The Straight Dope on Profit Sharing

Back in the late 70's when I was a university freshman, one of the really "in" things to do was to be an aficionado of an underground comic called the Fabulous Furry Freak Brothers. If you could quote from the latest edition of the Freak Brothers' escapades, you were instantly recognized as ultra-cool.

One of the life-defining mantras of the brothers related to a very simplistic model for macro and micro economics, namely: "Dope will get you through times of no money better than money will get you through times of no dope." This piece of wisdom in an era of peaceniks and the anti-establishment movement became entrenched in the college scene's social consciousness.

One of the reasons for the popularity of the Fabulous Furry Freak Brothers was the simplicity and predictability of its story lines. In every edition, Fat Freddie and his brothers Phineas T. Freakears and Freewheelin’ Franklin would come up with some hair-brained idea to fatten their wallets, for no other reason than to avoid having to get a job (which the comic strip repeatedly refers to as a “horror”) and so they can pay their rent, thus freeing them to engage in a self-indulgent lifestyle. But rather than think their idea through, they would engage in self-adulation at their supposed brainstorm and with careless abandon, immediately implement it in a quest to get rich quick with as little effort as humanly possible. Predictably, they would just as immediately find themselves in a mess of trouble which created the chaos for their current escapade. Ultimately, through a series of miscalculations and a comedy of errors, they would somehow become extricated from their self-induced pathos (before they became incarcerated). What entertainment! It was like Itchy and Scratchy in a 70’s hippy time warp.

I’m willing to bet that a healthy proportion of the 50-something Baby Boomers who now hold positions as presidents and CEO’s can recall, however dimly, a time when they were college students who counted themselves as ardent fans of Freak Brothers (unless they weren’t very cool in their undergrad days). Yet after thirty years in the corporate jungle, many of them haven’t learned how to differentiate the foliage. In an attempt to be seen as “cool bosses” they espouse, at least with their lip service, that they want to create peace and love with their employees by providing more “bread” so their employees can enjoy a more carefree lifestyle. By more “bread” we’re talking about profit sharing programs. Yet innumerous studies in workplace dynamics prove that when these supposedly altruistic business leaders bring on such a program, if it’s initiated with the wrong motive it is doomed to fail. For corporate leaders who jump into profit sharing programs without first carefully determining the potential landmines, you might say they’re headed for a bad trip. By plugging the wrong weed into their peace pipes and following the same erroneous thinking that created all of Freddie, Pineas and Franklin’s pathos, they’re ultimately going to face the same conclusion as our anti-heroes, the Freak Brothers. Namely, lack of contingency planning usually leads to chaos.

In a quest to increase the bottom line in as quick a fashion as possible, many business leaders have heard that one relatively “quick fix” is to adopt a profit sharing program, believing that if a carrot is dangled in front of the workforce, the workforce will move just a little farther and for just a little longer. Typically, the primary motivating reason for such an offering of “extra bread” was the expectation that it would boost company morale and increase production, such that the improvement in the bottom line would more than pay for whatever (smaller) proportion of the increase was required to dole out to the workforce in the form of profit “sharing”.

In principle, this “give a little, get a lot” model of economics sounds great on paper, and many company leaders and decision makers have taken that paper, rolled it up and put it to the fire. Trouble is, they didn’t incorporate fire prevention into their new corporate initiative because they never thought that the workforce would see through the smoke screen. If their primary motivation for initiating a profit sharing program was that it would immediately (and effortlessly) create a boost in morale which would simultaneously result in a boost of productivity, they didn’t qualitatively test the grade of their assumptions by asking the end-user if they would be excited about buying in. Predictably, most business owners who have attempted to institute a profit sharing program without first determining if the structure of the program was “A” grade ended up with a workforce that rebelled against the plan, so morale became depressed, rather than stimulated. Talk about a bummer. As my Depression-Era father was fond of saying:

What were they thinking? They must have been on “the dope”.

Profit sharing is a dangerous strategy for increasing employee motivation. Like the proverbial two-edged sword, it cuts both ways. Employers who embark on a profit sharing program with the expectation that it will trim the fat and make things “lean and mean” without appropriate forethought and litmus testing with the rank and file workforce, often discover how the sword that cuts both ways can just as easily lead to a rebellion which results in a blood bath. The reason for this is counter-intuitive to those who believe that money is the fuel that fires increased productivity, rather than understanding that productivity is increased as a byproduct of employee engagement and personal job satisfaction. In a nutshell, the paradoxical yet psychological truism that profit-driven employers need to understand, but all too often don’t, is that:

Money is a lousy motivator.

Surprised? So was I when I first began reading the studies in the mid-90’s dating back some 20 years which reported how incentive programs not only don’t bring out the highs in employee performance, they actually contribute to further lows. Say what? I was blown away. In fact, the data seemed so counter-intuitive (to me) that I set out to disprove it by surveying members of the audiences at conferences where I was asked to give lectures on improving workplace dynamics. Guess what I found? Given twelve points to consider about what the employees believed was important for creating a healthy workplace environment, when it came to ranking the criteria which caused people to feel more enthusiastic, more engaged and more excited to perform to a higher level than what they typically performed, getting a bonus, profit sharing and/or a raise ranked seventh out of twelve. The criteria that ranked in the top three is the topic of other articles, but as it relates to money being a catalyst to improve motivation – it clearly wasn’t.

