profit sharing and corporate performance: some evidence from bangladesh

The International Journal of Accounting

Profit Sharing and Corporate Performance: Some Evidence from Bangladesh

Dhiman Chowdhury and Zahirul Hoque University of Dhaka, Bangladesh and Griffith University, Australia

Key Words: Profit sharing; Corporate performance; Performance related pay; Developing country; 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 pro- rooting 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 non- existen~ 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.

Considerable effort has gone into researching of profit sharing schemes used by employers to secure employee involvement (e.g., Procter, McArdle, Hassard & Rowlinson, 1993; Smith, 1993; Ogden, 1992; Kennedy, 1995; Marks, 1995; Wood, 1996; Poland, 1996; Tho- mas, 1996). These studies suggest that profit sharing ensures high financial benefits for high performance and establishes the workers' claim on 'residuals' thus, causing them to be more involved with their business and more motivated to ensure its success (for a review, see Ogden, 1995). In the UK, securing greater employee involvement has been the major justification offered by employers introducing profit-sharing schemes. It is also the

Direct all correspondence to: Zahirul Hoque, School of Accounting and Finance, Griffith University, Gold Coast Campus, PMB50, Gold Coast Mail Center, Queensland 9726, Australia.

The International Journal of Accounting, Vol. 33, No. 4, pp. 469-481 ISSN: 0020-7063. All rights of reproduction in any form reserved. Copyright © 1998 University of Illinois

470 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol. 33, No. 4, 1998

principal argument in the government's recent promotion of its profit-related pay scheme (Ogden, 1992, 1995).

The above findings are both theoretical in nature and based on empirical evidence from a wide variety of firms located in developed economies. Little evidence is available for firms in developing countries. The present study attempts to redress this situation.

This paper reports the findings of an empirical study of profit sharing systems in Bang- ladeshi enterprises. It provides additional material to enhance comparative analyses of profit sharing schemes between developed and developing countries. The study has the following objectives in the Bangladeshi environment:

I. To examine the incidence of profit sharing schemes; 2. To review and evaluate the existing government regulation on profit sharing

schemes; 3. To examine whether profit sharing scheme adoption is related to socio-economic

variables; and 4. To examine the relationships between profit sharing scheme adoption and corporate

performance.

The next section documents the findings of previous studies on profit sharing. Subse- quent sections describe the study's research method, findings, limitations and conclusions.

PREVIOUS RESEARCH

Performance-related pay (PRP) schemes are of two types: (1) long-run PRP schemes; and (2) short-run PRP schemes (Bell & Hanson, 1984). Under long-run PRP schemes, incentive benefits depend upon the long-run performance of the firm, and under short-run PRP schemes, the benefits depend upon the short-run performance of the firm. Profit sharing is considered as a short-run PRP scheme. Profit sharing schemes are a means by which employees receive a share of the profits of the company in which they work. The essence of a profit sharing scheme is the creation of a distributable pool based on the profits of the company.

Profit sharing schemes encompass a number of different computational formats with entitlement and payment varying with the profit level at which payment is triggered (Ogden, 1995). Commonly, 5-10% of the corporate profit before tax is set aside and man- aged by a trust for the benefit of the employees. The amount is distributed according to some agreed formula.

There are alternative methods for calculating the employees' share of profit. One alternative is to take a certain percentage of profit before tax after deducting a minimum return necessary for the investment_ The minimum return is called the cost of capital. This method is consistent with the assumption that the incentive bonus is paid for performance beyond normal performance. Another method sets aside a specified percentage of profit before tax subject to a maximum limit. Under this method, there is an upper bound on the total amount the employees can share. The objectives of the upper bound are: (1) retaining sufficient fund for investment (ploughing back profit); and (2) discouraging manager income manipulation behavior. Another alternative is to employ both a lower and upper bound.

Profit Sharing and Corporate Performance 471

The lower bound is the minimum amount of profit that must be earned before a bonus will be paid, and the upper bound is the maximum limit to which employees share in profits. The later model satisfies the objectives of the previous two models, i.e., providing for employees' abnormal performance, maintaining sufficient fund for reinvestment, and mit- igating income manipulation behavior. This model is not free from limitations. Referring to this model, Healy (1985) showed that managers manipulate profit not only by increasing the amount of reported profit but also by reducing it. He observed that managers use income decreasing accounting accruals (big bath) instead of income increasing accruals (smoothing) when earnings fall below the lower bound of a bonus scheme with a view to maximizing their own future bonuses.

