The relationship between profit-sharing schemes and wages: Evidence from French firms

Abstract

Profit sharing (PS) is a form of financial participation defined as a collective regulation that, in addition to the stipulated wage, provides a variable income component dependent on enterprise profits. Historically, approaches and instruments for financial participation have emerged for various reasons. Considered one of the solutions to labour problems in the early 20th century (Adams & Sumner, 1905), profit sharing was particularly developed after 1945 because of socio-political motives for promoting wealth creation among employees in many European countries (France, Germany, and the UK). In all European countries, distinct participation models have been developed with national peculiarities in terms of taxation, state support, forms of enterprise, and so on, so they can appear very different in detail. Notwithstanding differences, most European countries are pursuing a national policy promoting financial participation, which is linked to political goals of strengthening participation and wealth creation among employees1. According to a survey by the European Foundation for the Improvement of Living and Working Conditions in 2009, France was highest with regard to PS, with an incidence of 35%, followed by the Netherlands (27%), Sweden (24%) and Finland (23%). Given this widespread use of profit sharing among French firms, PS practices in this country are particularly relevant to study.In France, as in other countries, PS can either be paid directly or diverted to various forms of investment for later disbursement. Two major schemes can be distinguished: profit sharing through bonus payments (cash-based profit sharing) and profit sharing with a deferred payment/savings plan (deferred profit sharing).2 As in other countries with a high level of profit sharing, schemes in France are offered to the whole workforce. In France, as in some other EU countries, PS plans are subject to tax benefits for employers and employees. This applies primarily when they are set up for the medium-term accumulation of assets by employees. In these cases, allocation rights, prescribed holding periods, forms of investment, and so on, are legally regulated. Examples include not only France but also the Netherlands, Sweden and the UK. Despite these common patterns, the French context presents a few specific features. A part of PS in France corresponds to provisions, depending on global benefits, that prescribe financial participation for firms with 50 or more employees; this is called legal participation. However, profit sharing and gainsharing plans remain based on the principles of voluntariness as well as savings plans. Savings plans are provided by PS revenues and employee voluntary contribution (versement volontaire). Both benefit from an additional voluntary contribution provided by the company (abondement) with tax advantages for both employers and employees. All of these PS arrangements are based on firms' collective agreements in France. Appendix 1 presents the main features of PS plans in France.Profit sharing has three main objectives: (1) to stimulate worker effort, (2) to improve labour-management cooperation, and/or (3) to implement wage flexibility and moderation (Poutsma, Hendrickx, & Huijgen, 2003). Many studies about PS address the effects on attitudes or behaviours (Fitzroy & Kraft, 1987; Florkowski, 1987; Doucouliagos, 1995; Coyle-Shapiro, Morrow, Richardson, & Dunn, 2002; Black & Lynch, 2004; Kruse, Freeman, & Blasi, 2010). However, few analyse the effects of PS schemes on wages. This question nonetheless is a fundamental issue. Although PS can be considered a mechanism for incentivizing employees while increasing wage flexibility, particular in an environment of increased profit volatility risk, it is unclear whether this practice involves substitution of wages, as written in the European report, The Promotion of Employee Ownership and Participation (Lowitzsch & Hashi, 2014). …