Profit sharing in British industry, 1865–1913

International

Journal

PROFIT

of Industrial

SHARING

Organization

6 (1988) 69-90. North-Holland

IN BRITISH

INDUSTRY,

18651913

T.J. HATTON* University of Essex, Colchester CO4 3SQ, UK Australian National University, Canberra, ACT 2601, Australia Final version

received November

1986

This paper examines the history of profit sharing in Britain between 1865 and 1913. Some 300 schemes were introduced during the period and these were intended both to raise labour productivity and to improve industrial relations, in the firms concerned. These schemes appear to have added significantly to the wages of eligible workers but were frequently given up after a period of experiment. Analysis of the survival rate of schemes indicates an important role for the type of scheme (by method of payment and the size of firm) but suggests that the probability of abandonment increased with the duration of the scheme.

1. Introduction

In recent years the arrangement whereby workers share in the profits of the firm in which they are employed has attracted attention among economists and has become a focus of public policy. In an important book Weitzman (1984) has argued that such a system would have important macroeconomic effects, stabilising the economy and leading to lower average unemployment rates. Both this and the microeconomic implications are now being widely debated. At the firm level the effects of profit sharing on employment, productivity and industrial relations are coming under empirical scrutiny.’ In this discussion, the long historical pedigree of profit sharing in Britain going back a hundred and twenty years has not received the notice it deserves. A series of firms adopted, or experimented with, profit sharing schemes before the First World War and the issue drew the attention of writers, industrialists and trade unionists. The purpose of this paper is to examine to the history of profit sharing up to 1913, by which time it had become an established practice, and to comment on its nature and implications. It is hoped that this will provide a useful historical background to the present debate. *I would like to thank Lee Alston, Saul Estrin, Paul Geroski, Derek Matthews, Ian McLean and Geoff Stewart for extremely helpful comments on an earlier draft of this paper. I would also like to thank Paul Miller for valuable advice and assistance with the empirical work. The errors are mine alone. ‘For recent surveys of this literature, see Estrin, Grout and Wadhwani (1987) and Blanchflower and Oswald (1987).

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70

In the following section we examine the characteristics of profit sharing schemes and their relation to other systems of payment before the First World War. There follows an outline of the development of profit sharing up to 1913, its timing and objectives Finally we examine the results of profit sharing focussing particularly on the determinants of the survival of schemes. The overall findings are summarised in a short conclusion. 2. The characteristics

of profit sharing

The importance of profit sharing as an issue is reflected in the fact that a series of Reports on profit sharing, co-partnership and similar arrangements were published by the Board of Trade between 1891 and 1920. These provide details of almost all schemes known to have existed and provide much of the material on which we draw in this paper. The Report of 1912 lists a total of 299 schemes as having been introduced of which 133 employing a total of 106,000 workers were still in operation. For the purposes of the Reports, profit sharing is defined as ‘a voluntary agreement, by virtue of which an employee receives a share, fixed beforehand, in the profits of an undertaking’ [Board of Trade (1912, p. l)]. Thus the definition of profit sharing used is one which is consistent with the recent literature, both theoretical and applied. Then as now, major emphasis was placed on the effects of such arrangements on productivity and industrial relations.’ The sources of increased productivity and the consequent increase in profits claimed by contemporary supporters were thought to arise in several ways [see, for instance, Board of Trade (1891, p. 4)]. First, there were thought to be direct effects on worker effort, but even where incentive systems already existed, it was suggested that profit sharing might lead to improved quality of output, better conservation of tools and machinery and reduction of waste in raw materials. Second, it was argued that profit sharing would reduce supervision costs not only through motivating the individual but by workers monitoring each other’s performance. Third, profit sharing was thought to engender greater loyalty to the firm among existing workers as well as enabling the firm to attract and retain the most productive workers. Fourth, it was expected to improve industrial relations by reducing strikes, but more important, by allaying the every day frictions at the workplace. Finally, it was expected via increased consultation to lead to an improved flow of information in both directions which might lead to more efficient working practices. Similar arguments are found in the recent literature and have received ‘Much of the effects of profit implications for literature and as

recent discussion has, following W&man (1984), been focussed on the possible sharing on the adjustment of employment to demand shocks and the overall unemployment at the macro level. This is absent from the pre First World War a result. these issues are not discussed in the historical context.

T.J. Hatton, Profit sharing in Britain. 1865-1913

71

some support in empirical work. This analysis has pointed to the different kinds of effects that profit sharing might have on employee motivation and the importance of distinguishing different scheme types [for a useful survey, see Estrin (1986)]. Though the direct effects on worker effort are often cited, because profit sharing is a group incentive there is an obvious free rider problem. This may lead to a need for increased monitoring in which case an individualised incentive system would be superior to profit sharing [Jensen and Meckling (1979)]. In the case of team production it may be more appropriate to tie the profit reward to those responsible for monitoring [Alchain and Demsetz (1972)]. However, group incentives may have strong positive effects encouraging cooperative behaviour rather than rivalry resulting in negative externalities on worker productivity. Recent empirical studies of productivity have indicated that on balance profit sharing has positive effects on labour productivity [Cable and Fitzroy (1980), Jones and Svejnar (1985), Estrin and Wilson (1986)]. Potentially more important than employee ownership is the effect of employee participation in management and decisionmaking. In their study Cable and Fitzroy found that profit sharing had stronger effects on productivity in firms where there was a high level of employee participation. In most cases participation in major decision making is limited and might even result in reduced management effectiveness. In so far as profit sharing leads to long term attachment to the firm workers may be encouraged to invest in more firm specific human capital which could increase productivity directly as well as yielding reduced turnover costs to the firm. This would be more likely to arise where profit sharing arrangements involve acquiring assets in the firm which cannot be costlessly liquidated. However, empirical results indicate that employee stock ownership plans may have smaller productivity effects than profit sharing itself [Jones and Svejnar (1985)]. Perhaps the effect stressed most frequently arises from the feeling of having a ‘stake’ in the firm. This may lead to improved industrial relations, fewer strikes, lower absenteeism and greater flexibility in working practices. Such effects are also thought to arise through improved channels of communication allowing employees to voice opinions and grievances. It has been argued that these attributes may also arise through unionism [Freeman (1976)] and one interpretation of profit sharing is that it serves as an alternative to unionism. Though this aspect has not been stressed in the recent literature it has been a focus of debate in the historical context. The first question which arises is whether the structure of these early profit-sharing schemes was such that they would have been likely to generate the results which profit-sharing optimists hoped for. A general summary and analysis of schemes in force is given in Board of Trade (1912, pp. 10-27). Profit-sharing payments essentially took three forms, a cash bonus normally paid at the end of each year, payment into a provident fund often held

