The profit-shar­ing econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

Over the last 35 years, real wages in the United States failed to keep pace with pro­duc­tiv­ity gains; for the typ­i­cal non-farm worker, the lat­ter grew twice as fast as the for­mer. In­stead, an in­creas­ing share of the gains went to a tiny frac­tion of work­ers at the very top – typ­i­cally high-level man­agers and CEOs – and to share­hold­ers and other cap­i­tal own­ers. In fact, while real wages fell by about 6% for the bot­tom 10% of the in­come dis­tri­bu­tion and grew by a pal­try 5-6% for the me­dian worker, they soared by more than 150% for the top 1%. How can this trou­bling trend be ame­lio­rated?

One po­ten­tial so­lu­tion is broad-based profit-shar­ing pro­grammes. To­gether with job train­ing and op­por­tu­ni­ties for work­ers to par­tic­i­pate in prob­lem-solv­ing and de­ci­sion­mak­ing, such pro­gramms have been shown to foster em­ployee en­gage­ment and loy­alty, re­duce turnover, and boost pro­duc­tiv­ity and prof­itabil­ity.

Profit shar­ing also ben­e­fits work­ers. In­deed, work­ers in com­pa­nies with in­clu­sive profit-shar­ing and em­ployee-own­er­ship pro­grams typ­i­cally re­ceive sig­nif­i­cantly higher wages than work­ers in com­pa­ra­ble com­pa­nies with­out such ar­range­ments. About half of For­tune’s list of the 100 best com­pa­nies to work for have some kind of profit-shar­ing or stock-own­er­ship pro­gramme that ex­tends be­yond ex­ec­u­tives to in­clude reg­u­lar work­ers.

De­spite the demon­strated ben­e­fits of broad-based profit-shar­ing pro­grammes, only about one-third of US pri­vate-sec­tor work­ers par­tic­i­pate in them, and about 20% own stock in their com­pa­nies. If these pro­grams work so well, why are they not more wide­spread?

First, ex­ec­u­tives for whom shared prof­its al­ready ac­count for a sig­nif­i­cant por­tion of in­come may re­sist pro­grammes that dis­trib­ute prof­its to more work­ers, fear­ing that their own in­come would de­cline. Even when such pro­grams in­crease over­all prof­itabil­ity, they could re­duce the prof­its go­ing to top man­age­ment and share­hold­ers.

Sec­ond, work­ers are con­cerned that profit-shar­ing may come at the ex­pense of wages, with the sub­sti­tu­tion of un­cer­tain prof­its for cer­tain wages re­sult­ing in lower over­all com­pen­sa­tion. Ef­fec­tive profit- shar­ing schemes must be struc­tured to pre­vent this out­come, and strong col­lec­tive bar­gain­ing rights can help pro­vide the nec­es­sary safe­guards.

Third, if in­clu­sive profit-shar­ing pro­grammes are to have the de­sired ef­fect on pro­duc­tiv­ity, they should be com­bined with other ini­tia­tives to em­power work­ers. One way to achieve this is by es­tab­lish­ing “works coun­cils,” elected groups of em­ploy­ees with rights to in­for­ma­tion and con­sul­ta­tion, in­clud­ing on work­ing con­di­tions.

Works coun­cils and strong col­lec­tive bar­gain­ing rights, both fea­tures of high­pro­duc­tiv­ity work­places, are com­mon in de­vel­oped economies. But they are lack­ing in the US, where fed­eral law makes it dif­fi­cult for com­pa­nies to es­tab­lish works coun­cils and pro­hibits ne­go­ti­a­tions be­tween em­ploy­ers and em­ploy­ees over work­ing con­di­tions out­side of col­lec­tive bar­gain­ing, even though most work­ers lack col­lec­tive bar­gain­ing rights. Promis­ingly, the United Au­to­mo­bile Work­ers union re­cently an­nounced that, as it con­tin­ues to push for col­lec­tive bar­gain­ing rights, it is also co­op­er­at­ing with man­age­ment to form a works coun­cil in the Ger­manowned Volk­swa­gen plant in Ten­nessee.

