Question

The effectiveness of profit-sharing plans may be diminished because:

A) Potential free-rider problems render such plans ineffective in all but the largest organizations.
B) They are tied to group performance, so the link between profit-sharing and worker productivity is not always clear.
C) There is no means by which greater work effort can be translated into greater compensation.
D) Profit-sharing is a type of deferred payment scheme.

Answer 1

The effectiveness of profit-sharing plans can be reduced because their group-based nature may lead to the free-rider problem, where individual productivity is not directly linked to compensation, detracting from their potential to improve productivity.

Step-by-step explanation:

The effectiveness of profit-sharing plans may be diminished due to a variety of reasons. One key factor is that they are often tied to group performance, making the link between individual worker productivity and profit-sharing rewards unclear.

This can lead to a situation where employees who do not contribute as much still receive a share of the profits, a phenomenon known as the free-rider problem. On the other hand, profit-sharing can incentivize employees as they directly benefit from the success of the business, potentially leading to improved productivity.