12

T.J. Hatton. Profit sharing in Britain, 1865-1913

within the firm for sickness, accidents, death or superannuation, and shares or interest yielding deposits with the firm. Of the 133 schemes existing in 1912, 79 paid in cash alone while a further 17 had some cash element and the remainder paid in shares or into a provident fund or some combination of the two. This contrasts with modern profit-sharing schemes to the extent that the provident element is absent and as a result of tax incentives there is a higher proportion of share based schemes. The cash schemes related worker remuneration most directly to the performance of the firm over the preceding year, though in a few cases it related to an average of previous years and occasionally provided for losses to be carried forward. Provident fund payments which sometimes took the form of an individual endowment scheme and sometimes a form of insurance, and shares and deposits accredited, often carried limited rights of withdrawal and in some cases there were forfeits for misconduct or on leaving the firm. It is likely that the cash systems would have provided a stronger incentive and this probably explains the predominance of this form of payment, although the other systems would be more likely to bind the worker to the firm over a longer period and are a reflection of the paternalistic characteristics of many of the schemes. The rules for the division of profits varied widely but typically involved a reserve or first claim on net profits of five or ten percent return on capital, and of the excess, often half was allocated to employees, sometimes more and frequently much less. In some cases the whole of net profit was divided, though in those instances the employee share tended to be small, perhaps five or ten percent, and in others employees were given the same percentage on wages as shareholders earned on capital. In the overwhelming majority of cases profits were allocated to employees in proportion to annual wage earnings. In many firms, while the rule for dividing of profits was known to employees, they were not entitled to inspect the books, though in a few they were and in others independent auditors were used. Employees typically had very little power to monitor the firms’ performance though there were frequently consultative profit sharing committees to iron out grievances. Where employees owned stock they frequently did not have voting rights; in only six cases did they hold more than ten percent of the voting stock and in only nine did they have representatives on the board of directors. Conditions for eligibility to share in profits also varied between firms but forswearing unionism was a relatively rare requirement and, with the exception of the gas companies, the signing of long term employment contracts was unusual. The most common qualifying condition was length of service and in two thirds of such instances the qualifying period was either a year or six months. In a few cases specific groups such as casual workers, piece workers or those receiving commission were excluded. It was estimated that over all firms profit sharing in 1912, 57.3 percent of employees were entitled to share in profits but about a third of total employment was in 16

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firms where fewer than 20 percent were eligible.3 These were often large firms in which workers were selected either by the management or jointly with employees through a profit-sharing committee. It might be suspected that such restrictions helped to alleviate the free rider problem especially in large firms. It is important to distinguish profit sharing from other types of contracts which also existed in this period. First there were various types of cooperative enterprises some of which included an element of profit sharing but are excluded ‘4rom consideration since they were managed essentially in the interests of consumers or workers. In 1910 among the ‘store’ group there were 195 retail societies which had profit-sharing schemes covering some 17,000 workers while there were four non-retail associations in which 9,900 workers shared profits. In addition, there were 86 producer cooperatives with individual membership (not necessarily workers) of 21,000. Second there were various incentive systems of payment such as the ‘premium bonus’ system introduced in engineering or the ‘good fellowship’ system at the Thames Ironworks where a bonus was paid either individually or to a group for the completion of work in less than a specified time [see Board of Trade (1895)]. In addition there was a wide variety of piece-rate systems such as those in coal-mining or the piece lists in textiles as well as a mixture of incentive and sub-contracting as in the building industry. Third, there were sliding scales in which wage rates were linked directly to the prevailing product price. Though sliding scales in the coal and iron and steel industries in nineteenth century Britain are cited by Weitzman they are quite distinct from profit sharing. Collectively negotiated sliding scales often covered a local area and did not link workers’ pay to the performance of the individual firm. More important under sliding scales, an increase in worker productivity would not lead directly to an increase in workers’ pay, and might even have the opposite effect if it resulted in a fall in the product price.

3. The development of profit sharing The earliest profit-sharing scheme is thought to have been introduced in agriculture, on the estate of Lord Wallscourt in 1829 or 1832, but little is known about the character or duration of the experiment. In 1835 Charles Babbage proposed a system of profit sharing to ‘permanently raise the working classes and extend the manufacturing system’ in the second edition 3A calculation based on 128 firms profit sharing in 1912 gave the following results for the proportions of workers who were eligible to share in profits in different sizes of firm: Firm size (max. employment) Average % participating in profits