Profit sharing as a financial incentive (McGuire et al., 1962; Cosh, 1975; Jensen & Mur- phy, 1990; Baiman, 1982) applied to all employees in a company has been found to be of limited usefulness (see Ogden, 1992, 1993, 1995). Ogden (1995), in his study of profit sharing and organizational change in the newly privatized water industry in England and Wales, argued that profit sharing is principally valued not for any immediate discernible impact on employee motivation, or as an incentive to efficient working, but rather as a rhetorical device to reinforce and support the singular importance of profit as a measure of organizational performance. From this perspective it is argued that profit sharing is more concerned with per- suading employees of the legitimacy of contributing to company performance (Reed, 1989; Fox, 1985) than as a direct employee incentive. Support for this view can be found in Smith (1986), B addon et al (1989), Bell and Hansen (1987), Dewe et al (1988) and Ogden (1995). Reed (1989) viewed profit sharing is aimed at mobilizing employees consent to increased company income performance. Smith (1986) has shown that employers typically referred to profit sharing as an attempt to make employees feel more involved and interested in the company; to increase employees' sense of commitment to the company; and to increase the sense of co-operation between management and staffs (see also Ogden, 1995).

In the UK, the Government's introduction of tax incentives encouraged companies to introduce profit sharing schemes (see Poole, 1988; Schuller, 1989; Smith, 1986). Procter et al (1993) suggest that profit sharing becomes a fundamental part of the process by which management can exercise control over efforts and rewards and, ultimately, affects the profitability of the organization. Thompson (1990) suggests that management cannot rely on coercion as the sole means of control but must engage the cooperation and consent of employees in order to be constantly able to recognize production. This is particularly true in volatile economies like Bangladesh where workers and trade unions can render the formal systems of accountability and control ineffective despite worthy intentions by management (Hoque & Hopper, 1994, 1997).

The above suggests several rationales for the introduction of a profit sharing. First, an organization's profit sharing scheme can change employee attitudes about co-operation with management on issues such as work practices and productivity improvements, and more generally their attitudes toward involvement with and commitment to the company (Ogden, 1995). Second, a profit sharing scheme adoption can be viewed as the successful result of collective bargaining between employees and the employer. Third, a profit sharing scheme adoption may be a response to government regulation.

Profit sharing in Bangladesh is, in fact, regulated by the government through the Com- panies Profits (Workers' Participation) Act, 1968. Under this legislation every industrial enterprise of more than 100 employees or with a capital of more than US$0.125 million or


with value of fixed assets (at cost) of more than $0.25m must create a fund called 'Work- ers' Profit Participation Fund' with 2.5% of the firm's profit before tax. In 1989 the Act was amended and profit participation was increased to 5% of profit before tax. This paper considers whether Bangladeshi profit sharing schemes differ from those used in developed countries as described in earlier research.

RESEARCH METHOD

The Sample

This is part of a larger study examining the link between performance related pay schemes and corporate financial performance. Data were collected from published annual reports, on site semi-structured interviews and inspection of archival sources. The research was conducted in a sample of both publicly quoted and privately owned companies operat- ing in Bangladesh.

A total of 55 industrial firms were studied from the population of Bangladeshi quoted companies in 1993 Dhaka Stock Exchange (DSE) Register of Listed Companies. The Reg- ister includes 142 companies quoted on the Dhaka Stock Exchange on 30 June, 1993. Finan- cial reports and relevant data were not available for 87 companies. This resulted in a usable sample of 55 companies (38.7% of the total number of industrial firms listed on the Dhaka Stock Exchange). The sample firms' activities include engineering, manufacturing of food and allied products, wearing apparel, pharmaceuticals and chemicals, and footwear. In addition, a set of privately owned (unlisted) companies that do not satisfy the government leg- islated profit sharing conditions are also studied. Taking into consideration time and money constraints, this selection was made by taking the first 50 manufacturing companies in the 1993 Dhaka Chamber of Commerce and Industry (DCCI) Directory. The DCCI Directory population is of 5,000 business establishments. The selected firms represent only 1% of the total population and do not constitute a random sampling_ It must be recognized that our results may thereby subject to a selection bias. The state of profit sharing in banks was also studied using data from three nationalized commercial banks and two privately owned commercial banks_ The aim of this exercise was to determine whether or not the employers introduced profit sharing schemes solely because of government regulation or did so voluntarily.

