pro rata of salaries and importance of functions ; pro rata of salaries of years of service and of importance of functions ; pro rata of salaries, time of service and importance of function ; proportionally to salaries, years of service, personal merit, zeal, steadiness ; according to individual production ; according to sum of money deposited in a savings department; without any fixed rules according to the will of the employer.

Division Pro Rata Salaries—This is most frequently used. Many employers take the sum of salaries paid during the year as an indication of the energy spent in favor of the establishment. But a considerable number of others do not allow anything for extra work, premiums or gratifications. In some houses a maximum and a minimum figure is a basis to work on for the division of profits.

Division According to Salaries and Years of Service—This style of division varies considerably. The length of service is an important factor with some employers. In some establishments the employe can not benefit by Profit Sharing, except after so many years of service.

Salaries and Important Functions —In some cases it has been found judicious to consider the amount of salaries and the importance of functions, and to increase these factors in the case of head employes where ability and nature of services, play an important part, in the success and prosperity of the enterprise.

Years of service and importance of functions.

Employes are divided into classes. The first comprising chiefs of depart-

ments and managers, the second assistant chiefs and head employes.

In some houses classification is as follows : Managers are allotted 6

shares; assistant managers allotted 4 shares ; the accountant 2 *4 shares ; traveler, 2% shares; office help, 2 shares ; foremen, 2 shares ; help having served 20 years, 2 shares; help having served 15 years, il/2 shares; help having served 10 years, 1*4 shares ; help having served 3 years, 1 share.

These shares multiplied by the number of each class of employes and the result added, give an average figure which forms the basis of the division.

Some firms consider the moral qualities, such as regularity, zeal, faithfulness and sobriety. This is shown in the following example. The moral value of employes is established by notes given by the employer, the managers and also from chiefs of departments. The total of these notes gives an estimate of the moral merit. Multiplied by the years of service the sum of these serves as above for Profit Sharing.

According to Individual Production —Wherever it can be properly established individual production is a most equitable way of dividing profits.

It is successfully applied at the Nayrolles Lace Manufacturing Co., in Paris. On Saturday, when securing her salary, every woman gives notes representing “according to the prearranged methods,” the amount of work done during the week. Permission is given to explain involuntary losses of time and delay. If the explanations are satisfactory her notes are increased, and profit sharing takes place pro rata on the total of these notes of production.

In each department a forewoman is authorized to keep an account of the work done by her mates, and receives as a special salary an increase of 10 per cent, on her own notes of production.

The heads of departments, those receiving orders and distributing the work to other employes, receive the

maximum amount allowed to forewomen.

Division is often according to amount deposited into a savings department. Its object is to promote economy and saving amongst employes, and so induce them to become financially interested in the enterprise.

The firm receives the deposits of employes up to the maximum sum of say $1,000, and allows on these deposits an interest of from 3 to 10 per cent., according to agreement. Dividends are paid on these deposits and do not bind the depositors to share in the losses.

But it is forbidden to borrow funds from any one, for such deposit, except on the authority of the employer.

When the sum so deposited reaches a given figure, the employe may become a regular shareholder in the company and take the responsibility of profits and losses in the enterprise.

Division Without Any Fixed Rule at the Option of the Employer—This style of division is made according to the employers’ own appreciation of the value of employes’ services, the importance of functions, and the nature of the work. For example, the house of Gillet & Sons, Lyons, France, and C. Sachs, Aubervilliers, Seine, set aside an important sum of money for profit sharing. It is distributed among one-tenth of the help. The rate of this division is kept secret. The employer fixes the amount allowed to each according to his own appreciation of services.

In some cases, at least, six months’ work is required before an employe can share in the profits.

CONTRADICTORY ARGUMENTS.

“The Profit Sharing system,” says Mr. Paul Leroy Beaulieu, “imagined as a general means of labor’s organization, is not only a deceiving Utopia, but also a dangerous Utopia. It contains the seed of discord and a dissolving principle. Profit Sharing creates many more causes of disagreement than it rules off. The best way to conciliate men, daily experience has shown us, is not by mixing up their interests, to oblige them to

mutual confidences or to make their business relations more intricate still by obliging the workman to contribute from bis part of profits to tbe creation of a reserve fund for the purpose of covering losses of supposed bad years.”

According to Mr. Beaulieu, if the Profit Sharing system was to enlarge the field of its action we would see the laborer’s claims growing; they would ask for more rights and would try to interfere in the direction of the business. Besides, with Profit Sharing the remuneration of the workmen does not only depend upon themselves, but is chiefly regulated bv the director of the industry. Nevertheless, Aír. Beaulieu admits that in enterprises, where workmanship is preponderant, Profit Sharing can be applied with success, because in such establishments, prosperity depends less upon the directors’ commercial ability than upon the interior management and the cleverness and zeal of the workmen. Later on, Aír. Beaulieu said that he was not opposed to Profit Sharing, properly speaking, and that he looked favorably upon all new methods of remuneration known as premiums, bonuses, progressive salaries, but, according to him, it is giving a wrong sense to these encouragements by applying to them the formula of “Profit Sharing.”

Aír. Alaurice Black is of the same opinion as Air. Leroy Beaulieu with respect to objections to Profit Sharing-

Air. Alarshall. President of the “Société d'LTilite Publique,” of French Switzerland, is also against Profit Sharing.

“It is evident,” says he, “that Profit Sharing even in industries where it can be applied, will forcibly let work at the same time, the simple method of salary for all the movable staff, temporary or accidentally occupied by means of an excess of labor or of work of special design.”

“It is perfectly apparent that Profit Sharing cannot suppress the antagonism that reigns between capital and labor, because it would subsist either

from the rate allowed the capital or

from the distribution among the superior employes and the workmen.”

