What are the advantages and disadvantages of profit sharing?

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What are the merits and demerits of profit sharing?

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Merits

Healthy Employer Employee Relations—An important advantage of profit sharing is that it promotes healthy employer-employee relations. Workers take their work seriously and dislike the idea of going on strike. They know that doing so would have an adverse effect on the profitability of the enterprise, with the result that their own share in it might also decline. Thus instead of labour unrest. There is a community of interests of both-workes and employers.
Increase in Productivity—Because workers develop an interest in the increased profits of the enterprise, they accomplish their tasks more efficiently. They realise that low producivity or rise in production costs, would mean lower profits and therefore lower rates of bonus for them. They make every effort to increase production.
Additional Earnings for Workers—Profit sharing results in additional earnings for workers because the payment under il is in addition to normal wages.
Reduction in labour turnover-Payment under a profit sharing plan is laigely based on the length of service of a worker. Thus, to be eligible for higher bonus an employee has to work for the enterprise for a sufficiently long duration. An employee who changes his employer frequently. Loses his right to receive profits. Thus profit sharing plan encourages workers to stick to their present jobs. Thus resulting in reduced labour turnover.
Less Supervision —Since workers develop an interest in the profitability of the concern. They do not need much supervision to make them work hard. Even without supervision they accomplish the tasks to the best of their abilities.
Equity and Social Justice—A profit sharing scheme results in equitable distribution of profits among owners (haves) and workers (have-not). Just as increased profits lead to increase dividends. For shareholders, there are increased earnings also for the employees of the enterprise Thus owners and employees are put on an equal footing which serves the cause of social justice.
Selection of Better Personnel—Operation of a profit-sharing plan acts as an inducement to qualified personnel to join the enterprise as its employees.
Promotion of Team Spirit—A profit sharing plan encourages workers in each department to work unitedly as a team and to offer willing assistance in solving operating problems.They know that stoppage of work at any point may adversely affect the profitability of the enterprise and thus reduce their share in it. This generates a spirit of cooperation which leads to an all-round development of all those associated with the enterprise-entrepreneurs, employees, consumers and the community.

Demerits
(1) No Bonus in Case of Losses—A profit sharing plan adds to workers earnings only in case the enterprise earns profits. If the enterprise does not make profits, workers do not get anything.
(2) A drag on newly established concerns—In case of new enterprise it cannot correctly estimate its profits which in any case, may not be large enough to support any worthwhile profit sharing scheme. Profit sharing plan in such an enterprise may dry up its earnings completely.
(3) Element of Uncertainty—Payment under a profit sharing plan cannot be taken for granted. Even when employees do their best, they may not get any benefit in absence of any profit earned by enterprise. Sometimes this may be due to factors beyond anybody's control, for example depression, unfavourable business conditions, uncertain demand for goods and services produced by the enterprise etc. Lack of profits may be because of mismanagement of the enterprise. Thus workers haye to go without additional earnings for no fault of their own.
(4) Deliberate suppression of Profits—Sometimes an unscrupulous management may resort to manipulation of the accounts to suppress profits so as to avoid payment of the worker's legitimate share in the profits of the business.
(5) Inadequate Incentive—Payment under a profit sharing plan is made only one or twice in a year and therefore it does not have the same attraction as weekly or monthly incentive payments.
(6) No distinction between efficient and inefficient workers—A profit sharing plan doesnot make any distinction between efficient and inefficient workers. This discourages and demoralises the efficient workers.
(7) Opposed by Trade Unions: Profit sharing plans are generally not liked by trade unions. This is because in return for payment under such a plan, management expects the workers to be more loyal to it and keep away from trade unions. Hence trade unions oppose this as an attempt to destroy labour unions.
(8) Not liked by employers-Employers also oppose this scheme on the ground that they have to share their profit with the workers who, in their opinion, do little to deserve their share profits, according to the owners, represent the wages of management. If management has to sacrifice a part of their profits, there would be no incentives to undertake risks.