Twenty interviewees were selected from different hierarchical levels with each organization: members of the board of directors; general managers; accountants; and trade union officials. The interview topics included: the organization structure; organization strategy; managerial control; employee reward policy; performance measurement; financial report- ing; and employee attitudes towards their organizational processes and work environment. The interviews varied in length between 1 and 2 h and normally took place in their offices in informal surroundings.

Statistical Design

The first stage analysis utilizes data from the published annual reports of the selected companies. Descriptive statistics are used to examine the variety of profit sharing schemes

Profit Shadng and Corporate Performance 473

in practice. The second stage analysis uses regression techniques to examine the relationship between profit sharing and corporate financial performance. The variables used in our regression models are: (1) profit sharing; (2) company size; (3) return on equity (ROE); and (4) market return on shares (MRS). These are defined as follows:

1. Profit sharing, for purposes of this study, is the amount of corporate profit before tax set aside and distributed to the employees of the selected companies.

2. Company size is proxied as the natural logarithm of the company's sales revenue. 3. Return on equity (ROE) is calculated by dividing net income after tax by sharehold-

ers' equity. Shareholders' equity includes ordinary share capital, reserves, and credit balances of profit and loss account.

4. Market return on shares (MRS) is calculated as follows:

MRS = ( P r / e t - I ) - 1

Where, Pt = price of shares in the current month, and P t - I = price of shares in the previous month.

RESULTS

Profit Sharing in Publicly Quoted Firms

As mentioned earlier, since 1968 profit sharing in industrial enterprises is regulated by the government through the Companies Profits (Workers' Participation) Act, 1968. Inves- tigations reveal that since the'legislation provides for "just 5% of profit before tax," every company in the sample reserves just 5% of profit before tax. Table 1 shows that in 74.5% of sampled companies incentive payment is less than 5%. Only 4 companies out of 55 have paid more than 10% of total pay as profit sharing benefit. Table 1 also demonstrates that sampled companies pay an average of only 4.5% of total pay as incentive bonus.

All the interviewees expressed a high degree of dissatisfaction with the low rates for profit sharing schemes. They believe that the low rate of profit sharing has little or no impact on employee motivation. They also believe that the profit sharing scheme in their organizations is governed largely by the legal requirements under the Companies Profit (Workers' Participation) Act, 1968. Thus, the evidence suggests that firms introduce profit

Table 1. Bonus as a Percentage of Total Pay in Publicly Quoted Industrial Firms During 1993

Number of firms % of sample

Below 2.5% 21 38.2 2.5% to 4.99% 20 36_3 5% to 9.99% I0 18.2 10% and above 4 7.3

Total (N) 55 100_0% Note: Mean: 4.5%; Median: 2.9%; Standard Deviation: 2.4%. Source: Calculated by the authors from annual reports & accounts.


Table 2. Profit Sharing in Privately-Owned (Unlisted) Companies (N = 41)

Number of companies Less than 100 employees Value of fixed assets of less than $_25m

Capital of less than $0.13m

Profit sharing schemes

Eid bonuses equal to one month 's pay Eid bonuses equal to two months ' pay

41

34 a 26 b

nil

13

7

Notes: a7 companies declined to supply the data; hi5 companies declined to supply the data.

sharing to comply with legal requirements, not as a means to increase employee motivation and commitment. This behavior is inconsistent with findings reported in the studies of Smith (1986), Baddon et al. (1989), Bell and Hansen (1987), Dewe et al. (1988) and Ogden (1995).

Profit Sharing in Privately Owned Companies

Inspection of archival records revealed that only 6.2% of industrial enterprises satisfied the conditions of the Companies Profit (Workers' Participation) Act, 1968. The question now arises as to whether profit sharing is practiced by choice (voluntarily) in the 93.8% of the manufacturing companies outside the purview of the legislation. Table 2 presents the profit sharing profile of companies not subject to the Act_ As can be seen from the Table 2, all the companies have less than 100 employees, 34 companies have fixed assets of less than US$ 0.25 million, and 26 companies have capital of less than US$ 0.125 million. The Table further shows that not a single company has introduced a formal profit sharing scheme. However, 13 companies have paid one festival (Eid) bonus equal to one month's pay and 7 companies have paid two Eid bonuses equal to two months' pay.

