Mandatory corporate profit sharing: Why would it not work (or work well anyway)?

Great Debates
1

Just to be clear, I’m totally brainstorming on this and not seriously advocating that this idea be taken seriously as a policy proposal – not yet anyway. But it has crossed my mind: what would happen if, in a country that wanted to experiment a little, mandated (or strongly encouraged through sets of tax incentives) that X% of profits be shared with all employees in a company – not revenue, but profits that would go not just to investors but shareholders? The immediate reason that comes to mind is that you’d make investment less attractive and thus lose investors, perhaps sending them rushing out of one country and into a neighboring one if the other country is (countries are) competitive. But what if you made the percentage relatively small enough that the basic overall investment would still be attractive. One could argue that a lot of corporations do this when they offer special stock options to their employees, but that turns employees into investors. I’m talking about actual sharing the fruits of production itself.

I’m sure the particulars could be debated to death, but why would this idea fundamentally not work?

2

It really just becomes another mandated point of compensation, like minimum wage or health care. There’s no reason it would fundamentally fail, but it does introduce the dynamics you specified.

It may not even present as a direct increase in wages, as it would be a “new” point of compensation, the market would tend to reach an equilibrium where the base wage is slightly lower, and workers get additional money through the anticipated profit share.

One complicating factor is that this may actually increase risk for employees, as they now have a deeper downside if the company doesn’t do well.

3

I’ve long believed they should use the tax code to incentivize good profit sharing. To me it doesn’t seem that hard that someone could come up with an ‘ideal ratio’ for a few things. Like executive bonus vs salary increases for workers. The closer you are to the ideal ratio, the better your tax rate. Don’t care? It’s going to hit your tax bill hard.

The same could be done with benefits, make executives/civil servants use the same plans exactly or face a tax penalty. Surely some one could come up with a working algorithm that rates number of over paid execs vs salaries of front line workers to determine who gets government tax breaks.

It’s time to acknowledge the sad truth that the whole world (following the West’s example) is driven by money. Ethics are out the window in so many ways. Why not use money, in the form of tax incentives to shape the change people need.

Why should Walmart make millions while their employees need to use a food bank to feed their kids?

4

There’s no reason it couldn’t “work.” The U.S. government could do this. It would basically combine an income tax with an income redistribution scheme that targets an employer’s workers.

Like any income tax, it discourages investment. Investment might flow overseas where companies don’t have to pay a similar tax on their profits.

Cheesesteak is exactly right about how employers would game it. There is an upside though - during periods of declining profits, a company’s labor automatically gets cheaper. It would have less incentive to lay employees off at the first sign of recession, which is a good countercyclical effect.

How well it accomplishes your goal of improving workers’ income also depends on the particulars. For example, would Coke have to pay U.S. workers profits based on its overseas income? If so, U.S. workers might get a windfall but it would greatly discourage Coke from hiring in the U.S. Companies would probably also respond by shifting income overseas so there were no “U.S.” profits to distribute. How would we levy this tax on foreign companies?

5

There are several ways this idea has potential problems.

The most obvious is that it encourages Hollywood-style accounting, designed to shift costs in an opaque, uninformative way in order to disguise profit to avoid paying profit-percentages. Countless ways this can work. What if the workers are employed by a company which regularly loses money, but that company has fixed contracts with another company which is insanely profitable and – surprise! – has almost zero employees.

Even with sophisticated and highly costly tax enforcement, there will essentially always be tax workarounds that avoid it by legal means. And then what have you gained in the end? The cost of enforcement is pure deadweight loss. The cost of avoidance is more deadweight loss. And for what? Only a marginal redistribution of “profit” in a manner that could be done in other fashion?

Another way this doesn’t work is that it fails to address the actual market for labor. People work at firm instead of firm [Y] because they feel it’s the best alternative to them available, given wage and working conditions etc. Suppose it’s a 30k salary for a certain employee. Profit sharing pops up, and there’s a bonus 1k that’s mandated by the government, rather than enforced naturally and voluntarily by mutual agreement of the two parties. Then why wouldn’t the salary drop to 29k, plus a 1k profit-sharing bonus?

Net change of zero. This seems to be the point Cheesesteak is making.

If you haven’t done so, you ought to look into the difference between the legal incidence of a tax, vs the economic incidence. Just because the government collects a “tax” from the firm (and from their perspective, it absolutely is a tax) rather than the employee, doesn’t mean that the firm pays the whole incidence of the tax. It’s quite possible that the net change after profit sharing – even in the absence of accounting tricks – would be zero. Nothing. Exceptions to that would be sudden shifts in the profitability of the company. Companies that were going bankrupt would receive a cushion, as they offload their expenses by a sudden cut in their employees profit-sharing portion of their wage. Only in the subset of companies that saw sudden increases in profitability should we expect (again: in the absence of accounting shenanigans) the employees to actually benefit.

If that actually happened, then it’s conceivable that the firm would not be able to expand as quickly. Profits don’t just disappear into the ether. An unexpectedly profitable company might be hiring new workers. Is it really a good thing that those new hires should potentially get shafted, in order to benefit the current employees?

