Profit sharing and corporate performance: Some evidence from Bangladesh

Abstract

Despite the recent growth in profit sharing research in the Western World, little is known about the way profit sharing schemes are used in developing countries. This paper documents the incidence of profit sharing in a wide variety of Bangladeshi firms. In addition, consideration has been given whether Bangladeshi profit sharing schemes differ from those used in developed countries. Data has been collected from published annual reports, on-site semi-structured interviews and inspection of archival sources. Employee profit sharing is regulated by the Bangladesh Companies Profit (Workers' Participation) Act 1968 under which only 5% of profit before tax is reserved for the employees. This legislation is not particularly restrictive, however, as it applies to only 6.2% of companies. Furthermore, incentive bonuses comprise only 4.5% of total remuneration. Although a profit sharing scheme has been introduced in some publicly quoted firms, it does not appear to serve as a dominant mode of increasing employee motivation and promoting commitment; it has been largely concerned with meeting the legal requirements of the government regulation. The use of profit sharing in privately owned (unlisted) firms is almost nonexistent. Quantitative analysis has revealed a positive association between pay and corporate financial performance where return on equity or market return on shares explain less than 2% of the variations in employee remuneration.