Yet for those bosses with good intentions who want to dole out the goodies, believing that when the profits are fat it’s time to celebrate and share the fatties, profit-sharing can be a criteria by which employees will respond favorably, reporting that monetary rewards contribute to a sense of feeling affirmed, recognized and appreciated. It just depends on what the employees perceive is the motivation behind the management’s apparent generosity. As it relates to our metaphor about which way the sword cuts, the two edges of perception are:

  • is profit sharing an extension of managerial gratitude to acknowledge that “team” means Together Everyone Achieves More?

  • or is the profit-sharing initiative more likely to be perceived as simply a manipulative effort to get people addicted to the idea that they can get more, if they give more, as long as they give more first?

Admittedly, without increased profits then by definition, there can be no profit “sharing” but it’s a question of the perceived order of things, as this will determine whether there is a spirit of collectivism, or chaos. Think of it as a question of first things, first.

The first perception is altruistic. The second is hedonistic. If the primary motivating reason behind the master introducing a profit-sharing program is to trick the mule into working harder for the promise of a carrot, then the real donkey is the management because the workforce will refuse to respond to a perceived bribe. People will see through the smokescreen and quickly recognize the caterpillar with the hookah, sitting on high, has the same intention as what they remember from Disney’s Alice in Wonderland:

How doth the little crocodile improve his shining tail. And pour the waters of the Nile, on every golden scale. How cheerfully he seems to grin, how neatly spreads his claws. And welcomes little fishes in, with gently smiling jaws.”

Let’s not underestimate, nor insult, the cognitive abilities of our employees to see what many (though not all) employers are often really up to. Grinning like a Cheshire cat, management executives boast to their workforces how they are going to share their stash of goodies. They make these self-aggrandized announcements, euphoric in their belief that if they feed their people what in reality is a self-serving dose of BS, that somehow the employees will eat the mushrooms and then magically buy into what can aptly be described as a hallucinogenic departure from reality. If employers believe that their ulterior motives can remain veiled just under the surface of their profit minded motivation, rather than being sincerely concerned about looking after the health and wealth of their people, employees will cut through the BS and discern the truth − that while the company may be espousing that it’s trying to look after its people, the reality is the company is hoping the employees are too dopey to realize the profit sharing program is based on placing a greater priority than the health and welfare of the company’s profit picture. Underestimating our workforce’s ability to discern the truth is a classic (and expensive) mistake, because our people aren’t on dope.

Even if we don’t place enough faith in our people’s ability to see through smokescreen, then we can look to higher authorities, like say, one of the world’s foremost institutes of economic research. From a series of recent studies from the London School of Economics, the empirical findings report that “financial incentives can result in a negative impact on overall performance”. Additional studies done by US universities (and sponsored from, of all places, the US Federal Reserve Bank) just as definitively prove that certain types of incentives, applied to the wrong group with the wrong performance criteria, result in a reduction in performance when intuitive thinking would lead us to believe there should be an increase. In my book Survive, Thrive or Dive there are three chapters that examine the sociological and psychological roots which explain why the carrot-as-an-incentive policy paradoxically doesn’t work in the 21st century, when it was the universal mindset throughout the 20th century.

why the carrot-and-stick methodology of employee motivation doesn't work

One of my favorite human dynamics experts is Dr. Daniel Pink, the author of Drive and other books on the science of motivation. He’s one of my favorite human dynamics experts, not just because he’s a brilliant teacher, but because he’s humble in his approach to translating the scientific research to laymen audiences without using the psychobabble of psychologists or the academic vernacular of sociologists. He credentials his speaking without taking credit from the social scientists that have done the painstaking research.

In his lectures, he shares with the audience gleanings from his reviews of sociological studies, proving how many business models for financial incentives are based on theories that are “outdated, unexamined and rooted more in folklore than in science”. He believes that the solution whereby businesses leaders can become extricated from the messes of the 2008 meltdown which we’ve orchestrated for ourselves is not by attempting to entice people with a sweeter carrot or threatening them with a sharper stick. Rather, Dr. Pink admonishes business leaders to pay attention to what social scientists have discovered about the changing paradigm of intrinsic motivation. Specifically, that people will be motivated to do things because they matter, because they like it, because they’re interested in it and because they believe that by participating in the process, they’re part of something important.

Employees who have been burned by profit sharing programs will attest to the ineffectiveness, if not destructiveness, of any supposed attempt by management to increase morale when the real motivation is to increase profits. Management executives who have bought into the folklore that dangling a carrot is a viable methodology to get the donkeys to work longer and harder have similarly found that their “get richer, quicker” strategy can backfire with disastrous effects. Does this means that any form of profit sharing is counter-productive. No. Which leads us to the question; from an ROI perspective, what’s the proverbial bottom line?

Simply this. Profit sharing, with the express purpose of rewarding people for their contribution, value and as a sincere gesture of appreciation can be a source of motivation. The key is for employee’s to see the sincerity and not be suspiciously looking for the ulterior motive behind the smokescreen. A properly designed profit sharing program is created by engaging one’s people, soliciting their input, and then being transparent about the motives. Profit sharing programs don’t work if they’re manipulative, they only work if their motivational. Motivation, by definition, is something employees do for themselves; it’s not mandated by the management. To avoid the pathos depicted by the repeated misadventures of the Fabulous Furry Freak Brothers, business leaders would be wise to abandon the mindsets of the 20th century, having learned that society has changed in the past 40 years. They would also have learned that success in college was directly proportional to the degree that one studied the subject matter, asked teaching professionals for additional wisdom and insight, then acted on a combination of the two.

One thing that hasn’t changed is that quick fixes − aren’t. Any program which requires the participation of a group of people brings human dynamic complexities into the equation. One thing that Freddie, Franklin and Phineas never learned was that lack of contingency planning usually leads to chaos. Let’s not be so dopey.

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