Family-owned enterprises tend to recruit family members and relatives who are loyal to the owner. An interviewee put it thus; "the owner is the sole authority to decide employees' remuneration." Since there is huge unemployment in the country (18% to 37% of the labor force are unemployed or under-employed, according to Rahman, 1994) there is little room for wage bargaining. Furthermore, labor unions are absent or weak in the family-owned firms_ Seen in such context, profit sharing can be seen as a "distant" issue for the privately owned firms. Books of accounts are reportedly considered secret. A trade union official remarked: "...we (workers) do not have access to the company's books of accounts_" Gov- ernment officials (law enforcement agencies) also indicate that they have no access to accounts in these firms. Most interviewees believe that the Registrar of Joint Stock Com- panies (company watchdog) lacks sufficient manpower to verify the books of accounts even given adequate access.

Profit Sharing in Banks

Since 1975 profit sharing schemes in the selected banks have been introduced using the following sharing rates:

Profit Sharing and Corporate Pedormance 475

Table 3 Profit-Sharing (Incentive Bonus) in Banks (1986-1988) (Million $)

Profit Banks before tax Bonus Bonus~profit (%)

Sonali $19.5 $3 50 17.95% Janata 15.08 2.38 15.78 Agrani 14.75 2.20 14.92 Pubali 2.95 0.60 20.34 Solt~-e: Annual reports

1. If profit before tax (PBT) is < 1/3% of working fund (WF): no bonus.

2. I f P B T > l / 3 % o f W F b u t P B T < 1%: 1 month 's basic pay asbonus .

3. I f P B T > l % b u t P B T < 1 . 5 % o f W F : 1.5 months ' basic pay asbonus .

4. If PBT > 1.5% of WF: 2.5 months' basic pay as bonus.

Until 1988 employees in the selected banks received incentive bonuses ranging from 14.8% to 20.3% of profit_ During this period bank profit was sufficient to cover 1/3% of the working fund (see Table 3). Since 1989 bank profits (before tax) are much lower than the minimum requirement (1/3% of working fund) and therefore bank employees receive no profit-related incentive bonus. In this study working fund is the sum of total of (i) all deposits (time and demand); (ii) all borrowings; and (iii) reserve fund.

Due to the decreasing profitability since 1989 all of the banks failed to qualify for profit sharing_ One of the main reasons for decreasing profitability was the increasing trend in bad and doubtful debts_ Since 1989 (as per instruction of the Bangladesh Bank circular no. 34, dated 16.11.89) no bank can report in a bank ' s profit and loss account interest accrued but unrealized from the classified loans and advances. Classified loans are loans that are overdue more than twelve (12) months.

"...for limitation beyond its control the bank suffered substantial loss due to suspension of interest on classified loans under the policy directives of the Government. The bank will make substantial profit when these loans are recovered." (Director's overview, Annual Report, 1990)

It is believed that bank employees are demoralized due to the elimination in 1989 of profit-related incentive bonuses_ A bank employee remarked:

"True, employees have to be blamed for the bad credit management but this is not the whole scenario. Bank management does not wholly control debt recovery. It is also dependent on political situation of the country. Bank performance has been actually increasing from the viewpoint of deposits and advances."

Discussions with some bank employees reveal that they are also demoralized, because they believe that their workload has increased without commensurate rewards. A bank employee remarked that even though bank 's deposits and advances had increased, employment size did not increase in proportion. Most bank employees interviewed believe that good credit management is essential in order to revive incentive bonus. According to them, co-ordinated efforts in this respect by management, trade union, political parties, and the

476 THE INTERNATIONAL JOURNAL OF ACCOUNTING Vol_ 33, No. 4, 1998

government is an urgent need if an 'enabling' and 'motivating' environment is to return to the banking industry. It is recognized in Bangladesh that bank loan defaults are a national crisis. "This has caused the discontinuation of incentive bonus," commented the chief executive of one nationalized commercial bank.

