The unequal distribution of wealth is a problem which has perplexed politicians and civic leaders for time immemorial. Thomas Jefferson first posited on the feasibility of an equal distribution of wealth through a progressive tax system and the abolition of inherited wealth in his Notes on the State of Virginia. Theodore Roosevelt fought against the anti-competitive industrial practices of the “Robber Barons” through anti-trust legislation. And Franklin D. Roosevelt’s response to mass poverty and unemployment was the National Labor Relations Act and Keynesian Economics. Many modern critics of predatory capitalism have addressed the growing inequity between the working class and the privileged class, yet few have offered workable solutions. The purpose of this analysis is to determine whether employee ownership is a viable solution in addressing the problem of growing wealth disparity in the United States.
Government subsidies and social welfare programs have become the accepted method of redistributing wealth and sustaining low income families. However, there has been much criticism about the long term viability of government intervention in the economy, due to the burden it places on the most productive citizens and its interference with free market operations. Profit sharing seems to be a practical alternative. It retains the possibility of redistributing wealth without assaulting the American bastions of private property and free enterprise. According to the National Center for Employee Ownership (NCEO) “Broad-based stock-option plans are important to study because of their possible role in aligning worker and shareholder interests, encouraging job creation in knowledge-related industries, helping corporations cope with tight labor markets, and involving more citizens in sharing the fruits of capitalism” (Blasi, et al 2002:3).
While many finely crafted arguments have been made about the equity of our capitalist system, it has been rightly criticized for its lack of economic equality. As the argument goes, greater financial rewards for entrepreneurs are justified by the greater financial risk of capital investment. I must disagree. Employees have an active interest in the financial success of any enterprise on which they rely on to make a living. The individual shares a financial risk with his employer by choosing to participate in the profit seeking partnership. While ownership has economic mechanisms to adjust for lower demand in product, such as layoffs or reduced wages, an employee has no such security in maintaining his interest. The result is inherently inequitable. As political economist, Louis O. Kelso points out:
An economy which makes it easier for John Paul Getty to get a third billion dollars than it does for two-thirds of the families in the country to get $500 ahead of their debts is buying a lot of hogwash about the value of John Paul Getty. The aggregate motivation in the millions of individuals that is destroyed and frustrated by such an insane arrangement is infinitely more productive than anything that one individual could contribute, irrespective of what that may be. (as quoted in Gates 1998:50)
The object of this paper is to investigate several theoretical models and the available statistical data in an attempt to compare the economic justice of profit sharing corporations versus the traditional entrepreneurial model of defining labor as an input. Kruse (2002:1), a professor of the School of Management and Labor Relations at Rutgers University, estimates that there were over 70 empirical studies between 1977 and 2002 which studied the effects of Employee ownership. Much of the literature has dealt with (a) employee attitudes and behavior (Coyle- Shapiro, et al, 2002); (b) firm performance (Fitzroy and Kraft 1987; Kruse 1992; Blasi et al, 2002); (c) employment stability, growth, and firm survival (Meade 1972; Weitzman 1985; Blanchflower and Oswald 1987; Gates 1998); (d) employee wealth and wages (Gates 1998; Blasi et al, 2002; Kruse 2002); (e) and the theoretical function of employee ownership (Meade 1972; Weitzman 1985; Blanchflower and Oswald 1987; Coyle-Shapiro et al 2002). The case studies and statistical analysis provide useful data in testing the plausibility of various economic and social theories which can be applied to measure the economic justice of employee ownership as compared to traditional profit seeking entities. While theories on how profit sharing affects corporate performance and employer/employee relationships have been plentiful, studies on its potential to affect economic equality have been lacking.
Employee Ownership: ESOPs and Profit Sharing Plans
The National Center for Employee Ownership reports that in 1996 more than ten thousand American corporations had Employee Stock Option Plans (ESOPs) and similar broad based ownership plans covering almost 9 million employees (Gates 1998:2). By 2002, employer participation had more than doubled, while employee coverage had almost tripled. As of 2002, $330 billion, or 19.8%, of the total $1.7 trillion of assets in employee contribution plans was invested in employee stock (Kruse 2002:3).