I-49

50-149

1.50-449

50&999

1ooo+

83.2

71.6

58.8

68.1

47.6

14

T.J. Hatton, Profit sharing in Britain, 1865-1913

of his classic work On the Economy of Machinery and Manufactures. The two conditions laid down by Babbage were: ‘That a considerable part of the wages received by each person employed should depend on the profits made by the establishment’, and (2) ‘That every person connected with it should derive more advantage from applying any improvement he might discover, to the factory in which he is employed than he could by any other course’ (1835, p. 253). The first practical scheme to attract widespread attention was that introduced by a firm of Paris house decorators, the Maison Leclaire in 1842. Having had the seed of the idea sown in his mind, Edme-Jean Leclaire is said to have ‘cudgelled his brains’ for a means of putting it into effect. Having overcome suspicions among his workmen and criticism in the press Leclaire established his scheme which included an annual cash bonus and payment into a provident or ‘mutual aid’ fund to provide for sickness, injury or retirement. Leclaire’s scheme served to increase wages in the order of 20 percent and continued to operate successfully long after Leclaire’s death in 1872.4 Leclaire’s example was followed in France, notably by the Paris and Orleans Railway company in 1844 and later by firms in manufacturing and insurance. It was noted with approbation by J.S. Mill in the first edition of his Principles of Political Economy in 1848 and rapidly gained adherents who saw it as a means of raising labour productivity and reducing antagonism between capital and labour. But it was not until the mid 1860s that it was recognised as a practical proposition in Britain. Writing in 1865 Henry Fawcett recommended it in these terms: ‘Why should not the labourer in the same way as the manager be made more energetic, more intelligent, and more zealous by sharing the profits which industry yields? It may of course be argued that the aggregate profits which the employer obtains would be diminished, if he gave his labourers a certain portion of these profits. We, however, on the contrary maintain that the employer would be far more than compensated for the portion of his profits which he might relinquish in favour of his labourers’ (1865, p. 155). That same year several English firms introduced profit-sharing schemes, the most notable being that of Henry Briggs, Son and Co. at the Whitwood Collieries in Yorkshire.5 An employee stock ownership plan was introduced and half the profit in excess of a ten percent return to shareholders was allotted as a cash bonus to the workforce in proportion to annual earnings. The collieries had experienced a series of strikes lasting in aggregate a year 4For a glowing and sometimes entertaining account of Leclaire’s company and his personal history, see Gilman (1889, pp. 66105). 5For accounts of the events surrounding the profit-sharing experiment of the Whitwood Collieries, see Royal Commission on Trade Unions (1868, evidence of H.C. Briggs, J. Pyrah, J. Pickles and J. Toft, Q’s 12482-13175), Taylor (1884) which includes a memorandum by H.C. and A. Briggs and comments on the memorandum, and Gilman (1889, pp. 243-247).

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15

and a half over the previous ten years. This culminated in the importing of blackleg labour, the use of armed guards and the eviction of unionists from company housing which led to a riot followed by convictions at York assizes. According to the account of H.C. Briggs, the scheme was intended to identify the interests of the miners more closely with those of the firm rather than with their fellow miners through unionism. In the atmosphere of mistrust and antagonism the plan was greeted with suspicion by many of the miners. As one put it: ‘Well, the thing itself is good, but you know it comes from Briggs, and I have no faith in Briggs.16 The firm laid down a condition for participation that each miner should obtain a penny book to have his wages recorded each week for the purpose of calculating his share of the profit, but in the first year only 30 percent of the employees rendered themselves eligible. In the second year 80 percent did so and industrial relations at the company improved dramatically. The boom in the coal trade of 1872-1873 led to rapidly rising prices and a 50 percent increase in wages which, in common with the other coal masters, Briggs conceded though at the same time they raised the return on capital prior to the division of profits to 15 percent. Despite this, the amount distributed to employees rose from El,745 in 1871 to &14,265 in 1873. At the same time the tide of unionism was advancing and in response to the spread of unionism within the firm Briggs rejoined the employers association.’ The deterioration of relations was exacerbated in 1872 when the employees petitioned the management for a day off to attend a meeting and demonstration of the miners union. Coincidentally, this was the same day that profits were to be distributed; the company insisted that those absenting themselves would forfeit their share and a third did so. The slump of 1874 led to a clamour among the employers for lower wage rates and industrial relations at Briggs and Co. further deteriorated as a result of the firm’s attempt to re-introduce riddles to sift the coal before raising it to the pit head. Profit sharing was finally abandoned at the wish of both shareholders and employees in 1875 following a four weeks’ strike against the reduction in wages. During its brief flourish the Briggs scheme received a great deal of attention. It was widely publicised by the owners in addresses to the Social Science Association and by their evidence to the Royal Commission on Trade Unions in 1868 where it also received favourable comment from three of the firm’s workers. A number of other schemes introduced during the same 6Royal Commission on Trade Unions (1868, evidence of J. Pickles, Q 13072). ‘In their memorandum the Briggs stated that ‘it was obvious that if the men were entitled to their union to combine to raise the standard rate of wages, it would be incumbent on us in the interests of our shareholders to combine with other employers in keeping it down, and thus our object in entering into the system of Industrial Partnership would be entirely frustrated’ [Taylor (1884, p. 123)].

16

T.J. Hutton, Profit sharing in Britain, 1865-1913

period attracted less attention and their experiences were rather mixed. Fox, Head and Co., manufacturers of puddle bars and iron plates, introduced a scheme in 1866 under which half of the profits in excess of ten percent were to be distributed to workers. A condition of participation was that workers refrained from joining the union while the employers undertook not to join the employers association. After a few years the puddlers at the firm joined the union, making themselves ineligible, and at the expiry of the initial agreement, profit sharing was given up. In a number of other cases profit sharing either did not have the desired effects or was given up when profit margins narrowed during the depression of the late 1870s. This happened particularly when the original plan was set up while profits were high in the early 1870s as was the case at the engineering firm of Gimson and Co. where, with lack of profit and lack of worker cooperation on overtime ‘the whole matter quietly dropped’ [Board of Trade (1894, p. 43)]. A number of the early schemes did survive through the cyclical fluctuations of the 1870s but in some cases profit sharing took a limited form. For instance, at the firm of John Crossley and Co., carpet manufacturers, profit sharing took the form of an employee stock ownership plan where employees were lent sums for the purchase of shares at fixed interest and the difference between interest and dividends was used to pay off the principal. The early interest in, and enthusiasm for, profit sharing was marked by the brief appearance of a journal devoted to its furtherance - The Industrial Partnership Record - but support was far from unanimous.’ From 1870 to 1885 new schemes were introduced at the rate of only three or four a year and a number of observers sympathetic to profit sharing thought that the widely publicised experience of Briggs and Co. had seriously set back its progress. Some, such as Sedley Taylor, argued that Briggs’ experience was due to unfortunate circumstances rather than any fundamental defect in the concept - a view shared by the Briggs themselves. Jevons, who had advocated profit sharing in 1870, saw no reason to revise his view in the light of events (1882, p. 144). Though progress was slow, these years saw a number of well known firms embarking on profit sharing. These included in 1878 Armstrong Whitworth and Co. in armaments and engineering, printers and publishers Cassell and Co. in 1878 and Hazel1 Watson and Viney in

