Profit‐Sharing and Wages: An Empirical Analysis Using French Data between 2000 and 2007
| DOI | http://doi.org/10.1111/bjir.12295 |
| Date | 01 March 2019 |
| Author | Noélie Delahaie,Richard Duhautois |
| Published date | 01 March 2019 |
British Journal of Industrial Relations doi: 10.1111/bjir.12295
57:1 March 2019 0007–1080 pp. 107–142
Profit-Sharing and Wages: An Empirical
Analysis Using French Data between
2000 and 2007
No´
elie Delahaie and Richard Duhautois
Abstract
Economic theory presents dierent arguments about how profit-sharing may
aect wages. First, profit-sharing may substitute for the base wage. Second,
profit-sharing can be interpreted as an ‘eciency wage’ that adds to the base
wage and increasestotal compensation. The existing empirical literature has not
determined which of these arguments is valid. This article attempts to address
this issue for France between2000 and 2007. Based on a dierence-in-dierences
selection model, we show that bonuses in firms adopting profit-sharing are too
small to conclude whether it substitutes foror complements the base wage. While
base wage levels are generally higher among profit-sharing firms, changes in the
base wage over this period are lower among firms that have had profit-sharing
for a number of years.
1. Introduction
Since the early 1980s, there is an on-going interest in profit-sharing among
firms, policy makers and scholars in Franceand internationally. According to
the European Company Survey, in 2013 about 30 per cent of firms and 13 per
cent of employees were covered by a profit-sharing scheme in Europe. As is
often noted, France diers from the other countries by the highest coverage
rate: in 2013, profit-sharing concerned 41 per cent of firms and 43 per cent
of employees (Eurofound 2016). These considerations raise the question of
whether profit-sharing thatinduces greater variability into total compensation
aects employees’ earnings in France. Particularly, this article intends to
tackle the issue on whether profit-sharing substitutes for or complements the
No´
elie Delahaie is at IRES (Institut de RecherchesEconomiques et sociales). Richard Duhautois
is at CNAM(Conservatoire National des Arts et M´
etiers), LIRSA (Laboratoireinterdisciplinaire
en Sciences de l’action) and CEET (Centre d’´
etudes de l’emploi et du travail)
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2018 John Wiley& Sons Ltd.
108 British Journal of Industrial Relations
base wage, which may be very important in its eects on productivity and
employment stability.
In the theoretical literature, there are dierent views on the eect of profit-
sharing on wages. The first view assumes that profit-sharing substitutes at
least, in part, for the base wage. By reducing the short-term marginal cost
of labour, profit-sharing can provide an incentive for firms to recruit and
retain more workers (Weitzman 1983, 1984, 1985). At the full-employment
equilibrium, firms implementing profit-sharing must pay the same level of
total compensation (i.e. base wage plus bonuses) as firms that do not use such
a pay system. Consequently, profit-sharing induces a negative impact on the
base wage and a neutral eect on total compensation, so that the lower base
wage represents a compensating wage dierential for the profit-sharing. In
the same vein, the compensating wage dierentials theory predicts that the
base wage is lower when other forms of compensation such as profit-sharing
are improved. The second view considers profit-sharing to be an ‘eciency
wage’ that increases total compensation. Therefore, firms introduce profit-
sharing to retain the most qualified and productiveemployees (Long and Fang
2012) or increase workers’ eort and cooperation (Kruse 1993a; Kruse et al.
2010). Employers may indeed use profit-sharing as a group incentive device
under asymmetric information, that is, total compensation may be higher
even if the base wage is lower. Numerous empirical studies note that profit-
sharing induces higher labour productivity and firm performance. However,
the empirical literature on the eect of profit-sharingon wages remains scarce,
and neither the substitution hypothesis nor the theory of incentives (through
group incentives or ‘eciency wage’) is borne out by the existing results.
From a historical point of view, profit-sharing was implemented in France
in the early 1960s to promote employee participation in management and
to diminish conflicts between employees and employers. French labour law
currently defines two profit-sharing mechanisms. The first mechanism, called
‘int´
eressement’ and denoted in this article as FPS (‘free’ profit-sharing),
was introduced in 1959. Its implementation within firms is voluntary and
concerns all employees (whatever their positions). The FPS bonus depends
on the firm’s performance (financial results, labour productivity, a decrease
in absenteeism, etc.).1The second mechanism, called ‘participation aux
b´
en´
efices’ and denoted ‘LPS’ (‘legal’ profit-sharing), was implemented by
the French legislature in 1967. It diers from FPS in three main respects.
First, this system is compulsory for all firms with at least 50 employees.2
Second, the law defines the computation formula for the LPS bonus, which
takes into account the firm’s value-added, wage bill and equity. Finally, until
2009, LPS was designed as a deferred bonus, such that bonuses were not
paid directly to employees. LPS bonuses were systematically saved though
employee savingplans or other saving accounts that were designed to enhance
firms’ productive investments. As in Great Britain, the introductionof tax and
social insurance exemptions mayhave played a crucial role in the development
of profit-sharing in France (Marsden and Belfield 2010). Indeed, profit-
sharing systems, especially FPS, actually became widespread and popular
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2018 John Wiley& Sons Ltd.
Profit-Sharing and Wages 109
at the beginning of the 1980s when the French State implemented tax and
social insurance rebates forboth employers and employees. In the early 2000s,
FPS experienced renewed dynamism because of new tax benefits and social
insurance exemptions for small firms and numerous legal dispositions to
promote collectivebargaining on profit-sharing. Such advantages are designed
to encourage employers to develop financial participation plans (profit-
sharing, company savingplans and employee stock ownership plans) for their
employees. On the employees’ side, such programmes aim to encourage them
to invest part of their compensation in employee saving plans. From the
perspective of Frenchlaw,the goal of tax and social insurance incentives is also
to compensate for the risks to which employees are exposed because profit-
sharing bonuses are uncertain and variable.3
In this article, we focuson FPS because of its non-compulsory character. To
assess the eect of FPS, we work with an original database that covers more
than 22,900 French firms over the period from 2000 to 2007. Our research
contributes to the existing knowledge by assessing the eect of profit-sharing
on both the base wage and total compensation.Moreover,it sheds new light on
the relationships betweenprofit-sharing and wages by investigating,on the one
hand, the influence of FPS during the first years following its implementation
within firms, and on the other hand, the eect of FPS over seven years. In
France, this time period is crucial because the law prohibits the substitution
of FPS bonuses for wages for at least one year after its introduction in
order to prevent firms from developing a profit-sharing plan simply for tax
optimization purposes.
The remainder of this article is organized as follows. Section 2 presents a
review of the theoretical and empirical literature addressingthe links between
profit-sharing and wages. Section 3 describes our data, and Section 4 develops
the econometric strategy. Section 5 presents our results and a robustness
check. Finally, we conclude by focusing on the potential role played by tax
and social insurance contribution exemptions on FPS in France.
2. A brief survey of the literature addressing the links between profit-sharing
and wages
As noted by Long and Fang (2012), economic theory considers three main
motives formanagement to implement profit-sharing, which are not exclusive:
the substitution of a bonus for the base wage, the retention of higher quality
human capital and encouragement of employee eort. The eect of profit-
sharing on the base wage and total compensation diers according to the
motives behind it.
Theoretical Background
To the extent that profit-sharing is of value to workers, the theory of
compensating dierential wages predicts that workers will accept lower
fixed wages and benefits in exchange for profit-sharing. Profit-sharing may
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2018 John Wiley& Sons Ltd.
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