No purchase, no pay - profit sharing in the past and present

How much is a capable, talented and productive IT professional worth? Should the compensation be base salary, shares, profit sharing or something else? How do you count and distribute bonuses? What, if anything, is the connection and effect of compensation and productivity? How do you measure productivity in the first place?

Traditional Prize Money

 Somewhat simplistically one can start with No Purchase, no pay from Henry Morgan's times. A raiding trip - a venture - is funded by merchants, richer patrons, bankers etc. The crew, including the captain, is compensated with a share of the profit, hence "no purchase, no pay".

This model of profit sharing was very effective and used not only in Caribbean waters but elsewhere, including Sir Walter Raleigh and the Golden Hinde.

Different privateers and pirates and national navies used the system for prize money sharing between the officers and crew of a ship. Royal Navy used that system until 19th century - see 1808 change in crew shares.

Navies, privateers and often also outright pirates have other, sometimes conflicting goals than just filling the pockets of the crew, so the practice has been abandoned in Navies, privateers are no longer commissioned, and I do not know how present day pirate share their booty in Strait of Malacca and elsewhere.

Commercial fishing and profit share

Whalers followed a similar profit sharing scheme, as anyone who has read Moby Dick remembers. A more concrete example about whaling ship Milton is explained on New Bedford Whaling Museum pages.
Whaling, like privateers and prize money, is pretty much gone (with small exceptions). Fishing vessels used - and still do - a similar profit sharing system.

The long history and experience collected about profit sharing in fishing suggests that it is actually beneficial to the industry and to the participants. Newsweek  reported that also Thomas Jefferson found evidence for profit sharing - quote:

"Research commissioned by Thomas Jefferson found that, when fishermen bargained for their pay in advance and shared in the profits, the operations were highly efficient."

 IT is different from privateering, fishing or any other seagoing activity

IT projects and companies are different than fishing, let alone privateering.
Even the longest whaling trip is seldom 5 years, and the single goal of filling the vessel with as much catch as possible is very clear, fully shared and easy to understand.  Crew members don't leave the ship (except overboard!), new crew members don't join and the accounts are straightforward to settle. The ship returns to port, catch is sold, expenses are calculated and shares can be done right there. There is no recurring revenue, no complexities about vesting, questions about  residual value etc.

An IT project, service, company, has time span that is much more different. There is initial investment, which can be followed by maintenance, additional innovation, changes of direction, services launched and services discontinued. Teams start small, grow, evolve, and eventually shrink or move to other projects.
How would one apply the useful principle of profit sharing?

An obvious answer is to issue company shares. That is slightly different that the fishermans share, as the Shares in the company imply ownership in "the vessel", not just fair share of the income.
Profit shares like practiced at Southwestern Airlines looks like it works in a focused service industry (see Huffington Post about it). Interestingly, owner's share is pretty similar for the airline as it is for a fishing vessel.

A capital intensive service provider, e.g. hosting services provider, could follow a similar model. A knowledge intensive company, whose valuation is based on intellectual property, customer base (followers, brand) would be different. Tangible capital assets are few, and the bulk of the value generated depends on the crew. Yet, the founders, the  capitalists would not want to forfeit the reward for the risks they have taken early on.

In such circumstance a share that would be smaller for those who joined late could work. Everyone can have a share, but not all shares are equal even if the jobs are similar.

Profit share example

Vietnam Van Thuy Tu profit shares are explained in a paper by Kenneth Rudle and  Luong Thanh Son. Please note the fairly detailed rules and specific fishing gear and catch explained in table 4.1 in the paper.

For a hypothethical IT operation one could argue the following:
- Revenue 105MEUR
- Profit 5MEUR
- Labor costs 50MEUR

If such a company runs into slowdown, and revenue is reduced to 100, all profit is gone. If, however, a part of labor costs was based on profit sharing, in bad times the costs would be flexible, and the company would have an easier time to adjust to slowdowns. The other  side is that in good times the labor costs would be higher, but as Thomas Jefferson observed, that tends to increase the efficiency - productivity - of the operation over salaried alternative.

References and pointers

 Joseph Blasi discusses profit sharing in his blog entry for the Huffington Post

The Argument for Profit Sharing 
Blasi's profile is worth checking before you buy his books.

Reference for Business opens up aspects of profit sharing in their article.

-- Note about Golden Hind:

Venture capitalist Queen Elisabeth I netted more than the then-current national deficit from the spoils of that circumnavigation. Unusually, the crew had agreed to sail for wages, and so the £8000 they received was a token of good will by their Captain.
State power was misused as Queen Elisabeth confiscated most of the loot right at Plymouth Harbor. Lesson learnt - if you run a business, protect your assets from state intervention and make sure you pay your  crew first.