An ESOP is a financial incentive offered by companies which grants workers shares of stock, usually tied into a 401(k) or similar type of pension plan. “In the United States, the main vehicle for employee ownership is the [ESOP] which was first given recognition and preferred tax treatment as a form of pension plan in a 1974 ERISA law” Kruse (2002:2). According to the U.S. Department of Labor (2001) report on federal form 5500 data for all large pension plans, there were approximately 18.8 million U.S. employees participating in large ESOPs.
A profit sharing plan is another type of financial inducement offered by employers, which rewards employees with shares of stock or cash payouts based on quarterly, or annual, earnings. According to the U.S Department of labor (2002), there are an additional 8.4 million U.S. employees enrolled in profit sharing plans.
The steady growth of employee ownership plans in the past two decades has been attributed to several causes: (1) Government tax incentives offered to employers (Gates 1998); (2) employee retention (Blasi et al 2002; Kruse 2002); (3) employee/employer response to hostile takeover attempts (Gates 1998); (4) enhanced employee/employer relations (Coyle- Shapiro, et al, 2002); (5) higher productivity (Blasi et al 2002; Kruse 2002); and (6) to avoid bankruptcy (Gates 1998).
Employee ownership is not without risk. The financial wellbeing of workers and managers is intrinsically tied to company performance. However, it is a shared risk, one that would exist if a non profit sharing organization suffered financial hardship as well. “While detractors worry that employees ‘will put all their eggs in one basket,’ supporters worry that employees have neither eggs nor a basket” (Gates 1998:62).
The greater danger, exemplified by the recent Enron scandal, seems to lie in the potential for mismanagement of pension funds. In the case of Enron, corporate executives deceived employees about company performance. The problem was exacerbated when pension fund managers, even after becoming aware of the firm’s financial problems, continued to limit option purchases to Enron stock. As Enron’s mismanagement came to light, high level executives dumped their shares, causing stock prices to plummet, while simultaneously freezing the sale of employee shares. Many employees lost their retirement funds as stock depreciated from $80 per share to $12 per share between February and November of 2001 (Appleby 2002). The Enron debacle has led to calls for closer scrutiny of stock-based pension funds and greater accountability for pension fund managers.
Kruse (2002:9) advised Congress that employees should be advised that investments in substantial amounts of employer stock are “not the basis for sound investment” and that employees should be have better access to internal data on company performance. The hazard of fund mismanagement increases where employees have limited knowledge or understanding on the financial health of the company. Kruse (2002:9) conjectured that mechanisms such as the attendance of “employee monitors” at board meetings would help to hold board members and trustees more accountable to employees.
My hypothesis is that employee ownership effects greater economic justice. In attempting to prove my hypothesis I will need to examine a series of factors that affect causality: 1.) whether profit sharing organizations are more productive/profitable than traditional firms; 2.) whether higher productivity/profitability increases the earning potential and job stability of employees; 3.) whether profit sharing affects a redistribution of profits at a micro level; 4.) whether the anticipated advantages of profit sharing acts in accordance with market mechanisms to ensure that companies adopt the profit sharing model in an effort to remain competitive; and, finally; 5.) whether the increase in firms adopting employee ownership practices will be significant enough to spread wealth redistribution to a macro level; reducing the overall growth rate of economic disparity and unemployment, if not stabilizing it.
The potential of profit sharing to affect economic justice is attractive in that it requires no considerable restructuring of our current economic system; it is a phenomenon that already operates freely within the parameters of capitalism, while placing no restrictive limitations on the market. “The idea of employee ownership has attracted support across the political spectrum, often being seen as a form of economic democracy that complements our political democracy” (Kruse 2002:1). Employee ownership also presents a challenge to the notion that economic equity and equality are separate concepts that can only exist on a continuum (Sodaro 2004:168).
