And all the shareholders would just sit there and take it?
I wasn’t advocating for the employees having shares, I was advocating for tax incentives. Simply enticing good employees benefits with tax incentives.
And again, any loophole can be closed.
Well, this thread is about profit sharing. Tax incentives for companies that offer maternity leave is kind of a different subject.
The main problem is with the mandatory part. If it’s a better way of paying employees, we can let companies experiment to see how it shakes out, independent of our wishful thinking about how good an idea we think we just had.
If it’s a better way, is there a reason that wouldn’t show when companies experiment with it? One of the great things about capitalism is that companies have a lot of freedom in how they operate so they can experiment, innovate and then the ones that innovate best tend to replace the ones that stick with obsolete ways of doing things. Is there a prisoner’s dilemma which practically traps companies into the suboptimal Nash equilibrium we’re currently supposed to be in? If so, I’d like it explained because I don’t see it.
The other possible reason to make it mandatory is that it would be a better way but companies will conspire to snuff out a better way of doing business to maintain their current way of doing things. While this may be true on a company level, it’s much more dubious at the industry or world economy level; The history of the last 100 years or so is full of big, lumpen companies that refuse to change and get humbled by agile upstarts who are willing to try something new without being forced to.
Depends on who the shareholders are, what the corporate situation is, and how the reinvestment is pitched.
Plus, if employees think this is a good idea, they can do it already - take part of their salary and buy shares in the company they work for. I would rather invest in something more diversified, but that’s just me. I’d rather have the money, so I can decide for myself.
Regards,
Shodan
My company even allows me to purchase shares at a discount. I hold them for two years and then dump them. It is risky but I keep it to a small percentage of my pay.
Right, so saying they could easily cheat is kinda jumping the gun. Shareholders and managers get into these sorts of battles all the time but I seriously doubt managers would slash dividends because, horror of horrors, 2% of the shareholders is an employee trust.
I’m not sure 2% of shareholders really equates to anything much though;
If you were to look at Wal-Mart in 2018, we have 3.01 billion shares outstanding, so 2% of that is 60,200,000.
Divide that by the 2,200,000 employees, and we get 27.36 shares per employee.
Multiply that times the dividend of 2.08 per share, and we end up with the princely total of $56.91 per employee, or a grand total of about 120 million.
Of course they wouldn’t be all that wound up about that- it’s small potatoes when compared to 129 billion dollars in profit.
But neither would employees really care about $57 dollars per year more either. I’m sure it would be nice, but it doesn’t really equate to much of anything in an hourly sense, nor is it much of a lump sum either.
Things might be different at a company that’s not majority owned by the founding family and doesn’t have 2 million employees.
Regardless, I didn’t say Walmart greeters are going to get rich and well aware that a company can’t dump all profit into dividends.
I was specifically thinking of an engineering firm I used to work for; it had five or six principal partners, one of which was the President/CEO and largest stockholder. I could have totally seen them doing something like reinvesting profits for a while rather than be forced to cough them up to the employees. Not directly out of spite for the employees, but because they needed some capital investment, and because they wouldn’t have appreciated being told what to do with what they see as THEIR personal money as owners of the company.
That’s really the issue here- a tax is one thing, but a mandate that business owners effectively pay workers extra out of what many likely consider their own personal money is entirely another.
Quite a few large companies effectively do share profits through bonus plans. Typically they will measure a few key performance metrics. Your personal performance, often the performance of your division and overall company financial performance. These are usually measured against pre-determined targets. So if you were basically performing to target as was the company you would get your on target bonus (think something like 10% of salary). From there the numbers can be manipulated a bit depending on what the company is trying to incentivize. You can give key performers higher base bonus targets and such, so this is a pretty sophisticated way of managing this profit sharing comp.
This also has the benefit that it’s easier to cut back on bonuses when the company isn’t making target. Setting the actual targets in effect becomes a control on how much you will spend. Cut back too much and you might even lose people to the competition…
Other common ways of sharing profits are to actually incentivize directly with stock. Back in the day this was almost always options but these days it’s almost always direct grants of stock. This is mostly because the IRS nuked the tax advantage with options.