“The overgain that Profit Sharing allows to workmen besides their actual salaries could not in general be but very small, because if the share of the proprietor is, often considerable, this would not occur in the case of a few hundreds and even thousands of co-partners. Most of small sums thus given would be spent and not spared.”

“It is evident that if Profit Sharing was general and used in all establishments of a same industry, the result would be a low er cost price, the interested workmen producing a greater quantity than the non-interested ones, and owing to the competition each of these establishments would finish by reducing its profits, so that the advantages of Profit Sharing would totally vanish.”

Dr. Brocher, Economist of Geneva, is also against Profit Sharing. Here is what he says: “The Profit Sharing system is contrary to the law of justice. Three agents surely contribute to manufacturing. The commercial director, the workman and the capitalist. But these three agents have missions totally different. One only is the cause of the gain, the two others are but its condition. If the work of the direction is good or bad, there follows profit or loss. Consequently, an injustice would be committed by depriving that direction of its profits. It would be stopping production, because it would be paralyzing the impulsive force. Profit is for the direction of the works. To the workmen belongs usually the salary by the piece.”

The owner of a large manufactory in Switzerland gives the following reasons for not adopting Profit Sharing: “It is possible that Profit Shar-

ing may be an effective means of reestablishing social peace between contractors and workmen in certain industrial enterprises. However, it will be difficult in more than one plant to state the base or proportion of Profit Sharing, among the workmen. A joiner, a saddler, a locksmith, etc., and

in general any direct manufacturer 102

of a sole line of merchandise can tell after his product is sold and delivered, if this transaction is liable to bring forth profit or loss and can also tell in what way his help may share the results. The same thing occurs in an iron foundry. But it is altogether different when we consider an establishment taking up several manufacturing branches. My plant, for an instance, is composed of a spinning mill, a dye house, a mechanical weaving, a hand weaving, a dressing shop and an agricultural plant. I send my products away beyond the seas on markets where they can remain for some times six months ; by that time many changes in the staff may occur.”

Other quotations of a similar character might be furnished, but the foregoing will suffice so far as the objections raised are concerned.

PRACTICAL RESULTS.

Let us now consider the results obtained by several firms who have put in operation a Profit Sharing system for many years. This will surely be the best proof of its good working.

The first two related are from Canadian firms. The Wm. Davies Co., Limited, of Toronto, in a letter under date of October 16th, 1907, expressed themselves as follows : “For the past

twenty years we have had Profit Sharing in our business, based on the following general method : On profits

of the year being ascertained, we have laid aside a percentage of them for distribution among our employes of two years’ standing and upwards. The amount given to each has been determined by the wages paid to them during the year. Over a period of years we have found that the more thrifty and careful of our men have used their bonuses to help them to buy a home. We have always encouraged this action and we believe that 50 or 60 per cent, of the married men in our employ possess their own homes. The method related was instituted originally by a member of this company, now deceased, and has been continued since, because the judgment and desires of the general

manager and directors of the company were so indicated.”

The W. F. Hatheway Co., Limited, of St. John, N.B., wholesale dealers in teas, flour, etc., write under date of December 30th, 1907: “We started

Profit Sharing 15 years ago, and it is based upon the following rules: Every clerk, factory hand,

cartman, warehouseman, has a small share according to his wages in the net profits of the business. These profits are placed to the credit of each employe on the ist of February of each year, on which 6 per cent, is paid unless the employe specially needs the money for extraordinary needs outside of regular living. We have found Profit Sharing very satisfactory, causing much greater interest among the employes, keeping them all on the qui vive to see that the warehouses are looked after and the business generally well conducted.”

The following testimonies are from firms located in the United States : The N. O. Nelson Manufacturing Company have adopted Profit Sharing since 1886 by distributing each year a certain amount amongst all the employes based on the salary earned. The distribution of the first year amounted to $4,828 in cash. In 1885, Mr. Nelson called his men together and told them his intention as to Profit Sharing. They heard very little more until the year was over, when the above referred distribution was made. The distribution of the second year amounted to $9,700. In 1904, with a view of transferring his business to his employes and customers, Mr. Nelson made the following rules and regulations: One-half

of the net profits was divided amongst all the employes, the other half to the customers having bought $100 or over during the year, in proportion to the gross profits realized on their respec-

tive purchases. The results of this system are as follows: In 1905, $156,854 was divided, giving 15 per cent, on wages and 25 per cent, on gross profits to customers. In 1906, $230,506 was divided, giving 25 per cent, on wages and 45 per cent, to customers on gross profits. In 1907, $357,519 was divided, giving 30 per cent, on wages and 45 per cent, on gross profits. These figures prove the good results obtainable by Profit Sharing.

Ballard & Ballard Co., Louisville, Ky., dealers in flour, say in a letter dated November 19th, 1907: “In

1886, we employed our head miller with a fixed salary and 5 per cent, on the net profits. Some years later we divided 10 per cent, of our net profits among our salaried employes in proportion to their salaries. A few years later, we added our laboring men, who had been two years with us as profit sharers. Lately we have changed our plan by giving to seven of our employes each 5 per cent, and distributing the balance between the other members of the staff. With regard to the results of our Profit Sharing plan, we can only say that, while in the case of heads of departments and more important positions, we are satisfied that there is an appreciation of the plan, still we have not been so sure in the departments requiring unskilled employment, although some evidence of appreciation has been manifested. We have also found that our plan tends to keep our employes together and make them less inclined to leave us on short notice.”

Numerous other instances might be cited, but the foregoing will serve for the present. In the next issue of The Busy Man’s Magazine more arguments for and against the plan of Profit Sharing in business will be presented bv Mr. Lariviere and certain conclusions reached.