This study will employ an examination of the written record to compile empirical data about profit sharing entities. The information will be used to appraise the predictive value of the various theories put forth regarding employee ownership. My research will be aimed at verification or falsification of the theoretical models by comparing them to the available data. I will be compiling no new figures, but simply utilizing existing data already produced by researchers interested in employee ownership. I am certain this knowledge will be useful in creating a new theory about the potential for greater economic justice that exists in employee ownership.
I will attempt to extract the applicable information from the studies on employee ownership between 1975 and 2006 to create a quasi- running record for the last thirty years. Problems with continuity will arise, as there are time gaps between the studies. However, it should present us with a better picture of the interaction between firms and profit sharing over a significant period in time, proving useful in projecting future trends and developments.
To control for the effects of differing economic attitudes in different political systems, the aggregate data has been limited to include only the study of U.S. Companies. I will report the methodological approach and controls used by the researchers when available, and will limit my use of case studies to provide context for some of the aggregate data.
One weakness to this type of research is that I will need to rely on the validity and reliability of past studies, rather than confirm the data myself. This, however, is an unavoidable risk caused by my temporal and financial restraints. Another drawback is that many of my conclusions must be limited to logical inferences as much of the data has been compiled at random, to fit the need of the individual research projects. The inconsistent levels of measurement and differing subject matter pose difficulties in composing a parsimonious theory. Much of the data, fortunately, overlaps and allows for general inferences to be made about the behavior of profit sharing entities. There is a specific pattern which evolves.
While much of the aggregate data measures different attributes of profit sharing over different periods of time, they all uniformly measure the results of the same independent variable, employee ownership, upon a common dependent variable, corporate behavior. I believe that the variety of research culminates into a more comprehensive understanding of the general effects of employee ownership.
Employee ownership is a broad term used to cover a range of employee participation plans that offer stock options as a form of employee compensation. These plans include ESOPs and profit sharing plans as defined earlier in the paper, and cooperatives which are a more democratic means of profit sharing by giving all employees a stake in ownership and a voice in decision making through voting shares.
The concept of economic justice is simply defined as fair and equitable business practices that result in a greater equality between the employer and the employee’s interests. This study will attempt to measure four aspects of economic justice: (1) job stability, (2) wage and income increase, (3) redistribution of wealth, and (4) employer/employee conflict. This is by no means an exhaustive list of qualities that can be attributed to economic justice; nonetheless, they are characteristics which can be reasonably measured using the available aggregate data and case studies.
Other related economic factors that will be gauged are productivity, efficiency, and firm survival, which I believe are closely linked to profitability and employee retention. This data will be used to make certain assumptions regarding the abstract measurement of job stability.
Effects on Productivity and Efficiency
Some of the theoretical gains attributed to profit-sharing are higher productivity (Blanchflower, Oswald 1987; Kruse, 1992; Meade 1972; Weitzman 1985), higher profitability (Weitzman 1985), higher real wages (Weitzman 1985: 948-9), and lower unemployment (Weitzman 1985: 950). Weitzman (1985: 948-949), a pioneer in the development of profit sharing theory, postulated that a profit sharing entity operates at “full employment,” and was better suited to handle disequilibrium: “not only is aggregate output and employment higher in a profit-sharing economy than a wage economy after a contractionary shock to a long-run equilibrium state, but so is each employed worker’s real pay.” According to Weitzman, “resources are always fully utilized in a share system,” and as a result:
A wage economy behaves in the short run as if aggregate supply were elastic at fixed prevailing prices (the as if Keynesian case). A profit-sharing economy behaves in the short run as if aggregate supply were inelastic at the full-employment level (the as if classical case) … The share economy behaves essentially like a classical macroeconomy, even while the classical preconditions are not being met. And the wage system, of course, behaves like the Keynesian macroeconomy that it is … Output in a profit-sharing economy automatically self-regulates at the full employment level, independent of government policy, or lack of … (Weitzman 1985: 949-950)
Weitzman (1985: 937) also argued that an additional benefit to profit sharing was that it “possesses natural immunity to stagflation.”