The more sophisticated companies will combine comp through salary, bonus and stock awards. Often times bonus money is subject to vesting (typically 3-4 years). Over time this vesting can create a form of “golden handcuffs” that make it hard for longer term employees to leave without giving up large amounts of money they haven’t vested. This leads to something that in the past has been called “rest and vest” where you have people just hanging around to vest without much ambition to work hard.
Overall I think good companies already do share profits with their employees in many ways. It’s good policy to do it but I’m not sure that we need regulations around it.
This is a good answer IMO. But proposals like this are usually by people who are not big believers in classical economics or the idea of equilibria. The OP includes a typical statement from that POV, ‘how about if it wasn’t big enough to change anything else’. IOW a concession that big changes create a new equilibrium with lots of things adjusting. but smaller ones somehow don’t, they just direct X dollars to Y group and nothing else. But reality is usually IMO closer to ivory tower classical economics than people in favor of more public intervention in markets would like to think it is.
In general if you want to subsidize lower income workers the least inefficient way to do that is cut them checks out of other people’s taxes. The exceptions where a more convoluted system would beat this are rarer than people tend to think. Just collecting more taxes from some and paying it out to others strikes the wrong emotional chord with a lot of people, and not only hard core conservatives or head-in-cloud libertarians. But look at this proposal. Within a few posts there are good points about complications (eg. foreign profits) and ways to dodge it (don’t organize as a corporation*), with counter complications in the law and its enforcement. And distortions that complexity creates. Whereas higher taxes for more direct redistribution would tend to damp economic activity, there’s really no way around the basic human fact that people are most willing to put out effort and take risk, giving their labor and/or capital, for themselves and their families not other people. However the broader, simpler and more transparent you make that tax&redistribute effort, the less that inefficiency hit will generally be.
*this is a big long term hole in a lot of proposals to rein in ‘corporations’ and/or ‘excessive wealth’ in general. They often focus on publicly traded corporations, who they’d have to name to their boards, what they’d do with their profits, how the wealth represented by holding their shares would be taxed under a wealth tax, etc. But tend to ignore that over time the economy could move significantly away from organizing economic activity under public stock corporations if you set up substantial hoops they have to jump through that other forms don’t. In a year or a political term, no. Over decades, yes. A shift to private companies would leave no boards to have to name labor reps to, more difficulty nailing down profits, appraisers able to reasonably appraise ownership interests at a big discount (in case of a wealth tax), etc.
Corry, to some extent I think we are already there. There are very large costs to going public. Private equity money has been flowing like crazy so the number of IPOs is definitely down. Basically regulations on public companies are just regulations on making it harder for joe average to invest in anything. Remember, rich people can become accredited investors and buy into all kinds of things that aren’t available to normal people.
There are many problems with this type of plan, most of which have already been outlined by others.
The primary ‘problem’ is that wages are determined by the market, not the government. Very few workers make minimum wage - everyone else has a wage set by market requirements. So if you mandated that all employees must get x% of profits, all that would do is lower the fixed part of their income.
Why people think it’s desirable for poor people who live paycheck to paycheck to replace part of their steady pay with risky profit sharing is beyond me. How is it better to get, say, $35,000 per year plus profit sharing that might get you somewhere between $2,000 and $5,000 extra, but might get you nothing, vs a fixed salary of say, $37,000? Is it really a good idea to mandate that poor people must take financial risks with their own paycheck?
I suspect most people who like this idea think that the profit sharing would come in addition to what they are making now, but you can’t just hold the wages of everyone above the equilibrium level like that. Eventually reality will assert itself and overall compensation will return to whatever level the market shakes out to. You can’t regulate this, because governments have no idea what a particular job is worth to a company, or how much a particular employee is worth in a particular job. If you tried to set wage controls overall to raise the price of labor, the result would be disastrous, and the people who would feel it most keenly are the laborers you were purporting to help.
