Profit Sharing in Small Business: An Analysis of Risk and Incentive Effects

Mukhopadhyay, Arun K.; Pendse, Shripad G.

doi:10.1177/104225878300700406

Cited by 6 publications

(2 citation statements)

References 3 publications

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“…This is due to the fact that risk of operating profits is partially shifted to workers under profit sharing, relative to the conventional wage system. This has been recognized in the literature by Mukhopadhyay and Pendse (1983) and Stiglitz (l974), among others. Our analysis suggests that when stockholders are risk averse, the firm is better off with profit sharing at each value of the sharing ratio.…”

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confidence: 59%

Optimal Sharing Ratio in a Profit‐sharing Arrangement

Rashid

Sharma

1991

Can J Adm Sci

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This paper derives an optimal sharing ratio for a capitalist or non‐participating firm in a model where workers get a fixed market‐determined wage plus a share of net profit. For the analysis, modern capital market theory and the stock value maximization principle are used. It is shown that the optimal sharing ratio depends on (i) the productivity effect of profit sharing, (ii) the corporate tax treatment of the sharing wage, and (Hi) the risk preferences of management! shareholders. A relationship between productivity effects from profit sharing and optimal sharing ratio is derived. Assuming normally distributed profits of the firm, the results of the paper are illustrated numerically. Resume Cet exposé présente la proportion de partage optimal pour une firme capitaliste ou non‐participante dans laquelle les employés recoivent un salaire déterminé par les forces du marché avec un pourcentage des profits‐net. On utilise pour l'analyse la théorie du marché capital moderne et le principe de maximalisation de la valeur des réserves. Il est démontré que la proportion de partage optimal dépend de: (i) l'effet que le partage des profits a sur la productivité, (ii) comment les taxes commerciales affectent les salaires portagés et (iii) les préférences de risque des gestionnaires\actionnaires. Un rapport est établi entre les effets sur la productivité du partage des profits et la proportion de partage optimal, partir d'une distribution normale des profits d'une firme, les résultats de cet exposé sont illustrés numériquement.

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confidence: 59%

Optimal Sharing Ratio in a Profit‐sharing Arrangement

Rashid

Sharma

1991

Can J Adm Sci

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“…For example, there is a possibility that the workers may want to convert the employment risk (risk of being laid off) into income risk by accepting variable wages to provide a cushion to the firm in times of low demand for its product [2]. There is also the issue that the threat of business failures would be reduced in a profit sharing, as opposed to a fixed wage, arrangement, so that the firm may be interested in sacrificing some mean income to reduce the downside risk of business [19]. Both of these influences would tend to increase the sharing ratio (and reduce guaranteed wage) in a profit sharing scheme, and also make a profit sharing arrangement more likely to be adopted.…”

Section: Discussionmentioning

confidence: 99%

Profit Sharing and Income Risk: A Survey

Mukhopadhyay

1986

Managerial Finance

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