How do the theories hold up in actual practice? The report on Public Companies with Broad-Based Stock Options: Corporate Performance from 1992-1997 provides us with a useful empirical study in which to examine the claims, as this study uses the most extensive dataset yet available on broad-based stock option plans in U.S. companies (Blasi, et al 2002). The researchers compared the performance of 490 profit-sharing companies against that of companies without broad-based stock option plans (Blasi, et al 2002). According to the report “All data on company performance was taken from Standard and Poor’s Compustat data of public information on public corporations which is available at Rutgers University” (Blasi, et al 2002: 26). The data was compiled by researchers at Rutgers University, who according to the report were not compensated by the NCEO, nor by any of its consulting organizations: “The agreement was that the Rutgers University team would work independently in arriving at and publishing our results and make them available in a final report to the organizations that facilitated the initial survey” (Blasi, et al 2002: 26). The performance criteria used were productivity, annual and cumulative total shareholder return over the period between 1992 and 1997, Tobin’s q return on assets, and fixed wage compensation per employee.
Blasi, et al. (2002: 4), used the definition of a broad-based stock-option plan provided by Weeden, Carbury, and Rodrick (1998: 185) as one “where the majority of full-time employees of a corporation actually receive (rather than are merely eligible for) stock options over a reasonable period of time.” They narrowed the definition further by using the standard that a “broad-based” company is one which “includes a majority of non-management employees” (Blasi, et al 2002: 4). The companies in the survey “distributed an average of 45% of recent stock option grants to non-management employees” (Blasi, et al 2002: 2).
The report made some interesting observations. It argued that “there is unambiguous evidence that broad-based stock option companies had statistically significant higher productivity levels and annual growth rates” compared to traditional wage-paying companies in general, as well as among their corporate peers (Blasi, et al 2002: 2). Next, the “actual average and median cumulative shareholder return” for all groups of profit-sharing companies exceeded that of their entrepreneurial counterparts between 1992 and 1997. An additional measure of market value, the Tobins q, reveals that the levels of Tobin’s q of profit sharing companies tend to exceed the Tobin’s q of waged based employers:
The available evidence suggests that the levels of return on assets of broad-based stock option companies may be significantly higher than that of the non-broad-based stock option companies, although there is inconclusive evidence regarding annual growth rates in return and some mixed evidence of this effect remains. Our interpretation of these findings is that the performance of the firms using broad-based stocks, appears to equal or exceed the dilution that these plans would have initially caused. (Blasi, et al 2002: 2-3)
Finally, they found that profit-sharing companies did not substitute the stock options for wage cuts and found support “that broad-based stock option payments during the period studied may have significantly contributed to unmeasured and hidden wage inflation” (Blasi, et al 2002:3). This means an increase in real wages for the employees, as stock options supplemented their normal wages, rather than replacing them.
The NCEO report does much to affirm many of the conjectural benefits attributed to profit sharing, as well as to validate the claims made by some of the corporations who offer broad-based stock options. Alan S. Binder (1990:3) questions whether incentives such as profit sharing programs boost production because employees exert more effort, or because “they simply attract the most productive workers to jobs where high productivity is rewarded.” He argues that the empirical data simply shows that productivity does increase, without satisfactorily answering why:
From society’s point of view, the source of the productivity gain is crucial. If profit sharing simply shifts workers from one company to another, society neither gains nor loses. But if profit sharing actually raises the productivity of individual workers, society reaps an important benefit. (Binder 1990:4).
So why is profit sharing successful? According to Coyle- Shapiro, et al (2002), “the success of profit sharing can … be explained as an application of principal-agent theory (Eisenhardt, 1988, 1989) since it is a performance based form of compensation that serves to better align the interests of employees, managers, and shareholders.” They also believe that a company’s willingness to share profits with the employees who help to earn them invokes trust in management, and nurtures organizational commitment (Coyle- Shapiro, et al, 2002:434). As a result, companies find themselves better situated to retain their high skilled employees.
Kruse (2002:3) found that “most studies” found “higher organizational commitment” under employee ownership, while studies on “job satisfaction, motivation, and other behavior” were less conclusive. However, “it is rare to find worse attitudes and behavior under employee ownership,” in fact, the only study that did report negative findings was “an ESOP where the union had lost a bitter strike the year before” (Kruse 2002:3).
