Profit sharing & employee ownership – what’s in it for me?

Inequality is a popular topic these days, and as an organisation committed to tackling the most pressing of social problems, it is one that the RSA cannot afford to ignore. In anticipation of an upcoming paper on capital ownership, I will be writing a series of blogs on policy approaches through which access to wealth might be expanded. The first of these explores the promise of profit sharing & employee ownership.

Recent posts by Adam Lent and Anthony Painter have grappled with why inequality is so problematic for a prosperous and healthy democracy – such as the disproportionate power it gives the wealthiest over the political and economic destiny of the community, the negative effects it has on economic growth and on educational, health and social outcomes, and the indebtedness and frenzied competition for resources it encourages as the slice of the pie available to the majority of the population shrinks.

The RSA’s focus on the constraints and enablers of mass creativity gives us further grounds to be concerned about serious wealth inequality. A lack of access to capital makes it harder for people to pursue creative endeavours such as starting their own business, pursuing further education & training, and having the financial security to pursue non-material interests or change career path.

As Anthony laments, while there is an increasing amount of data on the causes and consequences of economic inequality, practical proposals for solutions have been few and far between. Furthermore, those that have made it into the public discourse are either utopian (Piketty’s global wealth tax) or pitifully unambitious (infinitesimal increases in the minimum wage or vague promises to improve education).

An upcoming RSA paper on capital ownership and wealth inequality will be a modest attempt to take the debate in a more proactive direction, by proposing a range of policies that would help bring about a fairer distribution of wealth/capital (read: power).

Our focus on wealth is particularly important – the current discussion around inequality is far too preoccupied with income, when in reality it is the distribution of wealth that is most skewed. While it is difficult to justify extreme wage differentials based on productivity or social utility (bosses of the top 100 UK companies earn 131 times more than their staff), income broadly remains an earned reward for work done, whereas the returns generated on wealth already acquired are not.

As a taste of what is to come, over the next few weeks I will be writing a series of blogs on some of the policy avenues our paper will be exploring.

The first of these is increasing employee participation in/control over corporate wealth, through share ownership and/or widespread profit sharing.

Profit Sharing & Employee Ownership – What’s In It For Me?

The ethical case

Common to recommendations for both profit sharing and employee ownership is the belief that employees are more than replaceable wage-earners hired by the owners of capital. Instead, their fates are seen as inextricably bound up with those of their employers, both in a financial sense but also because workplaces are an important factor (perhaps the most important) in determining the quality of peoples’ lives. If the fate of an enterprise lies in its success in the marketplace – in other words the wealth that it generates – then those helping steer the ship, no matter how small their role, should have a genuine stake in that success.

In an era of high corporate profits and stagnating real wages, where globalisation, skills-biased specialisation and labour saving technologies have shifted the balance of power away from labour towards capital, spreading ownership of that capital makes more sense than propping up income with artificial measures like minimum wage laws and welfare-based redistribution (though these remain absolutely necessary).

Profit-sharing does this by ensuring that some of the profit generated once costs (including those of labour and initial capital investment) have been paid off finds its way back to workers. Once they have recouped the cost of their initial investment in an enterprise, the owners of capital have no more of a right to the pure profit that arises afterwards - at least according to cooperative theorists like Robert Owen. Following this view, profit-sharing is simply the implementation of the recognition that labour and capital are equal partners, not rivals bound in a hierarchical contract-relationship.

Employee-ownership takes this one step further by proposing that employees themselves become the capitalists of their firms. Instead of claiming a share of the pure profit going to their owners, employee-ownership models propose that they possess their firms themselves (if only in part) by owning shares, so that the benefits of wealth creation accrue to them directly (via dividends and the increasing value of shares). J.S. Mill saw total employee ownership as the final stage in the political-economic evolutionary process, and in his Principles of Political Economy argues that:

‘The relation of masters and workpeople will be gradually superseded by partnership, in one of two forms: association of the labourers with the capitalist; in others, and perhaps finally in all, association of labourers among themselves’.