‘Briggs’ profit-sharing system received a rather negative assessment in the Eleventh and Final Report of the Royal Commission on Trade Unions where it was concluded that ‘the principle is to limit the profit of the employer, and to give to the workman, over and above his wages, a share in the profits of the concern, without subjecting him to any liability for loss. Is it then not unreasonable to suppose that many capitalists will prefer the chances of disputes with their workmen, and even run the risk of strikes and temporary loss, rather than voluntarily limit their profits to ten percent or any other fixed amount? (p. xxxviii). Whether this served to deter other potential profit-sharing schemes is not known but both Jevons (1883, p. 128) and Taylor (1884, p. 140) pointed out that this was a misleading representation of Briggs’ scheme.

T.J. Hatton, Profit sharing in Britain, 1865-1913

II

1886 as well as Brooke Bond in 1882. Such schemes as these were not surrounded by controversy and attracted relatively little attention. The late 1880s saw a revival in interest in profit sharing. The year 1889 is marked by the International Congress on Profit Sharing held in Paris and by the inception of the prominent and controversial scheme of the South Metropolitan Gas Co. The chairman of the company, George (later Sir George) Livesey had introduced profit sharing on a limited basis in 1886 with officers and foremen at the company participating, but could not persuade his fellow directors to extend it more generally. Amid rising industrial unrest in the gas industry the National Union of Gas Workers and General Labourers was formed and quickly obtained a reduction in hours from the employers, including the South Metropolitan. With rising agitation on the London Docks beginning to spread, it was anticipated that a strike for higher wages was likely to take place at any moment without warning and Livesey gained the support to introduce profit sharing for the bulk of the workforce. Under a legal regulation laid down in 1876 the shareholders’ dividend was related inversely to the price of gas and the company obtained an agreement to distribute a bonus to workers on the same basis. The scheme was to operate retroactively for three years giving an initial ‘nest egg’ to increase its attractiveness.’ A condition of participation was that each worker signed an employment contract for a year at a fixed wage rate, the bonus to be forfeited in the case of a strike or wilful injury to the company, and the contracts were staggered to ensure the workforce could not all leave at once. The predominantly unionised stokers struck against the system in December 1889 but the company brought in blackleg labour and the strike ended in defeat for the workers after seven weeks. After the strike the original plan that the bonuses be retained by the company for live years except in the case of death or superannuation was modified in favour of a cash payment. In 1894 it was required that half the bonus be re-invested in the company and a prolitsharing committee with equal numbers of members nominated by the directors and the workforce was introduced. Worker participation was further extended in 1907 with the election of three worker directors to the company’s board. The example of the South Metropclitan became a model for the introduction of profit sharing into other gas companies, though the non-union regulation was not followed by others and was ultimately relaxed ‘Because of the fixed relation between the gas price and the rate of return on capital the profit-sharing system was equivalent to an inverse sliding scale and unlike other sliding scales an increase in productivity, if passed on through gas prices, would result in increased wages and return on capital. Thus the arrangement of 1894 was that employees received a 1.5 percent increase in wages for every penny that gas was sold below the standard price of 2s. 8d. per 1,000 feet. For details of profit-sharing arrangements at the South Metropolitan Gas Co., see Board of Trade (1894, pp. 83-87), Board of Trade (1912, pp. 5461, 141-144) and Royal Commission on Labour (1894, Fifth and Final Report, app. 1, pp. 152-156).

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by Livesey’s company. lo by 1912, 33 gas companies had introduced profit sharing and though these were only a small proportion of all gas companies, because they were among the largest, they accounted for nearly half the gas produced in Britain. As in the case of Briggs more than a quarter of a century earlier, Livesey vigorously promoted his profit-sharing plan and it gained the attention of the Royal Commission on Labour of which he was a member. In the light of these two controversial cases as well as the concentration of new schemes in the years 1865-1867, 1889-1892, 1908-1909 and 1912-1914, profit sharing has been seen as essentially an anti-union strategy. According to one historian. ‘The apparent correlation of profit-sharing activity with periods of good employment and industrial unrest underlines the conclusion to be drawn from the two specific cases, namely that the underlying motives for these schemes were not philanthropic but that they were self-interested attempts on the part of employers to improve industrial relations, and often enough through undermining the power and influence of trade unions either explicitly or otherwise’ [Church (1971, p. 13)]. It has been suggested that of 24 employers introducing profit sharing between 1865 and 1873 in at least six cases this was aimed at trade unions [Bristow (1973, p. 269)]. But the sharp increase in profit sharing in 1889 is perhaps most important in this respect because it coincides with the rise of ‘new unionism’ and the beginning of the so-called ‘employers counter attack’ in which Livesey was prominent [Clegg et al. (1964, p. 67)]. Even so profit sharing was far from universally a direct attack on unions and though many employers were strongly antiunion others were not so disposed. Aneurin Williams, one of the leaders of the Co-partnership Association, condemned schemes aimed at subverting unionism and argued that most of these had deservedly failed (1913, p. 73). In many cases there was a marked element of paternalism in the attitudes of employers and some were motivated by ideals stemming from the cooperative movement. It is notable that the late 1880s saw a revival of interest in cooperative enterprise as well as in profit sharing. Just as the number of profit-sharing schemes introduced rose from 13 in 188&1884 to 79 in 18901894 so the number of producer cooperatives rose from 17 to 108 over the same periods. Briggs and Co. and the South Metropolitan provide perhaps the most extreme examples of profit sharing as an anti-union strategy. Like the Briggs, Livesey regarded his scheme as ‘quite incompatible with trades unionism’ roThe first company to follow the example of the South Metropolitan was the Crystal Palace Gas Company (later the South Suburban Gas Co.) also under Livesey’s management, which in 1894 introduced an almost identical plan except that there was no prohibition on union membership. Livesey informally dropped this condition at the South Metropolitan by 1892 and, at the urging of representatives of the Copartnership Association, formally in 1905 [Lloyd (1898, pp. 198-199), Williams (1913, p. 73)].

