Ask HN: Do/did you ever work for a profit-sharing business?
How is/was it? Do you think it could motivate employees? Is there any way to do it wrong? Why don't more businesses do it, in particular lower wage-type businesses, like fast food, that seem to struggle with employee motivation?
I thought of this, in part, because of the complicated nature of trying to divvy up equity. So, if profit-sharing worked, then presumably I would not have to worry about keeping track of equity.
At Hewlett Packard in the 1970's all employees (except the executive suite) got the same percentage of profit sharing. Twice a year, after announcing earnings, management would announce it as some number of extra days of pay. Usually eight to ten days of extra pay. This was based on corporate profit put into a formula. This was independent of product division, level, location, etc. There was also an employee stock purchase plan, but no options.
Intel had a similar plan with profit sharing based on corporate profits. plus a profit sharing based on product division success.
Today, corporation focus is strictly improving the stock price. Therefore paying more to staff with profit sharing is bad.
I work in a worker-owned carpentry co-op. We do anything from making little knick knacks to remodelling a house, whatever people need done.
Personally I think it's the only legitimate way to run a business. Shareholders are scum and do not deserve the free ride they get off the backs of real workers. Workers should own and control the means of production directly, not shareholders and certainly not the government.
> How is it?
It's nice. Take all the things you hate about working for a capitalist, and it just magically goes away.
Instead of working to make someone else rich, you work to make you and your fellow workers a good and reasonable amount of money. Everyone except the capitalists make more than before, and if the capitalist was also a worker they make a reasonable amount now too. The fundamental difference is that there isn't someone claiming ownership of stuff that belongs to others.
Instead of having an almighty ruler who dictates things because they have a subconscious need for control and no self awareness, things are decided by the people actually doing the work, who actually know the knowledge required to make good decisions. How many times has a superior forced you to make a stupid decision?
There is no strict set of hours you must work. There is no strict limitations for what role you play in the company. There are no unreasonable rules you must follow. There is no fear of having your family's source of ability to live taken away from you just for making some arbitrary mistake or questioning some grown-up child's authority.
This isn't limited to just small firms. Check out companies like the Mondragon corporation with over 80k employees in 2019 (latest data I could find).
> Do you think it could motivate employees?
Yes, and several studies have reported higher job satisfaction in worker-owned firms. Worker-ownership leads to higher productivity because, unlike in capitalist firms, working harder benefits the workers.
There is also greater satisfaction from having more control over the work you do. Humans have a desire to be the cause behind things.
> Is there any way to do it wrong?
Yes, absolutely there are ways to do it wrong, but first let's talk about the right way. The right way would be for every employee to have exactly 1 share of the company, and no one else has any shares whatsoever. It is acceptable for there to be a new-hire probation period, and it is acceptable to still have a variable hourly-wage or salary system (or not, that's even better), but the profit itself must be divided amongst everyone evenly.
Letting some sub-group claim some kind of higher status than everyone else. This is especially wrong if said special group gets a bigger cut of the profits or has authority over everyone. That just makes it a regular company at that point.
Trying to make every decision be voted on by the whole company is another way to go wrong. Things should be decided by the people who work with and know about that particular thing. There's no reason for the office staff to have input on what type of welding gloves we should stock, for example. To allow this is what I'd call tyranny of the majority, the biggest flaw with the authoritarian democracy which permeates our society. It allows people who don't know what they're talking about to ruin things that could have been great.
Trying to copy what "the big companies" do is especially bad for a worker-owned co-op, because the big companies are explicitly built around the domination of laborers by a superior class. Worker-owned companies should lead to more dynamism, not more of the same bureaucrap.
Not having a solid grasp on procedures of consensus democracy will lead to ruin. It will either lead to gridlock during meetings or domination by a sub-group. Ideally you would have consultants from an already-existing worker-owned co-op come in and run/advise the first few meetings to get things started in a good way.
> Why don't more businesses do it, in particular lower wage-type businesses, like fast food, that seem to struggle with employee motivation?
Because that fundamentally goes against what capitalism is for, and what capitalists are doing in general with their lives. Capitalism encourages shareholder profit above all else, that's why we're stripping and contaminating the entire planet for useless trinkets and more ability to work ourselves into the grave. They won't allow worker co-ops to form under their noses because it's the one thing they fear the most: less profit for them to throw down their bottomless pit.
So how does the profit sharing work, numbers-wise? Proportional to salary?
