Incentive profit-sharing rules joined with open-book accounting in SME networks

Abstract

Profit-sharing rules applied together with open-book accounting are a synergetic combination that encourages SME networks to continuous innovation. This article studies profit-sharing rules that work as incentives for cost reduction in networks. We describe a case study of a steel-roof manufacturing and assembly network, where profit sharing became relevant shortly after open-book accounting was successfully implemented. Moreover, we present a dynamic game theoretic model for the study of the desired characteristics of profit-sharing rules in such networks. We find that, under quite general assumptions, profit-sharing rules need to satisfy certain conditions in order to encourage the network partners to announce their cost-reducing ideas immediately. A suitable and simple profit-sharing rule is the combination rule which rewards the innovator and the target of cost reduction.

Keywords:

• subcontractor network
• incentives
• profit sharing
• game theory
• continuous innovation
• open-book accounting

Acknowledgements

The authors thank Henri Hytönen, and the two anonymous referees for their helpful comments. During the course of this research, T. Jarimo was with VTT Technical Research Centre of Finland. The research has been partly funded by Emil Aaltonen Foundation and the COBTEC project of the Finnish Funding Agency for Technology and Innovation (Tekes) and the National Workplace Development Programme (Tykes).