Kruse (2002:3) also discovered that “improved attitudes” were generally related to the “status of being an employee owner” rather than “the size of one’s ownership stake.” Kruse (2002:3) found that “employees generally like the idea of employee ownership.” He cites a 1994 EBRI/Gallup poll which found that employees preferred a stake in company ownership over higher immediate take home pay, and that 80% of those surveyed believed that “employers should be allowed to contribute company stock to fund retirement plans” (Kruse 2002:3).
It is not a novel idea that increased incentives lead to higher productivity. Most companies motivate employees through rewarding relative performance with promotions and raises. However, it is hard to link the effort of a single individual to overall company performance and “exclusive reliance on individual incentives under uncertainty is also likely to engender counterproductive rivalry rather than efficient cooperation and mutual assistance in team work” (Fitzroy and Kraft 1987:25). This type of reward system can result in decreasing productivity. Fitzroy and Kraft (1987:26) point out: “If workers believe that most of the gains from increased productivity will be appropriated by owners or managers, their best collusive strategy is to maintain their nonpecuniary benefits through limiting efforts.” Discouraged workers seek to decrease their workload by maintaining minimum expectations, whereas economic rewards tied to company performance should provide an enhanced motivation to perform at maximum effectiveness. The firm seeks a “cooperative solution” by offering a “contractual share of the surplus” and by providing a “substantial marginal return to increasing effort and efficiency” (Fitzroy and Kraft 1987:25).
Profit sharing also encourages employees to reduce costs. United Airlines, which is 55% employee owned, has become the most profitable airline in the United States. Innovations soon emerged from a newly collaborative workforce. A task force of ramp workers, pilots, and managers devised a way to use electricity instead of jet fuel while planes sit at the gate, saving $20 million a year…another task force urged more flexibility for in-flight personnel to swap assignments, resulting in another $20 million saved. (Gates 1998:50). The CEO of Continental (2007), another employee owned airline, also attributes his company’s increased profits to an “ability to significantly out-perform our competitors by working together as a team.”
The opposite also seems to hold true. There is evidence that with declining incentives comes decreased employee cooperation. Home Depot was a model for employee ownership in the 1990’s; their employee stock option plan led to greater levels of cooperation which manifested itself by increased customer service. However, in a recent move to expand contractor business, Home Depot has cut costs by replacing full-time employees, eligible for profit sharing, with part-time employees. According to Business Week (2006) part- time workers make up 40% of store staff and customer satisfaction has dropped significantly. As a result, profits have taken a hit; “share price has dropped 24% during the biggest home improvement boom in history” (Business Week 2006).
Another theoretical benefit of employee ownership is the reduction of employee/employer conflict in the form of strikes and work stoppages. Labor unions have sought employee ownership plans as part of collective bargaining agreements. In the 1980’s, labor unions representing airline, automotive, and steelworkers negotiated for employee ownership stakes as a form of wage concession.
Kruse (2002:5) reports that “there is no of decreased desire for union representation in employee ownership firms.” He attributes his conclusion to survey results (Kruse 1991) and the existence of “occasional strikes in employee ownership firms” (Kruse 2002:5). This sends a warning signal that workers are not fully confident with the promised prosperity of stock option plans. Worker uneasiness may be the result of their mistrust in corporate willingness to remain committed to employee interests in the absence of union representation.
Wage Increases and Wealth Distribution
Blasi et al. (2002:3) discovered in their analysis of 490 broad based stock option companies that companies did not compensate for enacting stock option plans by lowering employee wages, but rather that stocks supplemented employee income. In addition, the companies that adopted employee ownership practices were those that already tended to offer higher compensation packages; however, “companies did not continue to increase wages beyond their earlier edge” (Blasi et al. 2002:3). This was confirmed by Kruse (2002:8) in his report to a congressional committee: “Company stock appears to come on top of, and not in place of, other compensation.” Blasi et al. (2002:49) also found that employees in firms with “broad based” employee ownership, on an average, earned 8% more than the employees of comparable public companies.
