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Initiative, December 2002

Profit Sharing

Just over two years ago, there was a great deal of hoopla about profit share and gain share schemes the last national agreement, the Partnership for Prosperity and Fairness, was being trashed out by government, trade unionists and employers.

A survey by Noel Cahill, an economist with the National Economic and Social Council (NESC) found that profit-sharing, employee share ownership and gain-sharing in the Republic was well below the EU average with only 10 per cent of Irish workplaces operating some form of employee financial participation in comparison with an EU average of 28 per cent. Mr Cahill reported that 'a wide range of surveys found that profit-sharing increases productivity, typically by four to five per cent' and he predicted that profit-sharing and gain sharing schemes would increase in popularity in a climate of economic prosperity. Certainly, enthusiasm for profit sharing reached the apex in the run up to the last general election when Fine Gael proposed a National Profit Share Scheme, where taxpayers would receive a dividend when there was a surplus in national funds.

Since then, the economic climate has changed and there is little sign that profit-share schemes have taken off. Mr Cahill told Initiative that no further research on the introduction of such schemes has taken place since 2000.

Two years ago IBEC founded a sub-division known as the Irish Pro-Share Association to help promote profit-sharing schemes, but the association is holding no annual conference this year and it's Website has not been updated since November of last year. Indeed, there was no one available at IPSA to talk to Initiative about this article.

In simple terms, the difference between profit-sharing and gain-sharing is that with profit-sharing employees receive a bonus payment when their employer makes a profit, but with gain-sharing they receive a bonus when they come up with an idea to improve company productivity or efficiency. But it is not as simple as that, according to the Irish Small and Medium Enterprise Association (ISME) which has long been campaigning for the government to promote and facilitate gain-sharing and profit-sharing schemes in the owner-managed through tax incentives. ISME's latest wage report admits that 'the traditional ethos within the owner-managed was against such concepts, but in the changed business circumstances that no longer holds true. The successful implementation of such tailored schemes will enable them to offer modest wage increases in return for a share of any growth in the enterprise, against the backdrop of intense competition. This scenario would be beneficial to both the company and employees as individuals could benefit from the rewards of increased productivity and at the same time help secure the future of the company.'

Share-based

According to James Fitzsimons, a tax advisor to ISME, revenue approved profit-sharing schemes are 'a bit of a misnomer' as they are share based. These share-based schemes were introduced in the 1980s following intensive lobbying by multi-nationals, particularly those in the IT sector. Following the 1997 Finance Act, employee share-ownership plans, linked to profit, were introduced in a number of semi-state organisations including Eircom, ICC Bank, An Post, ESB and Aer Lingus.

Under the approved profit share schemes an employee can receive shares of up to Euro 127,000 a year, which they can sell after three years. If there is no capital gain on the value of the shares in the three year period, the employee pays no tax on the money earned from cashing in the shares.

'This works very well for a PLC, but it is very difficult to operate for a private company which has no shares. If a private company gives an employee a cash bonus based on profit, the tax man keeps the guts of 60 per cent of it - 42 per cent goes in tax, 10.75 per cent goes in employer PRSI and levies take up six per cent.'

ISME head of research Jim Curran adds: 'We are calling for the introduction of a simple profit sharing scheme for SME's that would involve a distribution of 10 per cent of a companies net profit based on certain criteria - to receive the payment, employees would to be with the firm three years later and that would have a bearing on staff loyalty.

'There are two many complications involved with Revenue approved profit sharing schemes. It involves setting up an employee share ownership trust, virtually a second company, that has to hold its own separate AGM and it involves giving employees access to the books. In a PLC where an annual report is published, there is no problem, but many owner-managers are reluctant to open their books to employees.'

Nevertheless, there are small private companies that are already operating profit-sharing schemes where payments are subject to tax, PRSI and levies. Scope Communications, the company which publishes ComputerScope and PC Live! magazines, has run a profit sharing scheme for the last five years. Publisher Frank Quinn says the scheme was introduced for two reasons. 'We introduced the scheme simply to be more fair and also to put a focus on profit,' he said. 'The advantage of a profit share scheme is that it makes sales people to think not just about sales, but to think about profit as well. It makes people more cost conscious and to ask themselves 'Do I need a courier?' or whatever. It is also a way of dealing with the bonus question come the end of the year.'

While the profit-share scheme's advantages to staff are most apparent at times when the company makes a large profit, profit-sharing schemes also make staff face up to economic realities when profits are low or non-existent, says Quinn. 'If there is not profit to speak of, you can't have a profit share - that is a fact of life. That helps people face the facts and I think it helps us to pull together.'

The economist Noel Cahill says that 'the downside to profit-sharing' is that when a company runs into trading difficulties employees take home pay does fall. But he adds: 'Very often the company with a profit share that is in difficulty would be in greater difficulty if there was no profit-share in place.'

Gain-sharing

When it comes to gain-sharing there is a scheme in place, but ISME say hardly anyone knows about it. Fitzsimons said: 'The Revenue Commissioners do have an approved staff suggestion scheme, but there is nothing officially published about it and most employer's do not know they exist. That said, it is easy enough to gain approval to run a staff suggestion scheme from your local tax office.

'Once you have approval for an SSS, if an employee comes up with an idea that is shown to give rise to a quantifiable productivity increase or productivity saving they can earn up to Euro 6,350 subject to a number of conditions on the level of payout. The tax-free amount can't exceed 10 per cent of the first year's saving or 10 per cent of the person's salary. The last condition is particularly unfair, because it means that low-paid staff who come up with gems of ideas that save millions receive only a limited amount under the scheme. Awards can be made to groups as well as individuals, but the group may contain no more than 10 employees'

These restrictions not withstanding, there is nothing stopping an employer rewarding a low paid employee with a good idea with a large cash bonus that would be subject to tax, just as Scope operate a profit-share scheme that benefits from no tax relief.

Christmas bonuses

While most small companies do not operate profit-sharing schemes at present, it is a long-standing tradition in Ireland to give staff Christmas bonuses. Such bonuses when paid in cash are subject to income tax and PRSI in the normal way, but PRSI can be circumvented if the bonus is in the form of goods, such as vouchers or a home-computer. Giving goods instead of cash, gives a potential saving of 10.75 per cent employer PRSI and six per cent employee PRSI and levies - but they are subject to income tax as a benefit in kind.

In the long-run however, introducing a staff suggestion scheme might be a better present for both your employees and your business. Encouraging staff initiatives has the potential to result in real productivity and efficiency savings that will see your company trading for many Christmas's to come. Plus greater up take of staff suggestion schemes may encourage the government to make them more rewarding for low paid staff.