Collective bonuses and the free rider problem

Profit-sharing and incentive schemes are two distinct mechanisms, created by ordinance in 1959 for the incentive scheme and in 1967 for profit-sharing. Profit-sharing is compulsory above a headcount threshold and rests on a statutory formula tied to profit. The incentive scheme is optional and rests on a negotiated formula tied to results or objectives.

Both benefit from a specific social and tax regime, which is a substantial part of the incentive to set them up, independently of their effect on work.

In a large collective, one person's contribution to the common result is small, and the gain they derive from extra effort is divided by the headcount. Theory therefore predicts unchanged effort.

That reasoning, known as the free rider problem, predicts that the effect of a collective bonus declines rapidly with group size. It was formulated for collective action by Mancur Olson in 1965, and applied to team production by Armen Alchian and Harold Demsetz in 1972.

Empirical work nonetheless finds positive associations between profit-sharing schemes and productivity, including in large firms.

Proposed explanations concern peer pressure, shared information and selection: firms adopting these schemes differ from others in many other characteristics.

Peer pressure was formalised by Eugene Kandel and Edward Lazear in 1992. It assumes that colleagues observe one another's effort, which is more plausible in a small team than across a whole large firm, and shifts the question towards the organisation of work.

Adoption of a scheme is not random. Firms setting one up are generally larger, more profitable and equipped with other management practices, which makes attributing an effect delicate.

The few studies exploiting regulatory thresholds, which make the scheme compulsory above a given headcount, produce more cautious estimates than simple comparisons. Those thresholds have their own effects, with some firms stopping just below them, which the authors must also take into account.

Profit-sharing transfers part of the firm's risk to employees, since pay varies with results. That dimension is rarely discussed in evaluations focused on productivity. Yet Martin Weitzman had made it, in 1984, the central argument of a share economy, in which variable pay would cushion shocks to employment.

It is, however, central in debates about the articulation between these schemes and base pay, notably where they partly substitute for it.