Blasi et al. (2003:41) estimated that broad based stock companies “statistically significantly surpassed” the average returns of their non-employee owned competitors during every year of the five year study; The cumulative average share holder return between January 1992 and December 1997 of broad based stock companies was 303.2% compared to the 193.1% combined average for overall company returns. This means that employee owned stock was more valuable than that of traditional firms, creating another advantage for stock options to help employees increase overall wealth.
There are a few instances where employees made wage concessions in exchange for ownership interest. There were the smaller technological startups which paid low starting wages and offered stock options instead, as well as cases where unionized employees conceded to lower wages as a part of company restructuring package, as with United Airlines. Nevertheless, Kruse (2002:8) reports that “among nearly 1,000 publics firms that developed employee ownership stakes of 4% or greater over the 1980’s … there were only 40 reports of wage and benefit restructuring linked to employee ownership.” That equates to a modest four percent. Nonetheless, even in these rare cases employees tend to have higher earnings then their non profit sharing peers.
This translates into a redistribution of profits at the organizational level, which should eventually spread to the macro level:
Stock options represent one of the fastest growing components in employee equity participation. A 1997 study by William Mercer consultants found that 30 percent of the largest U.S. companies now have broad-based stock option programs covering more than half their employees… (Gates 1998:61).
The survival of any financial enterprise is significantly affected by its efficiency and its ability to compete. Economic security, in turn, promotes employment stability and continuing profits. These are key factors of success whether a firm adopts employee ownership practices or not. However, studies have shown that employee ownership is related to greater employment stability, “which does not come at the expense of lower efficiency” (Kruse 2002:7).
Weitzman (1985:950) conjectured that a profit sharing entity always seeks to operate at full employment, being that the advantage of increased production outweighs the shared cost of added labor. Theoretically, a profit sharing entity meets lowered demand by increasing production, by which it then attains market equilibrium by creating a surplus and reducing price to increase demand. A profit sharing entity has a built in advantage with its flexibility of wages that results in full term employment during short term contractions in the economy, rather than a reduction in labor (Weitzman 1985:950).
While the only evidence he offers is an abstract economic proof, Weitzman’s prediction seems to be confirmed by the aggregate data: “A study of U.S. plywood cooperatives in the pacific northwest found that these cooperatives tended to adjust pay rather than employment as demand changed, and these firms had higher average productivity levels than conventional plywood firms” (Kruse 2002:7). Three studies comparing firms before and after the adoption of ESOPs found that firms experienced faster employment growth after adopting employee ownership practices; these included companies that had greater employee involvement in decision making (Quarry and Rosen 1993; Winther and Marens 1997); and a study of Ohio ESOPs which outgrew their competitors (Logue and Yates 2001).
Chelius and Smith (1990:263) found marginal support that profit-sharing firms faced with decreased demand “reduced employment less than did firms without profit sharing” and that workers with profit sharing, in general, “have greater job security” during economic downturns. Another study which tracked U.S. public companies from 1983-1995 found that firms with “substantial employee ownership stakes” had a 20% greater chance of survival (Blair et al. 2000 as quoted in Kruse 2002:7). Meanwhile, in a study of 1,382 U.S companies, Kruse (1991:451) found that “profit sharing firms have greater employment stability” than their traditional competitors, “specifically within manufacturing firms.” In addition, the NCEO (2007:7) reports “a 1995 study by Michael Conte at the University of Baltimore found that during the 1980’s, fewer than one out of 100 ESOPs were terminated because of the bankruptcy of the plan sponsor.”
Growth in Employee Ownership
The NCEO (2007) estimates that company participation in ESOP’s and equivalent plans has grown from 1,600 to 9,650 companies since 1975. In the same thirty year period, the number of employee participants has grown from 250,000 to 10,500,000 (NCEO 2007). ESOP plan assets have also significantly jumped from an estimated $133 Billion in 1975 to $675 Billion in 2006. The word seems to be getting out.