One final point here is just… why?

Why would you want to do this?

If you’re an employee for a company, do you want to buy stock for the same company? So that if the company goes under, you lose both your wage and the value of the financial savings? Really? If you work for and receive a wage from company , then presumably you want your savings to have some protection from the vagaries of fortune of that one company. I think it would be an absolutely excellent idea if more people had a sort of “mandatory saving” system. But there’s no way in hell I’d have their savings subject to exactly the same risk as their wage stream.

6

Of course, there are companies that do this already. In the UK, one famous example is the national retailer John Lewis, where all employees become ‘partners’ for the duration of their employment, and are rewarded with profit share as a result.

However, profit share is still effectively controlled by the Board (which blends appointed and elected members). There are times every company needs to make, for example, capital investments with their profits, so I’m not sure how a blanket % figure on profits would give companies the flexibility they need to adapt to market conditions and grow.

7

We have had schemes over here for years to make employees more ‘interested’ in the fortunes of their employer. There are now over two million employees in the UK who hold shares or options through a share scheme, often receiving life-changing sums in the process. I have known companies who paid a bonus based on their share value. The idea was that the share price goes up if the company is more profitable, so that incentivises the employees to work harder and better.

A brewery in the North had such a scheme which was fine until someone made a takeover bid. the share price rocketed and the bonus followed. When the bid failed, the company was nearly bankrupted. A haulage company came up with a scheme to reward drivers who remained when others left. They were all put into groups of a dozen or so and if they could do the same work with fewer drivers they got a large share of the savings. Unfortunately, the company was unaware that they were carrying a considerable amount of ‘fat’. The redundancy scheme was fairly generous and the groups did deals among themselves to cut the workforce - they were the highest paid drivers in the country for a time. The company is no longer in business.

8

I worked for a time for a company that dedicated a percentage of the “profits” to be split among employees at the end of the year. It was an identical portion for each employee, regardless of pay level or responsibilities.

You wouldn’t believe how quickly the employees started griping about legitimate (and not-so-legitimate) business expenses. “Why are we buying the salesmen these expensive laptops? I don’t drink coffee and I don’t want to subsidize the people who do by using a coffee service! This manager doesn’t need a new office chair!” It was pretty demotivating. When you add to this the natural reluctance of a company to make too much profit (and pay tax on it), we had some pretty angry people. Any reinvestment in the company or future growth was viewed as taking money out of the pockets of the current employees. I’d say that 75% of the people were OK with most decisions, but the remaining 25% sure ranted and raved.

9

Moved to Great Debates.

Colibri
General Questions Moderator

10

And if you don’t make it equal shares for everyone, hey, look at that, the CEO is an employee! He gets a big bonus, and now 20% of profits are going to the employees.

11

There was a move to bonuses (a kind of profit sharing) from salary increases in the late '80s, and I’m not sure it had any effect on reducing layoffs. It did have an effect of slowing salary growth since raises compound and bonuses do not.

12

Would employees also share in the losses? If not, why not?

13

A lot of the shenanigans about hiding profits and “do they share the losses?” could be simply avoided by just making it shares in the company. The law could say that every time a company makes a share offer it must reserve x% for an employees’ profit sharing trust.

14

Investing in - i.e. holding shares in - your own company is a big no-no for funds (not just pension funds). It makes it easier for companies to manipulate share prices on one hand and increases the risk to the members on the other.

15

Lots of employees lost their jobs and all their savings when Enron went under because they were heavily invested in company stock.

16

I’m not sure I understand. I’m talking about an independent trust that merely holds x% of company stock and disperses dividends to qualified employees. How would companies use that to manipulate share prices?

17

Options and/or stock grants could do that job with reduced risk.

In the early days of 401Ks company stock was very popular, but my last two companies didn’t even have it as an option. I know someone who get laid off from IBM who really got hit by the low price of IBM stock when he left.

18

Because all to often ‘independent’ trusts aren’t actually independent. Those of us in the UK will remember Maxwell’s misuse of the Mirror’s pension funds.

19

Thinking purely within the parameters of my brainstorm, my answer would be no. I’m thinking that employees would still receive a minimum wage for their time, but that they could receive some direct share of the profits. How much is too much? I have no idea - I’m not an MBA grad or a micro-economist. Hoping someone reading this thread with those qualifications could weigh in on that.

My concern is that laborers, the producers of material wealth, are being shortchanged at a time when there is record productivity. There needs to be a scheme to re-balance the profits that executives and the corporation take for themselves so that they are redistributed to those who produce wealth. At the same time, I acknowledge that the difference between a corporation and its investors is that the investors take on risk, which is something the average laborer doesn’t have to worry about. Take away too much of the rewards and the risk becomes less attractive – I get that. In times when there are no profits, obviously, there is no reward to share and the laborer simply falls back on his salary, which is a business cost. But the right scheme might even incentivize productivity among employees.

20

God do I remember the Enron debacle. What a nightmare that was.