Gain sharing

The central feature of gain-sharing is that at least a portion of employee pay is directly tied to some objective measure of firm performance such as profits, productivity growth or cost reduction.

The most prevalent type of gain-sharing program is profit-sharing which has several attractive features. First it stimulates employee job performance by giving each worker a direct stake in the amount of profit earned by the firm. Second it increases employee pay without raising base wages - this saves the firm money since cost-of-living adjustments and merit increases are typically awarded as some percentage of base wage. A third advantage is that the firm’s labor cost becomes flexible in the downward direction since the profit sharing component of employee compensation will typically fall during a recession.

Profit sharing also has disadvantages such as that in the firm it is more difficult to administer than straight time wages. In addition another disadvantage is that it must reveal all of its cost and revenue data to employees and important drawback to the management. That is what was done to the Detroit Auto industry who accepted a government bailout.