A modified form of the wages system by which wage-earners receive a part of the surplus of the industry according to some understood plan. Overseers receive salaries, capitalists interest, wage-earners wages, and what remains is divided among these classes, who all are responsible for success or failure. A part or all of the wage-earner's share may be given in cash; or it may be held in trust, invested in capital stock as savings to be used by
them in cases of emergency; or it may be used as a social, educational, or amusement fund.

Profit sharing is based upon the principle that work done varies with the degree of interest felt by those who perform it. Profits may be increased by the wage-earner by increasing the quantity of the product, by improving its quality, by better care of implements, by a decreased loss of materials, by lessening superintendence, and by avoiding quarrels with
employers. The extent to which profits may be increased varies also with the extent to which the wage-earner is made a sharer in profits, the form in which his share is increased, his intelligence, and the character of the industry. Profit sharing has been successful in many industries, and has sometimes failed where the methods employed were copied from those which had met with success. Upon the whole profit sharing has been most successful in handicrafts where there is a stable market for the products, and where the price paid for labor is a large part of the cost of production.

The origin of profit sharing is unknown. It is said that the American financier Albert Gallatin made a trial of it in his glass-works, established at New Geneva, Pa. ,in 1794. John S. Vandeleur, a disciple of Robert Owen, in 1831 tried an extensive experiment in profit sharing on an estate in the County of Clare, Ireland. It was successful in stimulating the interests of the laborers to the great improvement of the estate and of their condition, until it was unfortunately terminated through the loss of Vandeleur's entire property in consequence of his passion for gambling.

The first notably successful profit-sharing enterprise was begun by Le Claire, a French house painter, in 1842. At the time of his death in 1872, $220,000 had been distributed to workmen as their share of the profits. According to his plan, capitalists received 5 per cent. on capital invested, managers were paid salaries, wage-earners wages, and then from the profits remaining, one-fourth went to the capitalist class, one-fourth to a Mutual Aid Association of Workmen, and one-half went to wage-earners directly. Since Le Claire's death his business has been conducted on similar lines. At the present time the Association of Workmen receives 5 per cent. of interest on its capital as a half-owner of the business, and also about 20 per cent. additional to its wages, which are about as high as those paid for similar lines of work in Paris. Laroche Joubert, a paper manufacturer, adopted the system in 1843, and the Orleans Railroad Company in 1844.

In 1847 J. H. von Thunen introduced the system on his estate near Zellow, in Mecklenburg-Schwerin, where his son and grandson, succeeding in turn to the proprietorship, continued it in force. In 1875 there were about seventy-five profit-sharing establishments in France, and in 1878 a society of the proprietors and directors of these was formed in Paris for a comparative study of methods. Shortly after a profit-sharing scheme was recommended for the State, departments, and communes. The municipal council of Paris devised a profit-sharing arrangement to be used by the city contractors, but it was never put in operation.

In the Bon Marche, the largest retail store in the world, a scheme of profit-sharing and industrial cooperation prevails. Of the capital to the amount of 20,000,000 francs, 7,500,000 is held by employees; 6 per cent. is paid on capital. The profits shared assume four forms; the heads of departments to over a hundred, whether they have capital invested or not, participate in the profits according to the percentage of sales; the retiring fund draws about 5 per cent. of the profits; the provident fund takes another share; and what remains is then divided pro rata. Another successful experiment in profit sharing was begun by Godin, a stove manufacturer, at Guise, about 1872. 

In the first fifteen years $650,000 were distributed to the workmen in dividends, and a considerable amount besides was invested in capital stock. In France more than one hundred such enterprises are managed with success at present. Elsewhere on the Continent there are comparatively few instances. In Germany the piece-work system with prizes seems to be preferred. There are, however, 47 instances; in Switzerland, 14; Austria-Hungary, 5; Belgium, 6; Holland, 7; Italy, 8; and but nine in Spain, Portugal, Scandinavia, and Russia. In Great Britain there are 95 instances, and in the United States 23.

Conspicuous examples of successful profit sharing in the United States are those of the Proctor & Gamble Co., of Ivorydale, Ohio, and the N.O. Nelson Manufacturing Company, of Saint Louis, Mo. The former company employs largely unskilled wage-earners, who receive comparatively low wages. During the year 1886 the work of the company was interfered with by many strikes, and in the following year profit sharing was introduced to establish harmonious relations with the employees. Reasonable salaries were allowed the active members of the firm, interest was allowed on the capital, and the net profits were divided between the firm and "the employees, in the proportion that the wages paid bore to the whole cost of production."