An International Comparison of Profit Sharing Schemes in Practice

It will be interesting to observe the dissimilarities between this study and the studies conducted in other countries. In the USA and UK, although there is no government regulation on employee profit sharing schemes, the schemes are well developed through the interplay of market forces. In the USA, typically between 10% and 12% of a firm's net profit are paid as bonuses (The Economist, 15 April, 1995, p.75). In the UK, there is at least one incentive scheme in all of the 500 largest companies (Chowdhury, 1993), whereas, in Bangladesh, profit sharing is found in less than 1% of the industrial enterprises. In the UK, usually 15% to 25% of employee earnings are incentive related, whereas, in Bangladesh, in 74.5% of sample firms, incentive payment is less than 5% (Chowdhury, 1993). In India, profit-sharing benefit ranges between 8.33% and 20% of salary or wages (Narain, 1983). Available data on Malaysia, Philippine, and Singapore indicates that typically 10% of profit before tax is reserved for employees (ILO, 1989).

Profit Sharing and Corporate Financial Performance

The literature suggests a close linkage between profit sharing and corporate financial performance (Baiman, 1982; Smith, 1986; Thomas, 1996; Wright, 1986). A cross-sec- tional regression model is used to assess the relation. Here, the null hypothesis (H0) that employee profit sharing and corporate financial performance are unrelated may be rejected

Table 4. Descriptive Statistics for the Variables

Variables Mean Median S. D_ Skewness

Employee profit sharing $0.006m $0_008m $0.004 2.6 Sales revenue $5.35m $1.57m $12.96m 6_1 Net profit $0_09m $0.02m $0_23m 7.4 Equity $ I _04m 50.51 m $2.94m 6.9 Return on equity (%) 8.90 7_20 2.40 1.5 Market return on shares (%) 12.7 12_3 13.1 1.4

Table 5. Correlation matrix for the variables

Variables LnEPS LnSales ROE MRS

LnEPS (Employee profit sharing) 1.0 LnSales (Sales revenues) .79" 1.0 ROE (Return on equity) .20** 0.02 I_0 MRS (Market return on shares) .18" 0.02 0.43** 1.0

Notes: ""Significant at p'=.01, two-tailed; "Significant at p'=.05, two-tailed.


at a significance level of 1%. Table 4 presents the descriptive statistics and Table 5 shows the correlation matrix for the variables used in the analysis.

As can be seen in Table 4, employee profit sharing and sales revenues are highly skewed. The data was therefore transformed using a logarithmic transformation. The return on equity (ROE) and market return on shares (MRS) are slightly skewed. No transformation was thought necessary and none was performed. The relationship between the measures of performance and employee profit sharing are modelled as follows:

LnEPSi = b0 + blLnSales i + b2ROE i + e i (1)

LnEPSi = b0 + blLnSales i + b3MRS i + e i (2)

Where,

LnEPSi = Logarithm of employee profit sharing, LnSalesi = Logarithm of sales revenues of ith firm,

ROEi = Return on equity of ith firm, MRSi = Market return on shares of ith firm, and e i = Error term of the model.

As ROE and MRS are highly correlated (Table 5) they are not put in the same equation. Sales revenue is added to the models because it is expected that employee profit sharing varies with firm size (sales revenue being a proxy for firm size).

The results presented in Table 6 indicate that employee profit sharing is positively associated with sales revenue, the firm size proxy. Employee profit sharing is also positively associated with ROE and MRS individually (p = 0.0492-0.0500). We reject the null hypothesis that employee profit sharing and corporate financial performance are unrelated. The independent variables together explain 50.77%-51.03% variations in employee profit sharing. We also ran regression with Ln (Sales) as the single independent variable. While not presented here, it is noted that Ln (Sales) alone accounts for 49.9% of the variations in

Table 6. Regression Analysis with Log of Employee Profit Sharing as the Dependent Variable and Return on Equity (ROE) and Market Return on Shares (MRS) as Independent Variables

Regression 1 Regression 2 b o = Constant 6_41 6.74 t-value (sig) 5.92 (0_000) 5.96 (0.000)

b I = LnSales _1721 .1601 t-value (sig) 2.65 (0,005) 2.46 (0.010)

b 2 = ROE _0028 t-value (sig) 1_99 (0.049)

b 3 = MRS .0021 t-value (sig) 1.97 (0.050) R 2 .5103 .5077

Adjusted R 2 .5178 .5061

F (sig) 4.01 (0.051 ) 3_99 (0.022)

N 55 55


employee profit sharing. Thus performance variables appear to account for only 51.03%- 49.9% or 1.13% of the variations in employee profit sharing. Overall, it can be concluded that while employee profit sharing is positively associated with organizational performance, the adoption of profit sharing accounts for only a minor amount of the observed variation in performance.