And who decides each year/quarter what portion of the profits go to employers, and how much stays in the kitty to keep the business strong?
Just an example, how profit sharing might be divided up in a private company based on my personal observation.
50% profit retained by company for growth
25% profit distributed to shareholders
25% profit distributed to employees.
The Employee distribution (distributed quarterly, paid out after 6 months, only to employees still employed at the time of payout)
- 40% Based on number of years with company
- 40% Based on last 12 months earned salary
- 20% Based on cumulative salaries earned to date since starting at the company
This seems like more of the kind I was advocating against, though it certainly is more common. I suppose there is a distinction between worker co-ops and just profit-sharing, which is what OP actually asked about. My mistake for sort-of answering the wrong question. But back to my point:
Instead of retaining a flat 50% for "growth", it should be decided each quarter consensually. Infinite growth is not a good thing, it's the global problem. Needs should be met and the expected/needed growth should be funded if profits are good enough for growth, but there shouldn't be this looming expectation of always expanding. It doesn't have to be an infection.
For sure the 25% to shareholders is off the table anywhere I'm going to work. That's the one thing that makes or breaks the whole worker-owned thing. Unless you consider the workers with their 1 share each to be "the shareholders", in which case I think it could be a good idea to set aside a flat 25% to distribute evenly before all those other calculations take place.
It must be noted that worker-ownership does make one form of investment impossible: selling shares of the company. With that being a major form of investment in the modern world it might sound crazy, but it's what's right, and there are other ways for investors to make their cut; they just won't be able to milk the company for every drop or have decision-making power anymore (unless they get a job at said company and exercise their 1 share of voting power).
If shareholders don't get a cut then where does the capital come from? If the worker co-op needs to buy some expensive equipment then someone has to pay for it. Outside investors will not put in significant capital unless they also have a level of control, and a reasonable expectation of turning a profit. Banks generally aren't willing to lend to such organizations unless they're structured as partnerships and the owning workers agree to personally co-sign on the loan.
Worker co-ops can be fine for businesses that take essentially no capital, like small consulting firms. But if you want to build real stuff or scale up beyond the level of a hobby/lifestyle business then you must address the capitalization issue.
I understand your concerns.
> Instead of retaining a flat 50% for "growth"
50% retained earnings are not just for growth but also managing through economic cycles and smoothing the operational expenses and compensate for occasional losses. There need to be some sort of reserve funds when things are not going as well as expected.
In your model, what will happen if in a quarter there was a loss, are you going to ask employees to contribute cash to make up for loss? Both profit and loss sharing and quarter to quarter swings might not work in the long term at organization level; cutting cost one quarter, adding cost next quarter; employees will leave as soon as they smell losses and need for cash outlay from their own personal pockets.
> For sure the 25% to shareholders is off the table anywhere I'm going to work. That's the one thing that makes or breaks the whole worker-owned thing.
My example is from private company perspective, where shareholders are just family members who started the company and work within the company. Somebody started a company, put his own capital and took the risk of failure. He needs to be compensated. In my example, both capital and labor are rewarded equally, unlike current capitalism where all the loots go to capital providers and labor is left fighting for nibbles.
Ah I suppose I misunderstood. A rainy-day fund is always a good idea to have. I thought you meant a fund that is constantly increasing or being spent to grow the company arbitrarily.
You're right that if there's a spell of no work for my firm, we have to dip into our own pockets, because we don't keep a rainy-day fund or any "company money", but that's just because there's so few of us and we were already freelancers before getting together. Even when it first started as a "capitalist venture" there was no company money, just work and get paid. This is a good idea that I'm going to be running by the other guys.
I've never seen anyone leave the group due to a dry spell, and that's because if there's no work then there's no work. Being in the group only increases the number of jobs each worker has access to, because each of us are like advertising agents for the rest. If we're on our own, there's only one person spreading the word. We could go work for one of the capitalist firms in town, but they have a similar amount of work to do, and it comes with all the downsides of not being in a co-op.
I urge you to not use my hillbilly construction crew as an idea of what a large professional firm would look like under worker-ownership. We're just some dudes who like to hit things with hammers.
I would argue 25% in perpetuity is not fair. Invested sum * interest based on risk, should be paid out to initial investors and then they should become "ordinary" employees of the company.
What you described is a discount version of ordinary capitalist company.
> So how does the profit sharing work, numbers-wise? Proportional to salary?