The fourth im­ped­i­ment to the es­tab­lish­ment of profit- shar­ing pro­grammes is that they re­quire a fun­da­men­tal shift in cor­po­rate cul­ture. Though most com­pa­nies em­pha­sise the im­por­tance of their hu­man cap­i­tal, top ex­ec­u­tives and share­hold­ers still tend to view la­bor pri­mar­ily as a cost driver, rather than a rev­enue driver – a view em­bed­ded in tra­di­tional and costly-to-change hu­man­re­sources prac­tices.

Un­like the fi­nan­cial ben­e­fits of re­duc­ing labour costs, the fi­nan­cial ben­e­fits of profit shar­ing, re­alised grad­u­ally through greater em­ployee en­gage­ment and re­duced turnover, are dif­fi­cult to mea­sure, un­cer­tain, and un­likely to have an im­me­di­ate ef­fect on earn­ings per share, a ma­jor de­ter­mi­nant of ex­ec­u­tive com­pen­sa­tion. It is un­sur­pris­ing, there­fore, that the ad­van­tages of prof­it­shar­ing are un­der­val­ued by many com­pa­nies, es­pe­cially those that fo­cus on short­term suc­cess met­rics.

More­over, even when they do recog­nise the ad­van­tages of profit shar­ing, com­pa­nies may lack the tech­ni­cal knowl­edge needed to de­sign a pro­gram that suits their needs. Some states have es­tab­lished tech­ni­calas­sis­tance of­fices pri­mar­ily to help small and medium-size com­pa­nies over­come this gap. The fed­eral gov­ern­ment should cre­ate its own tech­ni­cal-as­sis­tance pro­gramme to build on states’ ef­forts and reach a larger num­ber of com­pa­nies.

From a pol­icy per­spec­tive, much more can be done to en­cour­age firms to cre­ate broad-based profit-shar­ing ar­range­ments. Cur­rent US law al­lows busi­nesses to deduct from their tax­able in­come the wages of all em­ploy­ees, ex­cept the top five ex­ec­u­tives, for whom de­duc­tions are lim­ited to $1 mln of an­nual pay, un­less the ex­cess com­pen­sa­tion is “per­for­mance-re­lated.” Spurred partly by this tax in­cen­tive, cor­po­ra­tions have shifted top ex­ec­u­tives’ com­pen­sa­tion to­ward shares, op­tions, and other forms of profit shar­ing and stock own­er­ship, largely leav­ing out reg­u­lar work­ers.

Some have pro­posed lim­it­ing the tax de­duc­tion for per­for­mance-based pay to firms with broad-based profit-shar­ing pro­grammes. But, although this ap­proach might en­cour­age profit shar­ing with more work­ers, it would con­tinue to pro­vide com­pa­nies with sig­nif­i­cant tax breaks for huge com­pen­sa­tion pack­ages for top ex­ec­u­tives.

US pres­i­den­tial can­di­date Hil­lary Clin­ton has a more tar­geted pro­posal: a 15% tax credit for prof­its that com­pa­nies dis­trib­ute to work­ers over two years. By pro­vid­ing tem­po­rary tax re­lief, the scheme would help com­pa­nies off­set the ad­min­is­tra­tive costs of es­tab­lish­ing a profit-shar­ing pro­gram. In or­der to limit costs and pre­vent abuse, prof­its to­tal­ing more than 10% on top of an em­ployee’s wage would be ex­cluded; the over­all amount of­fered to in­di­vid­ual firms would be capped; and safe­guards against the sub­sti­tu­tion of profit shar­ing for wages, raises, and other ben­e­fits would be es­tab­lished. The tax credit could also foster changes in cor­po­rate cul­ture, by spurring board-level dis­cus­sions not only of the ben­e­fits of profit shar­ing, but also of shar­ing in­for­ma­tion and de­ci­sion-mak­ing au­thor­ity with em­ploy­ees.

The stag­nant in­comes of the ma­jor­ity of US work­ers are un­der­min­ing eco­nomic growth on the de­mand side (by dis­cour­ag­ing house­hold con­sump­tion) and on the sup­ply side (through ad­verse ef­fects on ed­u­ca­tional op­por­tu­nity, hu­man-cap­i­tal de­vel­op­ment, and in­no­va­tion). It is time to take ac­tion to pro­mote stronger and more eq­ui­table growth. Clin­ton’s profit-shar­ing pro­posal is a promis­ing step in the right di­rec­tion.

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