DISCUSSION AND LIMITATIONS

Employee profit sharing in Bangladesh is regulated by a government legislation called Companies Profit (Workers' participation) Act, 1968. Under this legislation, every manufacturing enterprise with more than 100 employees or a capital of more than US$ 0.13 million or with the fixed assets values of more than $0.26 million must reserve 5% of profit before tax for distribution to its employees. This legislation is not particularly restrictive, however, as it applies to only 6.2% of companies in Bangladesh. The remaining 93.8% of the companies remains outside the purview of this legislation.

Our analysis indicates that profit sharing in publicly quoted firms is mainly in response to the external legitimacy offered by the Workers' Participation Act. Such a behavior is inconsistent with the suggestions made in the literature that an organization should introduce a profit sharing scheme to motivate employees to improve organizational performance (Ogden, 1992, 1995; Smith, 1986; Botlgen, 1989; Botlgen et al., 1988). The data indicates that the average incentive bonus in Bangladesh was only 4.5% of total pay. The quantitative analysis did reveal a small but a positive association between profit sharing and corporate performance.

Profit sharing schemes in banks are a separately interesting phenomenon. Until 1988, employees in commercial banks, private and public, received yearly profit-related bonus ranging from 1 to 2.5 months' basic pay depending upon bank profitability. Beginning in 1989 employees failed to qualify for incentive bonus due to low bank profitability, mainly for two reasons. First, the Bangladesh Bank (the central bank) policy no longer permitted commercial banks to credit their profit and loss account with interest from classified loans. Second, loan recovery rates decreased over the preceding years.

Limitations

Although the sample size is small the study has covered a wide range of firm character- istics e.g. large, medium and small firms, listed companies and unlisted companies, commercial firms and banks. Quantitative analysis of the data in this paper is subject to three primary limitations. First, each measure of performance used throughout the paper is an imperfect proxy for performance. For example, the accounting based measures of performance may have been subject to manipulation. In addition, the use of reported profits for any particular year as the index of corporate achievement may conflict with long-run max- imization strategies by management. Second, this paper includes banks with publicly owned and privately owned firms when measuring corporate performance. As pointed out, the basis of profit sharing is different between banks and industrial companies. Moreover, one may argue that bank performance in a developing economy should take into account social and economic development considerations that may not be true in case of publicly


owned and privately owned companies. Consequently, further research is advisable before firm conclusions are drawn with regard to the study!s reported association between profit sharing and corporate performance in the selected companies. Third, the study is con- strained to the period of 1993-94.

RESEARCHER POLICY OBSERVATIONS

The following observations are somewhat beyond the realm of the research presented above. However, the researchers have developed the following opinions based on their broader understanding of the Bangladeshi environment.

The Bangladeshi Company's Profit (Workers' participation) Act, 1968 discussed earlier needs to be amended. First, coverage of the regulation should be extended further so that large number of business establishments can reap the benefit of profit sharing schemes. Second, considering that in overseas countries profit-sharing percentage is more than 5%, the "just 5% of profit before tax" provision of the Bangladeshi Act can be replaced by "at least 5% of profit before tax." Like developed economies, the Bangladeshi government should give lucrative tax facilities to those business establishments that have wider incentive schemes.

It is recognized that in Bangladesh, bank loan recovery rates depend not only on bank management's performance but also on the national political condition. That is to say, it is recognized that political instability tends to reinforce a loan-default culture. We believe that employees, trade unions, politicians, and the Bangladeshi government must work together to revive bank profitability and incentive bonus.

As pointed out, profit sharing schemes used in the selected Bangladeshi companies were mainly in response to government regulation. In Bangladesh, the industry sector is subject to serious political crisis as its trade unions have pervasive political influence and they are linked to the political parties (Hoque & Hopper, 1994). The interaction of these factors ren- ders extant control systems ineffective in the eyes of management. It is argued that profit sharing can change employee attitudes about co-operation with management on issues such as stable work environment and productivity improvements. Profit sharing can become a fundamental part of the process by which management can exert discipline over its workforce and develop the harmonious employer-employee relationship that is a pre- condition for increasing productivity of the company.

Acknowledgments: Thanks are due to Haim Falk, Trevor Hopper, Bob Scapens, Chris Guilding and Mike Dempsey for their helpful comments and suggestions on an earlier draft of this paper_ The use- ful comments of two anonymous reviewers and the Editor are also gratefully acknowledged.

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