In my business we split it "evenly" with weight given to how many hours each person worked on each project. You could think of it like a variable hourly wage based on the profit of the business as a whole. But that's just one model that works for us as a small firm, there are other ways to structure it. Again, I recommend reading about Mondragon's policies for another example, though I can't say I agree with everything they do, but that's up to them not me.
> And who decides each year/quarter what portion of the profits go to employers ...
I'm assuming "employers" was meant to be "workers", as there is no longer a separation between employee and employer. Everyone is equal.
Ideally this would be decided by all the employees through consensus-based meetings, with some discussion about what is necessary and what is not. That's not to say there can't be financial experts involved giving more knowledgeable opinions, but the decision must be everyone's.
People are more incentivized to let some profits stay in the company if the company is theirs. It's not much different from how the capitalist feels about "the company's money". The co-op company growing stronger is directly beneficial to each and every individual worker. If I personally work extra hard, I directly gain more money in my paycheck. That does not happen with a capitalist company, where working harder benefits one or a few shareholders who have nothing to do with the work being done.
Did your co-op start with this model? (I presume it did.)
I like the model a lot, and wish I'd done domething like that with my own business. Alas I fear it would be exceptionally difficult to -change- to that model now, because the record interests at every level that would make it hard to do.
A company with that model attracts folk who want that model, who understand (or can be taught) how concensus works, how the outcomes are not always "fair" and so on.
No, it didn't start this way. It started with one of us as the owner and the rest as employees or sub-contractors. It wasn't until I said something and everyone thought it was a good idea that we started doing it this way.
But it won't be easy at every company. Ours was easy because our business model is "go to place, do physical skilled work, collect money, pay for costs, distribute money, go home", on a timescale of 1-day to 1-week. Profit calculations, for example, could get more complicated with a business that runs on quarters or years and has money moving all over the place. But it does already happen and it does work, it's just not what people are used to.
If done in the same simple model we use, it's simple to implement. For profits, just take whatever the owner would have gotten before and divide it evenly, accounting for number of hours worked. For decisions, get the opinion of everyone involved in that particular thing, bonus points if you include people who aren't involved in the work but will be affected by it.
In my opinion this type of arrangement is attractive to everyone except "career-oriented" or power-hungry types, for obvious reasons. Everyone else seems to enjoy being treated as an equal and making more money.
It's good to hear you've considered doing it that way. I'd suggest at least rolling the idea around in your business, including with your employees. It might not be as difficult as it seems. Shareholding investors will certainly need to be taken into account, and that's a complex topic of it's own. I'm sure they won't be too excited at the idea of losing their shares if that's even possible; I don't know, I'm not a finance expert, I just swing a hammer for a living :)
I'd like to leave this Legal Guide to Cooperative Conversions[1] and this Consensus Handbook[2] as possible starting points if you remain interested in converting your business.
- [1]: https://institute.coop/sites/default/files/resources/SELC%20...
- [2]: https://www.seedsforchange.org.uk/handbookweb.pdf
do all employees have shares with voting rights? how do you prevent hostile takeover where 51% decide its time to fire everyone else, sell the company and run with the bag?
how do you balance rewards for initial risk takers vs new hires who joined an already well oiled machine?
Yes, all employees have 1 share. We operate on a model of Consensus Democracy or Do-ocracy, which means there's no real "voting". All members must more-or-less agree to things that involve them. In the case of a hostile takeover, it simply wouldn't work because everyone is involved, therefore everyone gets a say in the matter, therefore it doesn't happen because nobody would want that.
We simply don't consider the fact that people who started work first started with a less-oiled machine and took more personal risk. If you wanted you could, but we don't because we simply don't mind. Personally I don't believe in using the fact that I started doing something first as a reason to get a greater share of what other people produce when they start working.
It works out in the end. Sure, I spent a lot of money on my tools, and some other guy is using them because he doesn't have his own. But if he sticks with it he'll end up buying his own tools, and I'll use them sometimes, and eventually he'll have an apprentice of his own who will use his tools. Not to mention, having someone to help is a lot better than not having anyone.
It's ultimately up to the workers at each specific firm to decide exactly how to handle these things. One firm could decide that initial-risk-takers deserve a bigger cut, others could decide not to. The group consensus is what matters most.
Thank you for sharing, this is all very inspirational. I believe models like these are the way forward, if we want to build a society based on trust and fairness.