The adoption and success of profit‐sharing plans in strategic business units

Purpose - To provide insights as to the determinants of profit‐sharing plan (PSP) adoption, as well as conditions that underlie their successful implementation. Design/methodology/approach - The sample comprises strategic business units (SBUs) within a large financial services organization, some of which voluntarily adopted a PSP while others did not. All sample SBUs face similar economic and market conditions. Through a logit analysis, we identify determinants of PSP adoption. Through longitudinal cross‐sectional design, we assess the impact of PSP adoption on earnings growth, as well as conditions that underlie successful implementations. Findings - Larger SBUs as well as SBUs exhibiting superior asset growth are more likely to adopt a PSP than other SBUs. Prior earnings performance is not found to be a determinant of PSP adoption. PSP adoption translates into superior earnings growth, but such impact quickly declines over time. Among PSP adopters, earnings growth following PSP adoption is greater for SBUs that adopt late (late adopters) and for those which had poor prior earnings performance. Research limitations/implications - Limited external validity as the analysis is performed within a single North American organization. Practical implications - PSPs are found to be an effective performance turnaround tool. In addition, their limited life cycle suggests that continuous reinforcements and communications are needed to maintain effectiveness. Originality/value - In contrast to most prior research that uses multi‐industry samples, the paper relies on a unique organizational database that controls for confounding factors and different earnings generation processes. Moreover, the paper provides additional insights as to the conditions for success.