Second, profit sharing won’t have the intended effect of making employees work harder or smarter, because a company large enough to have such a program will be large enough that no single employee at a lower level could possibly do anything to raise profits enough to matter.
I have had a bonus program along with my salary for years. The bonus was tied to a handful of metrics, and could vary from nothing at all to about $10,000 in a given year. I would MUCH rather have had a $5000 raise than a 0-$10,000 bonus, because the lack of knowing what my actual income will be in a given year creates problems with financial planning, purchases of durable goods like new furniture, etc. Bonuses also tend to get treated as ‘windfall’ money, and as a result are often spent poorly. My co-workers would spend their bonuses on vacations, motorcycles, new computers, or other luxuries that they might not have purchased if the money had come in the form of an extra $250 per paycheck instead of a lump sum of $6,000.
My company also offered a stock purchase plan, and matches the stock 50%. A sweet deal, and lots of guys had big portfolios of company stock. Then the company fell on hard times, and closed our office and layed off everyone. At the same time, the stock fell by about 75%, wiping out a good chunk of employee savings just as they were losing their jobs. I fail to see the social good in making every employee subject to that kind of extra risk.
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That’s a good expansion on that point. The govt can do things which might indirectly help wages to rise, like various kinds of public spending (eg. education, infrastructure) IF careful to structure the taxes used to minimize disincentives to produce and IF the education or infrastructure money is spent efficiently. It’s quite possible to spend more on those two things and accomplish nothing or even a negative for long term wage growth if done the wrong way, but it can work. But just ordering the general wage level to rise, even if it appears in theory to divert returns from capital to labor, generally won’t work.
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Also a good point not emphasized earlier. Employee Stock Ownership Plans are an idea elements of the left and right can both feel good about, or could back when they didn’t think it was immoral to agree with the Evil Other about anything. But still a bad idea. Payment in a small ownership stake only makes sense for people with a degree of control, either rank and file employees in very small companies, or a few people very near the top of bigger ones. Otherwise it’s the same as giving people cash and telling them to go invest it all in the stock of one company, which elementary financial theory says is a mistake. It’s taking extra risk of a single company that you could easily diversify away, and for which the market thus offers no extra compensation.
Even when something seems like a good idea, tax incentives can be distorting and problematic.
Many of the problems with the US’s health care system, for example, can be traced back to tax incentives for employer-provided health care. It seemed like a good idea at the time, but it became entrenched and inefficient in so many ways.
That’s naive. Loopholes become a part of the legal and economic landscape. People start to depend on them. The beneficiaries of the loopholes lobby to keep them in place. There are umpteen examples.
Also, I agree with everything Sam Stone posted.
I’ve never understood the idea that workers should share in the profits of a business. The workers do not take any financial risk to start or continue the business.
The only way that I could see such a thing as being remotely fair is if the workers must also share in the losses as well. “Gee, Bob, the industry went to hell last year because of the recession. You owe us 5% of your salary.”
All due respect, but isn’t that argument kind of like saying that e.g. wiretapping criminal organizations has a big long term hole because over time criminals adapt to the technology and don’t talk on the phone any more ? Like, sure, it’s true, but then you find a way to listen to what they’re text messaging and whatnot. And in the meantime, hopefully you’ve nabbed yourself some criminal organizers.
The increasing difficulty of trying to enforce laws on people reluctant to having said laws apply to them is not really a valid reason to not draft the law in the first place.
There is nothing inherent in the idea of taking financial risks justifying risk takers getting 100% of the profits. Risk takers must get profit, for sure, but 100% is a choice not a requirement.
And that conversation? It doesn’t usually end with 5% of your salary, it ends with 100% as Bob gets laid off. If he’s lucky his employer can do what IBM did a few years back and give employees a mandatory 2 week unpaid vacation. Or if he’s hourly there won’t BE a conversation, he just gets assigned fewer shifts and has to make up the money deficit some other way.
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