Could profit sharing be the answer to poor wage growth in ECEC?

Profit sharing – the process by which leadership designates a percentage of annual profits as a designated pool of money to share with employees – could be a way to boost Australia’s economy, and jumpstart sectors in which wage growth impacts on employee wellbeing and security, such as early childhood education and care (ECEC), researchers from Deakin University have said. 

Different to a regular bonus scheme, a profit-sharing scheme directly links employee compensation to the profits of a service or business. This, lead author Professor Chris Doucouliagos said, could lead to employees who “work harder and smarter, take greater care, and feel more connected”. 

“We can see at the moment that the government is struggling to improve productivity and wage growth in Australia, and that’s something that many countries are grappling with around the world,” Professor Doucouliagos said.

“What this study shows is that a profit-sharing model could help tick both those boxes. Sharing profits with workers is good for business, and it’s good for workers. Employees work harder when they have a financial stake in the business they work for.”

Profit sharing in the ECEC sector has a working model in Childbase Partnership, a UK provider who moved to shift their model from individual shareholders to a long term trust, with educators benefiting from investing in their services. 

The shift at Childbase was initiated by a company wide vote, undertaken in 2015, which elected to move from the shareholder model to something more equitable. In 2015, close to 50 per cent of the shares were held either by individual employees, or by the Employee Benefit Trust. 

Childbase has a target of seeing the employee shareholding increase to 100 per cent by 2025. Speaking about working under the model, Leoni Brown, a room leader with Childbase, told Nursery World that dividend payments were especially significant for her because she is a member of the governing body which represents all employee-owners, and plays a large role in the decision making of the company.

“I have been part of the process in fixing and approving the final amount of the dividend payment, so it is very exciting for me and for all of us. Having a say in how the company is run and then sharing the rewards of our hard work really does make our ownership very real,” she said.

Professor Doucouliagos’ meta-analysis – recently published in the British Journal of Industrial Relations – crunched the numbers on 56 international studies, which looked at 355 estimates of the effect of profit-sharing on productivity.

“On average profit-sharing is positively related to productivity, and this relationship is actually stronger where there is higher unionisation,” Professor Doucouliagos said.

“That’s a particularly interesting finding, and it’s essential to have a study like this where we zoom out and look at all the evidence in combination. Because when we look at individual studies, the evidence is mixed.

“So this data really highlights some of the things unions do that help businesses become more productive and profitable. It doesn’t necessarily mean you need a union presence to make profit-sharing work, but it is very helpful to bring in structured communication between employers and employees.

“Unions can offer a voice for workers to help align the interests of workers and employers. Employee participation in decisions, alongside profit-sharing, can help enhance a sense of ownership.”

Professor Doucouliagos said profit sharing was not common in Australian businesses, with less than 4 per cent of workers covered by such a model.

“I’m speculating that the reason for their growth in popularity (in the US) is that they do reward both workers and business. For example, profit-sharing has increased productivity in the US by about 9 per cent on average.

“With wage stagnation across many nations, Australia included, sharing profits provides an opportunity to give workers higher pay, as well as an increase in productivity.”

Professor Doucouliagos said profit-sharing could work to increase productivity by aligning employer and employee incentives, increasing motivation and loyalty, and fostering greater teamwork.

He highlighted that along with the positives, organisations needed to guard against what he termed ‘free riding’, saying that good workplace policies and culture were paramount to the success of this working model.

“Simply installing a profit sharing plan doesn’t lead to automatic improvement, so contextual factors are also very important,” he concluded. 

To review Professor Doucouliagos’ research in full, please see here. 

IMAGE CREDIT: Sabine Peters via https://www.kredite.org/