T.J. Hatton, Profit sharing in Britain, 1865-1913

19

[Lloyd (1898, p. 198)]. But these cases are somewhat isolated examples. Though the gas industry was a focus of new unionism, the South Metropolitan was the only gas company to introduce profit sharing during 1889-1892. Even by 1907 only four had started profit sharing but a further 12 introduced schemes in 1908 and 1909 when unionism and labour unrest were not quite as pressing. Among these was the London Gas and Light Coke Co. which had faced similar problems to the South Metropolitan in 1889 but did not introduce profit sharing until 20 years later. It has been argued that developments at the South Metropolitan should be seen against the background of the growing alienation of employees arising from the loss of personal contact with the employer in large firms and technological change. Profit sharing was one element in the expansion of welfare schemes at such firms. ‘In this sense the events of 1889 weakened the bonds of manager and men until resuscitated by fresh welfare initiatives’ [Melling (1979, p. 165)]. A number of employers while retaining autocratic control over their businesses were induced by their religious or ethical beliefs to attempt to elevate their employees both morally and materially. One such example was T.C. Taylor, the leading partner of a family firm of woollen-manufacturers at Batley. A congregationalist and Liberal MP, like other members of his family he gave generous support to charitable institutions and was active in local affairs, particularly education. His profit-sharing scheme which was introduced gradually from 1893 paid employees a bonus in the form of shares and is said to have engendered a feeling of belonging and unusual loyalty to the firm. This enlightened self-interest has been interpreted in the broader context of social control exercised by leading industrialists [Pollard and Turner (1976)]. Like Livesey, Taylor was strongly opposed to unionism but at least in the early years it was not a force to be reckened with at the firm. Of all the schemes existing in 1894 perhaps one third were ‘not within the sphere of union influence’ [Board of Trade (1894, p. 163)]. But paternalistic motives were often combined with a desire to improve or maintain good relations at the workplace even where there was no strong union presence. Profit sharing was introduced by the tobacco firm W.D. and H.O. Wills in the turbulent year of 1889 but according to the historian of the company, ‘This scheme was not a counter to unionism since no tendency existed because of the high degree of unskilled female labour’ [Alford (1973, p. 286)]. But in their reply to the enquiry of 1894 the employers remarked that ‘Before introducing the profit sharing system the relationship between our employees and ourselves was one of harmony and we felt that our action would cement this harmonious feeling at a time when there were such disturbances in the labour market and agitators were about endeavouring to make the work people discontented’ [Board of Trade (1894, p. 83)]. Sir William Lever, an archetypical paternalistic employer who became a

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convert to profit sharing and introduced it at Port Sunlight in 1909, commented on the failure of many prolit-sharing experiments thus: ‘We find that those men who try to mix philanthropy and benevolence with business find in it a mixture which is no more possible than oil and water’ (1918, p. 66). Yet there were a number of cases where the adoption of profit sharing was inspired by cooperative ideals. E.O. Greening, a leading advocate of cooperation, introduced profit sharing in his own firm in 1865 as well as influencing its introduction in others. The link is perhaps best illustrated by the case of W. Thompson and Sons Ltd., woollen-manufacturers of Hudderslield, which was one of the centres of the cooperative movement. George Thompson was influenced by the ideas of Ruskin and the Christian Socialist movement and sought to replace the injustices of competition with cooperation. In 1886, a few years after assuming control, he introduced a profit-sharing scheme and relinquished his own claim to profits in favour of a tixed (and substantially lower) salary as manager. The scheme went much further than most with the transfer of control to a committee of shareholding directors which in addition to Thompson himself comprised three employees, two cooperative representatives and two trade unionists [Perks (1982, p. 166)]. However, the philanthropic element and the sharing of both power and profits were comparatively rare. The motives for the introduction of profit sharing clearly varied from firm to firm and in some cases it was introduced for a variety of reasons. While it was not always aimed directly at trades unionism it was quite often intended to promote industrial harmony as well as to provide an incentive for loyalty and effort. Nevertheless it has been argued that ‘the policy was broadly discredited by the pattern of its dissemination. Employers repeatedly showed most interest during periods of intense industrial conflict and union organisation, when rhetoric about the natural community of interests was bound to seem particularly self-serving’ [Bristow (1973, p. 263)]. It was certainly viewed with suspicion by many trade unions though it is doubtful that it was seen as a very serious threat and some prominent union leaders like John Burns even supported it. A survey was conducted for the 1894 Report on the attitudes of the trade unions concerned with the existing schemes. While less than a quarter of responding unions approved of the schemes affecting them, about half answered that they regarded the arrangements with ‘more or less emphatic disapproval’ [Board of Trade (1894, p. 163)]. Profit sharing met with more uniform disapproval among Fabians and Christian Socialists. Among the former the Webbs condemned it on the grounds that ‘any separate arrangements with particular employers destroy that community of interest throughout the trade on which collective bargaining depends’ (1897, p. 551). Similarly Edward Pease argued that profit sharing had been part fraud, part failure and did not provide a solution to any social problem and

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that ‘Organisation alone places the worker on the same plane as the employer’ (1913, p. 15). Clearly profit sharing did not fulfill the expectations of those who saw it as a social movement to reconcile capital and labour. Neither did it provide a universal panacea for problems of industrial relations at firm level. What is less clear (and perhaps of greater interest) is what the effects were when profit sharing operated successfully and in which industrial settings such effects might emerge.