Although the profits received by the wage-earners increased their income considerably, they were indifferent to the success of the enterprise until the company divided them into four groups based upon their interest in the work, its excellence, and the prevention of waste. The best group received twice the regular dividend, the second the regular, the third one-half the regular dividend, while the careless and indifferent received none at all. The whole-some influence of this discrimination was at once seen in larger dividends.

The stockholders did not profit directly by this scheme, but the better profited at the expense of the poorer workmen. When the firm became a stock company, in 1890, wage-earners were to receive a dividend of 12 percent. on wages, which was the same as the profits on common stock. The number of employees receiving profits increased from 225 in 1887 to 550 in 1899, the latter number being 92 per cent. of the total number of wage-earners. Employees are encouraged to become owners of stock and 80 of them own 191 shares. Beginning with 1894, $500 is set aside semi-annually as a pension fund, of which one-half is contributed by the company and the other half comes from the bonuses of the employees. Since the beginning of the experiment no strikes or labor difficulties have arisen. In 1894 the labor cost, including the 12 per cent. bonus to wage-earners, was only 63 per cent. of what it had been in 1886.

The N. O. Nelson Co., brass manufacturers of Saint Louis, Mo., began a profit-sharing enterprise in 1886. The company pays out all sums needed in cases of sickness and disability as they occur, as a part of the costs of the business. Allowances are made for funeral expenses, and upon the death of an employee his family is supported to the extent of two-thirds of his wages, until it is able to support itself. The crucial test of profit sharing enterprises is given in periods of crises, when extra efforts of wage-earners are not rewarded by dividends. It is then that wage-earners lose interest in them, and the mortality rate of profit-sharing enterprises is high. For the first ten years, 1887-1897, the dividends to employees were large. In two years, 1893 and 1896, there were no dividends for employees. That no labor difficulties arose and that wage-earners did not lose interest in profit sharing, even though wages were reduced one-fourth, was due largely to the wisdom of the company.

Salaries and interest were reduced to the same extent as wages, but the one-fourth thus deducted from these shares was to be paid out of future profits before any bonuses were to be paid. In each instance it was not long before the company was on a dividend-paying basis and profit sharing weathered the storm in safety. One other feature of the management of the N.O. Nelson Company shows how profit sharing may pave the way to industrial cooperation. In 1896 the company made a proposal to employees in the cabinet-making shop which provided for the gradual purchase and management of the enterprise by the employees. The proposal, at first rejected, with a few changes was soon after accepted, and at present this department is owned and managed exclusively by employees.

On January 1, 1903, the United States Steel Corporation announced a plan of profit sharing. Only those employees who hold positions of responsibility share directly in the profits of the corporation. If the net earnings for the year exceed $80,000,000, but are less than $90,000,000, one per cent. of such earnings is to be distributed among the employees, the share to be determined by the finance committee, so as to permit the fullest recognition of merit. With every $10,000,000 increase in net earnings, the share to be distributed increases by 1/5 per cent. of such increase of earnings.

Employees of lower classes are given favorable opportunities for becoming owners of the corporation stocks. To further encourage the holding of stocks, those who buy such stocks and remain in the service of the company are to receive at the end of five years a bonus of 5 per cent. annually on the face value of the stock held over, and above the regular dividends, and the promise of a bonus at the end of another five years is given. A large number of the employees have already acquired stock. It is hoped that this plan will insure stability on the part of the mass of the workmen and the maximum of zeal on the part of the higher employees.

The recent record of profit sharing in the United States has not been such as would give encouragement to its ardent supporters. In 1889 there were thirty-four institutions in the United States, while there were but twenty-three ten years later, and of these twelve have been organized since 1899. Aside from these failures several others were attempted and soon after abandoned. A variety of causes contributed to the abandonment of these institutions during this period . The long period of the financial crisis went hard with all of them, and especially with those which had but recently attempted profit sharing. Changes in management were responsible for its abandonment in other cases. Impatience of success, and abandonment before a fair trial was given, was the situation in a number of other cases. To lack of seriousness in dealing with the matter and to unwisdom in management may be attributed still other failures.

That profit sharing is a scheme which will settle the great difficulties between labor and capital none but its most sanguine advocates would claim. But that it may be used in many enterprises to bring about harmony between the employer and the employee, to elevate workmen and to prepare the way for industrial cooperation, has been proved by experience in institutions which have passed beyond the experimental stage.