profit-related pay (PRP)a form of PROFIT SHARING in the UK. This was a very widespread scheme that gave employees significant INCOME TAX benefits if they took some of their WAGES as PROFIT-linked payments. In principal, their wages would vary according to company profitability. The objective was to combat the unemployment effects of ‘wage stickiness’ – i.e. that wages tend to remain unchanged when company profitability declines causing firms to adjust by reducing employment levels. However, a large proportion of these schemes were felt to be ‘cosmetic’ i.e. wages did not really respond to changes in profits. For this reason, the tax advantages have now been phased out. See FINANCIAL PARTICIPATION.
profit-related paya PAY system whereby employees receive a proportion of their pay in the form of PROFIT-related payments. Advocates of such schemes suggest that they can help to reduce UNEMPLOYMENT by making wages more variable. They hold that unemployment occurs because the price of labour is stuck at too high a level and argue that profit-related income schemes can build some flexibility into labour markets. Specifically, they argue that because of the automatic profit-related cushion, employers will be slower to lay off workers during a recession and quicker to hire workers when conditions are good. In addition, it is held that profit-sharing workers are better motivated than wage earners to improve PRODUCTIVITY within their companies since they share in any additional profits created (see PROFIT SHARING).
Problems can arise, however, because of the variability of profits in the face of events outside the firm's immediate control. For example, profits can be wiped out by an industry ‘price war’ or by falling demand in times of recession. Thus, the higher the required profit element in the workers’ overall pay package to provide a decent living wage, the more vulnerable they are to the variability factor, and this may deter people from joining the firm. See PRINCIPAL-AGENT THEORY. See also SUPPLY-SIDE ECONOMICS, WAGE RATE, MINIMUM WAGE RATE.