Different degrees of employee ownership would have very different consequences for the distribution of wealth and power within the firm. On a smaller scale, limited share ownership (or profit-sharing) would enable employees to begin sharing in the proceeds of company growth and help neutralise the wage chasms that have opened up in most corporate environments. Taken further, total ownership would make ‘employees’ (in truth the employee/employer distinction would cease being meaningful) full stakeholders in the success and development of their firms, responsible for major decisions regarding investment and business strategy.

This does not mean that every worker would be responsible for everything, as representative structures could be created to manage specific aspects of company operations. The key point is that ownership of capital would be more equally distributed, in both the modest and ambitious versions of employee ownership.

The efficiency case

Some readers might see the arguments about the inseparability of capital and labour, the value in spreading the proceeds of wealth, of making employees stakeholders, and of workplace participation, and say: that’s all very well, but how is spreading the wealth amongst workers going to impact the performance of the firm? What will this do to efficiency?

The good news is that employee ownership is sound from both an ethical and efficiency perspective. As a 2012 Centre Forum paper points out:

Employee ownership and share ownership have been shown to improve company performance and productivity. Employee ownership reduces absenteeism, and fosters greater innovation and a longer term approach to business decisions…

Whilst the evidence is that the greatest impact on company performance is from firms which are 100% employee owned or co-owned (significant 25%+ ownership), employee share ownership schemes generally also have a positive impact on company performance. Where employee ownership and share ownership are present alongside employee participation the effects are strongest.

A recent review of the impact of profit-sharing on labour productivity across almost 30 European countries found that firms implementing profit-sharing schemes are 5.5 percent more likely to report having ‘better’ or ‘much better’ labour productivity than the average in their sector, while a US review of 40,000 employees found shared ownership models to be associated with a 4.5 average increase in productivity. In the UK, a 2007 Treasury study showed that employee ownership boosts long run company productivity by 2.5 percent (as summarised in IPPR’s Fair Shares report).

All this is to say that employee ownership does not mean sacrificing business sense for the sake of ideals. But one should be careful not to conflate ethics with utilitarianism – our reasons for promoting employee ownership are grounded in its ability to more fairly distribute wealth and the benefits to individuals that this implies. Even if employee ownership had no positive effect on productivity, it would still be achieving these goals.

The Role of Policy:

If the case for employee-ownership and profit-sharing is strong, what is the potential role for policy in promoting such a shift? There exists a wide range of appropriate mechanisms that could be implemented, including:

• Offering tax incentives (such as reduced capital gains or corporation taxes) to cooperatives and firms that share profits or offer employees shares.

• Endowing employees with a ‘right to request’ either that an internal share scheme be established, or that bids for full or majority employee ownership be taken into consideration (the Green Party recently proposed something along these lines).

• Building institutions and funding mechanisms that support the establishment of new cooperative/employee-owned businesses. Quebec’s successful solidarity fund, which invests in local business and is capitalised by employees, trade unions and local government, could serve as a model.

• Facilitating lending to relevant businesses, either by encouraging private sector lending or providing affordable government loans.

While each of these mechanisms has potential downsides that would need to be evaluated, the point is that plausible tools exist to increase the prevalence of employee-driven business models.

Existing successful employee owned companies can also serve as inspiration, such as the UK’s John Lewis, where shares are held in trust on behalf of employees and annual profits are shared amongst staff. In Spain the Mondragon Corporation, a federation of worker cooperatives based in the Basque region, employs over 70,000 people and brings in annual revenues of over 12 billion euros.

With only 8 percent of UK workplaces (with 10 or more employees) offering a profit-sharing scheme, and only 10 percent of private sector workplaces using employee share ownership, their potential to dramatically alter the distribution of economic gains within society is gigantic. In view of the ethical and empirical arguments in its favour, it is a step long overdue. 

Maximilian is Research Intern for the Action and Research Centre.