This growth in employee ownership is an encouraging sign. In order for the benefits of employee ownership to significantly affect wealth distribution, we hypothesized that it would need to offer a competitive advantage to businesses. This would lead to an increasing number of firms adopting employee ownership plans to remain competitive, eventually affecting the redistribution of wealth at a macro level.
The evidence that this is taking place seems to be positive, yet it is difficult to predict for how long this upward trend will continue. There is simply not enough data to confidently assert that a growth in employee ownership is the result of in company productivity. The attractiveness of ESOP’s could be the result of Government tax incentives created by the 1975 ERISA laws. Adding to the dilemma is the fact that the numbers have been tracked sporadically throughout this time span making it difficult to determine which periods exhibited the most growth.
It is also not certain whether companies are committed to employee ownership for the long term, or if they are simply using it as a short term fix to lure potential employees and/or increase productivity. Not all companies who have adopted profit sharing have continued down that road.
The investigation logically culminates into the practical implications of profit sharing procedures in regards to public policy. If the disadvantages of incorporating profit sharing strategies outweigh the perceived advantages to most companies, then there will be little or no effect on economic well being in the long term. However, a thirty year trend has shown significant rise in the adoption by U.S. firms of employee ownership solutions.
There is substantial evidence that employee ownership increases the productivity and profitability of firms. This seems to promote firm stability through greater fiscal viability, and employee retention. There is also marginal evidence that employee ownership results in higher levels of employment and job security, even when firms are faced with decreased demand.
Employee ownership seems to increase employee income, by supplementing, rather than replacing fixed wages. This translates into an increase in real wages for employees, and the possibility for a redistribution of wealth at an organizational level. For those who choose stock over cash payouts, even minimal company ownership affects a raise in take home pay among workers.
The largest gains, however, are dependent on employees taking advantage of the long term maturation of their stocks. If they tend to cash out their stock options early, employee ownership will fail to result in an exponential growth of wealth for the lowest income bracket. Higher salaried employees have the luxury of more disposable income, making it easier for them to allow their stock to attain maximum value through price growth and stock splits.
There is also evidence that workplace satisfaction increases when workers experience an increased sense of value and organizational justice within a firm: “…when profit sharing is perceived as both, an opportunity for individual input to the organization’s success and a reflection of the organizations desire to treat employees fairly, higher levels of commitment follow” (Coyle- Shapiro, et al, 2002:434). This seems to reduce labor disputes and creates a common enterprise among employees and shareholders in pursuing the financial success of a company.
While profit sharing does exhibit some signs of economic justice by a fairer distribution of rewards, higher real wages, increased job security, and improved employee/employer relations, the question of whether it can affect the redistribution of wealth at a macro level and decrease the national growth of income disparity is a question which remains unanswered. A change in employee income needs to be complimented by a change in saving habits to realize the full promise of employee ownership. Nevertheless, the potential for the redistribution of profits to increase the standard of living for many lower income Americans does seem promising: “the fact remains that broad based ownership is preferable to its alternative” (Gates 1998:67).
Problems Encountered During Research
My Hypothesis that employee ownership effects greater economic justice by measuring (1) job stability, (2) wage and income increase, (3) redistribution of wealth, and (4) employer/employee conflict remains unproven with the current available data. Valid research is limited by the amount, the content, and the usefulness of the current statistical data.
The majority of the statistics concerning employee ownership have been compiled by the National Center for Employee Ownership, in Oakland, California. Their information is limited to the research provided by economic scholars interested in the effects of employee ownership on firm productivity and profitability. While this information is useful, it sheds little light on the impact of stock option plans upon individual income.
Missing from the research is data on employee salaries, employee investment, and employee satisfaction that is vital to the confirmation of my hypothesis. I believe the assumptions are still testable with the collection of relevant data. Without the requisite salary information, I am limited to further articulation of my general theory and recommendations for future research.
Employee Ownership’s Potential for Effecting Economic Justice
If profit sharing organizations tend to be more productive/profitable than traditional firms, this should give them a competitive advantage. Higher profitability makes the firm more attractive for shareholder investment, the lifeblood of a successful corporation. This allows for an increase in capital, which further strengthens the fiscal viability of the firm.
