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The Progressive Policy Think Tank

Big businesses should share profits with staff

'Shared capitalism' could boost productivity in UK and be a vote winner.

Businesses with 500 or more employees should be encouraged to share profits among all their staff, according to a report from the think tank IPPR published today. The report shows that profit-sharing boosts productivity and improves the bottom line.

The most famous example of profit-sharing is in the John Lewis Partnership, where staff benefited from a £410 million profit-share in 2013 - equivalent to 17 per cent of salaries.

IPPR argues that profit sharing could give definition to Labour's 'responsible capitalism' agenda to win over voters in the south, as well as the Conservatives' 'renewal' agenda to win over workers in the north. IPPR says the idea could be a key policy in winning 'the living standards election'.

Over 8 million people (43 per cent of all employees) work in the 3,000 private sector companies in the UK with 500 or more employees. If more of these companies offered a profit-sharing deal, employees could benefit from hundreds of pounds a year.

The report shows that 'shared capitalism' schemes like profit-sharing strengthen team-working and create better relationships between staff and managers. Employees tend to work harder and absenteeism is lower in companies that use profit-sharing and other similar reward schemes. IPPR argues that profit-sharing could be part of efforts to rebuild a more productive, dynamic and sustainable British capitalism, and ensure that working people share in the rewards of success.

Kayte Lawton, Senior Research Fellow at IPPR, said:

"In an age of austerity, working people can no longer rely on the state to support rising living standards with more generous in-work benefits. We urgently need to find ways of boosting productivity in British firms over the long-term and ensuring that working people share in the benefits of this success.

"Profit-sharing makes sense for business and for employees. It aligns the interests and incentives of owners, managers and workers. When everyone is focused on driving up profits, staff tend to work better together and get on better with managers, so productivity improves. Unlike traditional industrial relations, which too often pits workers and management against one another, profit-sharing enables working people to earn a greater share of financial rewards. The risk to companies is reduced and staff only receive a pay-out if profits hit a certain level."

IPPR's report argues that government should ask representatives of employers, employees and investors to consider ways of advancing the use of profit-sharing and other forms of 'shared capitalism' in British workplaces. This could include:

  • Reintroducing income tax exemptions for profit-related pay, or making profit shares exempt from national insurance contributions
  • Allowing employee profit shares to be paid before corporation tax, effectively reducing company tax bills
  • Making profit-sharing compulsory in some companies, or example in very large firms or in particular sectors

Notes to editors

IPPR's new report - Sharing profits and power: harnessing employee engagement to raise company performance - will be published on Wednesday and will be available from: http://www.ippr.org/publication/55/11028/sharing-profits-and-power-harnessing-employee-engagement-to-raise-company-performance

In 2012, there were 3,140 private sector companies in the UK with 500 or more employees, accounting for 8.6 million employees, or 43 per cent of all employees.

In most profit-sharing models, employees only receive a share of profits if they exceed a given level. Any profits below that level go to investors or are available for reinvestment in the business.

In the UK, around one third of companies offer profit-sharing but this figure has been relatively stable over the last decade.

Profit-sharing: an example
A major British company makes a taxable profit of £160 million. In the absence of a profit-share, the corporation tax bill is £35 million, leaving £125 million for reinvestment or to distribute to shareholders. If £26 million of taxable profits were shared with staff (equivalent to 20% of profits in excess of a 5% return on net equity), the company tax bill would fall to £29 million and £105 million would be available for reinvestment or to pay to shareholders.

If this company had 30,000 staff, the profit-share pot could be distributed as a flat rate cash amount of £866 to each employee. Or the pot could be distributed in proportion to individual salaries but capped so that more money was available for lower paid staff. The amount paid out each year would fluctuate in line with profits. Staff would only receive a pay-out if profits exceeded a 5% return on equity for shareholders.