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Is this the answer to Australia’s slow wage growth and economic woes?

Could profit-sharing be the answer to Australia's economic woes? (Source: Getty)

Australia’s economic experts have bandied around different ideas about what would kick-start the nation’s economic performance, from restoring confidence in the housing and construction industry to increasing immigration or investing more in infrastructure.

But Deakin University Business School chair in economics Chris Doucouliagos is proposing a new idea: profit-sharing.

Profit-sharing, distinct from a regular bonus scheme, directly links employee compensation to company profits and would boost the economy and lift wages, according to the professor.

Doucouliagos’ research, which analysed data from 56 international studies that looked at 355 estimates of the effect of profit-sharing on productivity, revealed a positive link between the two.

How much would profit-sharing boost the economy?

Evidence suggests that profit-sharing boosts business productivity by 9 per cent in the US, Doucouliagos told Yahoo Finance. “A similar boost can be expected for Australian business,” he said.

“This is actually a large effect, as productivity growth across the OECD (Australia included) has been low (less than 2 percent per annum). So, profit-sharing provides a significant lift of more than two or three years of productivity growth, on average.”

How does profit-sharing work?

Ultimately, profit-sharing schemes would vary between business. Some businesses might distribute profits to employees using a specific formula (for example, a fixed per cent of profits), while others may be more flexible (for example, distributing a share of profits once a certain level of profit is exceeded).

‘Good for business, good for workers’

Doucouliagos’ research suggests employees at companies with profit-sharing scheme worked harder, smarter, took greater care, and felt more connected.

With the government struggling to pick up productivity and wage growth, profit-sharing would “help tick both those boxes,” he said.

“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 company they work for.”

Economist, workplace experts cautiously supportive

However, not everyone thinks that profit-sharing will be the answer to Australia’s economic problems: while independent economist and workplace expert Stephen Koukoulas and Conrad Liveris were generally supportive of the idea, they expressed some reservations about the model.

“My only concern is that some industries, like childcare and health, do not have the same profits as others do, like finance, but their work is inherently important and valuable so people who make a good contribution to society may not reap the financial rewards,” Liveris said.

Speaking to Yahoo Finance, independent economist Stephen Koukoulas warned: “One needs to be careful, as we have seen in banking royal commission, that when bonus are offered, corners are cut and striving for profits at any cost can be counter productive.”

Profit-sharing a ‘HR gimmick’: Economist

However, The Australia Institute Centre for Future Work director and economist Jim Stanford did not believe that profit-sharing would see either higher wages or higher levels of productivity.

“In general, profit-sharing schemes are more of an HR gimmick, aimed at eliciting more effort and loyalty from workers in return for relatively token bonuses,” Stanford told Yahoo Finance.

Few instances of profit-sharing would actually see a difference in workers’ incomes and thereby a change in attitudes to work or the company, he said.

“Like all bonus schemes, the impact of profit-sharing schemes on employee motivation is diluted when people work in teams, and work for large organisations – because then their own personal effort doesn’t really affect the company’s success, and hence the size of their own payout.”

The exception would be in smaller start-up companies where people could be motivated by a big pay-out, such as an IPO, but noted that “few of us work in that type of environment”.

“In practice, profit-sharing has usually been introduced as part of a broader employer strategy to reduce wages, not lift them,” Stanford said.

“Most of the big US companies that have profit-sharing (like the auto companies and airlines) introduced them at a time they were demanding and winning wage concessions from their unions. The profit-sharing was meant to “sweeten the pot” a bit, and encourage the workers to use them.

“But wages declined, not rose. Wages at those companies are much lower than if the original concessions had not been accepted; for production workers, profit-sharing almost never makes up the income losses resulting from a cut in regular wages.”

The best way to ‘share’ profits, Stanford said, is to increase real wages every year in a “sustained, ongoing way that matches ongoing productivity growth”.

“That has not been happening in Australia for the last generation,” he said.

“Real wages have lagged consistently behind productivity – which is why workers’ collective share of economic output has declined (to the lowest levels in Australia since the 1950s, and the profit share of GDP has increased.”

The Yahoo Finance’s All Markets Summit will take place on the 26th September 2019 at the Shangri-La Hotel, Sydney. Check out the full line-up of speakers and agenda here.