4. Evaluating success and survival As we have seen, it seems reasonable to conclude that the profit-sharing agreements existing before the First World War were not too different from many that exist today and from those favoured by modern believers in profit sharing. The first question is whether these schemes yielded returns to workers sufficient to suggest non-negligible effects on incentives. Over the decade 1901-1911 payment from profits added 5.5 percent to the wages of eligible employees in reporting companies, the average varying from 4.5 percent in 1908 to 7.1 percent in 1906. Thus for the eligible worker profit sharing typically amounted to over two weeks extra wages each year. Unfortunately it is not possible to identify the rates of payment for individual firms but most workers received amounts close to the average. In 1911, 77 percent of profit-sharing workers received an addition to wages of between three and eight percent. These returns appear comparable with those obtained from recent surveys of profit sharing [Smith (1986, p. 383)]. Though these additions to wages are significant they could easily be eliminated if profit-sharing firms paid correspondingly lower wages. The Webbs argued that ‘Unless the Standard Rate and other conditions are rigidly adhered to, the workmen in profit sharing establishments may easily be losing more in wages than they gain in “bonus” or share with profit’ (1897, pi 551). In the enquiry to trade unions for the 1894 Report about one third of responding unions alleged that profit-sharing firms were paying a basic wage less than the union rate. However, such employees might not in any case have obtained union rates and it was concluded in the Report that ‘the employees of profit sharing firms can be taken to receive in addition to any bonus they may get, wages as high as they would receive if there were no system of profit sharing in force’ [Board of Trade (1894, p. 151)]. This is consistent with the result of a recent study which found that profit-sharing firms in engineering paid three percent of the wage as a share of profits but that wage rates were not significantly lower than in non-profit sharing firms [Estrin and Wilson (1986)]. A key question is whether these additions to wages of five percent or so

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T.J. Hatton, Profit sharing in Britain, 1865-1913

were reflected in higher productivity. Unfortunately we have little in the way of direct evidence. Some qualitative evidence can be gleaned from the replies to employer questionnaires conducted for the 1894 and 1912 Reports. Firms were asked whether the scheme had worked ‘satisfactorily’, whether it ‘tended to promote harmony between employers and employed’, and whether it contributed to ‘the exhibition of extra zeal’ on the part of the workforce. In the 1912 Report excerpts of the comments were given for all responding firms who had been profit sharing for ten years or more (pp. 67-74). Out of 60 firms, 51 gave replies and among these only three expressed dissatisfaction with the results though in several others no clear benefits were observed. In most cases they reported that harmony prevailed between employers and employed but it is not always clear that this was due to profit sharing. In so far as they reported on increased ‘zeal’ (or care or diligence) the results were far more mixed and a number reported no discernable increase. It should be noted that these were firms which had continued profit sharing for at least a decade and are therefore most likely to have found it worthwhile. Though these findings are somewhat impressionistic (and may reflect selectivity in reporting) they are broadly consistent with recent surveys of employer attitudes which give more weight to loyalty and commitment on the part of employees than increased productivity [Blanchflower and Oswald (1987, pp. ll-12), Smith (1986, p. 383)]. For the 1894 Report, firms were asked whether they had recouped, in whole or in part, the amount of profits distributed to employees in higher total profit, and while some responded that they were fully rewarded it is not clear that these were in the majority [Board of Trade (1894, p. 158)]. It is not possible to say much more about the rate of return on capital in protitsharing firms but we may return briefly to the case of Briggs. Jevons argued (in 1870) that the increase in the return on capital in the early years of the scheme reflected ‘an average profit of 13 percent earned out of peace and goodwill compared with 5 percent earned out of contention and riot’ (1883, p. 130). He concluded: ‘The Whitwood Collieries seem to me to furnish all the requirements of a perfectly decisive experiment. The reconstitution of the partnership in 1865 is the only cause to which we can attribute the undoubted change which has followed’ (1883, p. 131). However, this conclusion seems far from secure in the light of the changing profitability of mining generally over years of boom and slump. If we compare the rate of return on Briggs’ assets with the average of three other firms for which data is available, the former was 1.8 percentage points higher during 1865-1869 when the scheme was working successfully and 1.3 percentage points lower during 1870-1874 when it was breaking down. But even this is subject to qualification since, although Briggs earned lower rates over the live year intervals from 1870 to 1884, from then until 1909 Briggs’ returns were substantially higher than those of the other three even though they were no

T.J. Hatton, Profit sharing in Britain, 1865-1913

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longer profit sharing. l1 Hence , though it is possible that Briggs’ returns were slightly higher in 18651869 because of profit sharing it is by no means certain that this was the case. One indicator of the success or failure of profit-sharing schemes is the degree to which the schemes survived. This criterion was used by contemporaries [see, for instance, Howell (1890, p. 446)] and is frequently cited by historians. The fact that 55 percent of the schemes started before I913 had been abandoned by that time is often seen as telling evidence against the viability of profit-sharing schemes. It has been pointed out, however, that some proportion of abandonments were due to reasons other than the failure of the schemes themselves to produce the results expected or desired. The reasons given for the failure of 153 schemes abandoned up to 1911 are given in table 1. The first four categories might reasonably be thought of as exogenous to the existence of profit sharing (assuming that liquidations were not themselves caused by profit sharing). This would reduce the number of failures by ten perent. In some of the others it is far less obvious. One independent analysis of the reasons for all failures up to 1920 concluded that only 36 percent could be positively identified as having been given up because of failure of the scheme [Wallace (1959, p. 19)]. But this includes only the equivalent of 7-11 in table 1 (which would give about the same result). If profit sharing were given up though the firm continued to exist, it seems reasonable to suppose that it was not regarded as having been successful. ‘Diminution of profits’ or ‘changed methods’ ought not to have been the occasion to abandon successful schemes. Examining the proportion of failures up to a given point in time is inadequate as a way of judging the survival of schemes. Clearly if survival is regarded as an important criterion of success or failure then the correlates of the duration of schemes should be analysed. Such an analysis has not previously been undertaken for the period before 1914. While this cannot get directly to the effects on wages, productivity and profits, recent evidence from West Germany indicates that profit-sharing income per employee is strongly related to the duration of the scheme [Fitzroy and Kraft (1987, p. 33)]. The data at our disposal is severely limited but allows us to investigate certain hypotheses. First, it is sometimes argued that profit sharing would have more “These data were taken from Church (1986, table 6.7, p. 526). The five year averages are: 1865-9 187&I 1875-9 1880-4 1885-9 189&J 1895-9 190&l 1905-9 Briggs 3 firms Difference