Another significant factor is the effect of higher profitability on employee confidence. Faith in an employer’s stock should foster employee investment, distributing a greater share of ownership among the workforce. The greater the amount of employee owned stock, the greater the potential for a redistribution of wealth at an organizational level.
Increased profitability also allows for higher wages. A company’s increased profits allow it to maintain a competitive pay scale, encouraging employee stock purchases. The more disposable income an employee has, the more he can invest. If an individual’s wage barely meets their living expenses, then employee stock options are simply a token gesture. However, an increase in take home pay should encourage saving and investment.
A competitive pay scale, coupled with an employee stock option plan, also affects a firm’s ability to sustain its workforce. Higher wages and profit sharing incentives make a company more attractive to higher skilled employees in the labor pool. It also aids in the retention of current employees. A sense of economic fair play in the workplace should also cultivate employee loyalty. This should have a positive financial impact on a firm by reducing the costs of recruiting and training.
The advantages that profit sharing bestows upon employees and employers should stimulate additional firms to adopt this business model to remain competitive in the marketplace. Heightened employee cooperation, increased productivity, higher profits and greater shareholder returns are attractive incentives for corporations to incorporate stock option plans. Likewise, the promise of higher salaries, greater wealth accumulation, increased job stability, and enhanced job satisfaction are appealing to employees. The exponential growth of employee ownership would confer these benefits on a large scale basis.
New data must be accumulated before any significant correlations between employee ownership and economic justice can be drawn. I believe that the most important areas of research are the effects of stock option plans on employee income, investment, and job satisfaction. These measurements will allow for further research into the potential for wealth redistribution.
The most cost effective way to obtain this information would be to survey the 1,092 businesses that participated in the Blasi, et al (2002) study. The businesses have been selected to reflect similar businesses in different fields of industry, thus controlling for many outside variables. It also gives an adequate sample of 490 employee owned business; roughly half the population size. Furthermore, the researchers were able to identify when these companies adopted employee ownership practices, making it easier to apply the pretest/posttest method by reviewing salary information before and after 1992.
Anonymous salary information should be obtained for the years 1991 (1 year prior to the implementation of their stock option plans) through 2001. This gives us a substantial 10 year period in which to study the fiscal activity. This data should be entered into the Statistical Program for the Social Sciences (SPSS), or a comparable program, to determine whether there is a significant statistical relationship between employee ownership and salary distribution. Wage increases and stock option purchases should also be measured for.
The data on employee income should be requested through the board of trustees, trying to impress upon them the important implications of this study. The researcher should compile salary figures without names to protect the privacy of the individual employees. During the request process, board members should be surveyed on the question of why their company chose to adopt a stock option plan. This information is useful in determining what factors influenced their decision. I would ask the open ended question verbatim, also using an attitudinal scale to measure the influence of tax incentives, employee cooperation, and wage concessions upon their decision.
An alternative would be a poll of the workers requesting salary information. This would be a much less reliable determinant, as it would be affected by an employee’s ability to produce accurate salary figures. An attitudinal scale to assess job satisfaction could also be included in the poll. This would prove useful in determining what influence employer ownership has on attitudes. Board members and laborers may differ in their outlook towards cooperation.
I believe that the study of employee ownership’s ability to effect economic justice is an important focus of future research. The prospect of continuing economic growth depends on a more equitable distribution of wealth. The increasing economic disparity between our wealthiest and poorest citizens has a negative impact upon our society. The economic effects are work stoppages, increased absenteeism, lower productivity, and higher unemployment rates due to worker discouragement. The societal effects are an increase in entitlement spending, a rise in crime rates, and an escalation of tensions between the socioeconomic classes.
A legitimate economic hope is a powerful medicine for an ailing culture. The enduring economic prosperity of America depends on our ability to heal the social ills created by a widening economic gap. History has shown that working class frustrations usually manifest themselves in the form of violent civil conflict. Employee ownership is a potential cure.
By Lawrence Christopher Skufca (2007)
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