13.7 11.9

14.9 16.2

3.6 4.5

1.1 3.7

5.4 4.0

11.3 6.8

9.6 6.6

12.0 9.8

9.1 7.7

1.8 - 1.3 -0.9 -2.6 1.4 4.5 3.0 2.2 1.4 The other three firms are Bolckow Vaughan and Co., Cannock Chase Colliery Co. and Staveley Coal and Iron Co. Unfortunately none of these are in the same coalfield (Yorkshire) as Briggs and Co.

T.J. Hatton. Profit sharing in Britain, 1865-1913

84

chance of success in some settings than in others. One hypothesis would be that profit sharing would be more successful where workers have higher levels of human capital and more complex skills since there is a greater incentive to bind the worker to the firm and close supervision is more difficult. A second question concerns the type of profit-sharing scheme. While a cash bonus might be expected to provide a direct stimulus to productivity, provident schemes and employee stock ownership plans would be expected to engender greater loyalty to the firm. Thirdly, the size of firm might be important. Because profit sharing is a group incentive the free rider problem would typically be less serious in small units though this may be offset by workers monitoring each other. Alternatively, the greater stability and more formal organisational structure of large firms may favour profit sharing. There are a number of alternative parametric models of survival which can be used. We choose to use the Weibull distribution which gives the hazard function (or age specific failure rate) h(t) =IP(lt)p-‘. This allows us to investigate whether the probability of failure increases or decreases with duration. Negative duration dependence would arise from unmeasured differences between firms taking up profit sharing. On the other hand, if the introduction of profit sharing had initial beneficial effects which then wore off over time, there would be positive duration dependence. If the parameter P > 1, the hazard function will be upward sloping and if P= 1 then the hazard rate is constant and the function reduces to an exponential with a constant hazard rate A. L is itself determined by a set of variables (X) which Table 1 Causes of abandonment 1. 2. 3. 4. 5. 6. I. 8. 9. 10. 11. 12. 13. 14. 15. 16.

of profit sharing

schemes.”

Death of employer Job finished Enterprise abandoned Liquidation or dissolution Changes in, or transfer of business Losses or want of success Diminution of profits Apathy of employees Dissatisfaction of employees and grant of increased wages Dissatisfaction of employees Disputes with employees Dissatisfaction of employers with results Grant of shorter hours Different methods adopted in favour of employees Special circumstances Cause not known Total

aSource: 15th Abstract of Labour Statistics, p. 136.

2 2 4 21 11 21 9 10

3 40 2 5

8 153

T.J. Hatton, Profit sharing in Britain, 1865-1913

85

’ affect the probability of survival such that 1=exp( -bX). Maximum likelihood estimates are obtained with the log of duration as the dependent variable using all the observations, but censoring those with uncompleted durations. Of all the schemes recorded, 20 had to be eliminated because of inadequate information on duration. Further, in the light of evidence on the reasons for cessation of schemes, firms which were liquidated were also excluded.12 This leaves 258 observations of which 133 were schemes still in effect in 1912. The available information was used to classify the firms into 16 broad industry groups and where no industry was reported the dummy NOIND is used. The three different types of scheme, cash provident and shares were often found in combination, so combinations were entered separately.13 Where no scheme characteristics were reported we use the dummy NOTYPE. Unfortunately the number of workers who were profit sharing is ‘known only for the schemes in existence in 1912 and not for those which had been abandoned. The scale variable is therefore the total number of employees of the firm at abandonment or in 1912.I4 Similarly, where the size was not reported the dummy NOSIZE is used. It was thought preferable to introduce dummies when information was lacking rather than exclude the observations since this would have drastically reduced the number of completed durations in the sample. A final variable entered was a dummy NEWU for the years 1889-1892 of ‘new unionism’ and the attendant industrial unrest. This represents a crude test for whether schemes formed to combat industrial unrest were more likely to fail. The results are presented in table 2. The first equation includes all the variables while the second excludes the variables for Scheme type. Excluding the type of scheme has very little effect on the industry coefficients. Relative to the excluded group, which is ‘Other industries’, there are few significant coefficients, the most notable being the positive coefficient for agriculture and negative coefficient for services (which is typically things like laundry, etc.). Among the remainder there is some evidence of negative effects on duration in heavy industries and mining. Perhaps most surprising is the negative coefficient on gas, since as we have seen this became the most successful profit-sharing industry. However, since there is only one completed duration and most schemes were relatively recent there is little information in the data up to 1912. Overall, what these results suggest (given that the signs are about “Some of those liquidated had already been eliminated because of inadequate information on duration. The only other cases eliminated were one reported as ‘destruction of works by fire, system in abeyance’ and a case of farming where the scheme was terminated by the ‘death of the employer’. “Unfortunately it is not possible to obtain further details about the scope of schemes or to apply weights when different schemes types were found in combination. In a few cases all three scheme types were found but these were all eliminated on other grounds so that this group does not appear. 141n some cases a range was reported and in these the upper limit was taken.

86

T.J. Hatton,

Profit sharing in Britain, 1865-1913

Table 2 Estimates Independent

variable

of survival

function.a

Eq. (1)

Eq. (3)

1.33 (0.62)

2.31 (0.16)

0.34 (0.24)

0.33 (0.29)

0.53 (0.24)

0.53 (0.30)

0.19 (0.19) - 0.48 (0.31)

0.25 (0.21) - 0.44 (0.26)

-0.27 (0.27)

- 0.04 (0.24)

0.21 (0.42)

0.21 (0.50)

0.24 (0.20)

0.14 (0.22)

Services

- 1.29 (0.36)

- 0.99 (0.21)

Building

- 0.22 (0.43)

-0.35 (0.50)

Gas

-0.41 (0.41)

-0.91 (0.21)

Wood & furniture

-0.30 (0.55)

-0.36 (0.60)

Clothing

0.28 (0.28)

0.22 (0.27)

Mining

-0.63 (0.60)

-0.68 (0.63)

Iron & steel

-0.31 (0.36)

-0.35 (0.41)

Oil, soap & tar

- 0.03 (0.40)

0.08 (0.38)

0.61 (0.29)

0.50 (0.31)

Constant Industry Textiles Agriculture Printing

& paper

Shipbuilding

& engineering

Food, drink & tobacco Chemicals Distribution

& catering

NOIND

Scheme type Cash only

Eq. (3) 1.14 (0.59)

_

0.96 (0.62)

1.28 (0.60)

1.65 (0.70)

1.51 (0.70)

Cash & provident

1.53 (0.64)

1.63 (0.64)

Cash & shares

0.55 (0.51)

0.53 (0.62)

Provident

only

T.J. Hatton, Profit sharing in Britain, 1865-1913

87

Table 2 (continued) Independent variable

Eq. (1)

I%. (3)

Eq. (3)

Provident & shares

0.63 (0.55) 0.33 (1.20)

_

0.65 (0.64) 0.19 (1.07)

NOTYPE

Firm size/1000 NOSIZE NEWU Density parameters (at means) 1 P log likelihood

_

0.10 (0.03)

0.10 (0.03)

0.06 (0.03)

-0.79 (0.24) -0.02 (0.15)

-0.87 (0.23)

-0.72 (0.17) 0.01 (0.15)

0.07 (0.15)

0.107 (0.006)

0.106 (0.006)

0.103 (0.006)

1.303 (0.075)

1.223 (0.072)

1.181 (0.068) - 360.05

-335.72

-348.15

“Standard errors in parentheses.

half negative and half positive) is that there are relatively limited industry effects. At least in this era it seems that profit-sharing success was not specific to particular industries and technologies. Turning to types of scheme, some interesting results emerge. It appears that those with some provident fund element had the most favourable effect on duration relative to the excluded group which was shares only. A pure cash bonus has a slightly smaller effect on duration, which is notable in the light of the predominance of cash only bonuses (two thirds of the sample). Perhaps the provident variable is correlated with some element of employer paternalism. Schemes including some share element have a smaller effect. This may indicate that shares had smaller incentive effects but also that these schemes were perhaps less generous than the other types. The firm size variable indicates a strong positive effect of size on duration suggesting that greater continuity in organisation or more formal structure may have outweighed the possible free rider effects. It is also notable that in eq. (3) the effect of size is smaller in the absence of industry dummies. Furthermore, it may be downward biased since there is some evidence that larger firms tended to have a smaller proportion of employees sharing profits. (But there may be an offsetting bias if successful profit sharing led to firm growth.) Finally, there appears to be no evidence that profit-sharing schemes launched

88

T.J. Hatton, Profit sharing in Britain, 1865-1913

during the period of new unionism fared better or worse than those started at other times. The estimate of P indicates that in each of the estimated equations, the hazard function is upward sloping. Thus it appears that at least for the period before 1913, the longer the duration of the scheme the greater the probability of failure. This suggests that, as in the case of Briggs, firms often found that the effects of profit sharing wore off over time. For eq. (l), at the means, the hazard rate rises from 0.07 after one year to 0.14 after ten years and 0.18 after 20 years. The associated quartiles of the survival distribution indicate 7.5 percent of schemes surviving 3.6 years, 50 percent surviving seven years and 25 percent surviving up to 12 years. This may give an important clue to why profit sharing was not more successful before 1913. One might conjecture that many of these schemes experienced a ‘lifecycle’. As the impact effects wore off the benefits were perceived as increasingly marginal. 5. Conclusions

Jevons argued that in the evolution of the economic system from serfdom to wage labour, profit sharing would be the next stage and that ‘the sharing of profits is one of those apparently obvious inventions, at the simplicity of which men will wonder in an after age’ (1883, p. 125). As a movement towards fundamental change in the relations between capital and labour profit sharing clearly failed and this failure was evident well before 1914. It did not substantially alter the course of industrial relations and made only halting progress in its adoption. In part it was introduced to cope with the immediate problems of industrial relations but this aspect should not be pushed too far. In most cases where it was introduced there was a strong element of paternalism in the relations between employers and employees and it was not simply a response to an immediate crisis. It has been argued that, in the absence of coercion or tax incentives, firms and their workers would be unlikely to agree on profit-sharing schemes unless these could generate some internal surplus to the firm through productivity improvement. That the idea of profit sharing was well known can hardly be denied; yet, after nearly 50 years of experiment, profit sharing covered only about half a percent of labour force. The available evidence suggests that, during this period at least, profit sharing did yield some significant benefits but these were not substantial enough to employers to induce widespread adoption. Furthermore it is very hard to pin down, at least in terms of superficial characteristics, the types of industrial settings where it was most likely to pay off. This in turn suggests that the benefits were not related to particular technologies, but relate more to individual characteristics and attitudes of employers and their relationships with employees.

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