Should corporations pay a mandatory dividend to employees?

Great Debates
1

I remember reading once that corporations located in a South American country (I think it was Chile, but I’m not sure) were mandated by law to pay out dividends to shareholders. I can’t remember the amount, but it was a percentage of total profits.

So I was thinking about that again tonight, and wondering, what if it were mandatory to pay a similar dividend to workers? If we make it high enough, it could potentially put a serious dent in wealth inequality. It actually seems quite fair to me, as the only reason the company makes a profit in the first place is because of its employees.

Is it a wealth transfer? Absolutely, and I think that would be a good thing overall, and may very well lift a lot of working class people out of poverty. The people who are actually creating that wealth should get a fair share of what they create, and not merely what the owners of the company feel like giving them. I think, 30 years after President Reagan left office, we can safely conclude that trickle down economics was a huge flop, so it’s high time to try something else, something that doesn’t rely on the generosity of those whose modus operandi is to *hoard *wealth.

What if, for example, the dividend paid to employees had to be just 10% of what was paid out to shareholders? Take CocaCola, for example. It looks like they paid out over 6.6 billion dollars in dividends last year (cite). From what I can find, they have about 62,000 employees. So each employee, if they got just 10% of the dividends, would be looking at a $10,645 payout. That amount is probably chump change for the CEO, but it is a massive increase in the standard of living for the folks on the lower rungs of the ladder (or the lower floors of the multi-floor outhouse).

What would be the repercussions, society wide, if every corporation in the USA, or that wanted to do any business whatsoever within the USA, were required by law to pay such a dividend to its employees?

2

Disclaimer: I have founded four firms in my lifetime - the most recent one we just filed the incorporation paperwork on Friday - and I’ve always set aside profitability bonuses for my employees. In the current one, 10% of quarterly profits will be shared with all staff as a bonus.

Now, as you share it, you’re postulating that publicly held corporations share with employees. That disallows companies that don’t issue shares. You may think that’s smaller firms but some very large ones are Publix, Albertsons, Ernst & Young and others.

So what I think you’re shooting for is some aspect of a firm’s profits being shared with employees. The traditional solution in the United States - sadly losing ground over the last few decades - is unionization. Union contracts can stipulate such. Other countries do it differently, of course. You may find a solution there. Germany, for instance, has two boards per company and the supervisory one must be 50% employee representatives.

But, fundamentally, I don’t disagree. It’s clear to me - others may disagree - that the drive for short term dividends and growth provide self-destructive incentives for senior management in the United States and a change in focus is both needed and coming lest the entire system collapse in the medium term.

3

What would stop these corporations from simply reducing employee wages as a result? The workers might not be taking home any more additional take-home pay when all is figured in.

4

I would immediately cease all dividends.

5

The minimum wage provides a floor.

~Max

6

No.

However, if I ever form a company I’d have some form of profit sharing. But that’s my choice.

7

Assuming the new scheme is not funded by employee pay cuts, I have a feeling that the proposed change would decimate charity and retirement portfolios. Would someone more familiar with that field care to look into the effect of a sudden -10% cut to shareholder dividends?

I don’t suppose most businesses have a 10% profit margin (after paying shareholders) they are willing to part with and passing costs to consumers just means 10% inflation. The money has to come from somewhere.

~Max

8

In an environment where people negotiate their own pay, a Profit Sharing requirement becomes a nearly zero sum game, but where employees share the risk of the business owner.

Salaries will fall to a level where Salary + PS equals (roughly) current salaries. However, the PS piece is variable, and adds risk to the employee’s earnings. A risk, mind you, that they have little to no control over.

9

Well, congratulations. You just crashed the value of Coca-Cola. Given that the stock is currently overvalued (PE of 32.97 overnight) ending the dividend in that way would cut at least 20% off the stock’s value.

At that point, the board would be screaming because the sell off would get some momentum. Good luck managing that.

10

The most likely outcome, at least for the behemoths like Coca Cola, is that the corporations would seek to maintain their shareholder dividends and accept the employee dividends as an additional cost. They would then seek to alleviate this cost by reducing expenses elsewhere. Any current employee profit sharing programs would surely take a hit. Employee pay might not take an immediate hit, but raises and starting wages of future workers would be curtailed. If achievable cost savings weren’t enough to pay for the employee dividend, then the rest would probably be taken out of cash reserves. If that happened, there would eventually be price rises to pay for the employee dividend by finding revised profit points for the corporations’ products.

Ten percent of the dividend would not be a huge hit for a company like Coca Cola. My concern would be that that 10% rate would be used as a wedge for a socialistic takeover of corporate wealth. The surrounding community is also a corporate stakeholder right? Shouldn’t corporations be required to also pay a dividend to a corporate community fund? If a 10% employee dividend has good results, wouldn’t 20% be even better? Why should the corporations’ owners get a greater share than the employees or the community? Wouldn’t a three-way split be fairer for everyone? A minor change to redirect a relatively low percentage of corporate profits towards employees might well be a good idea. Any major change will downwardly impact stock prices and investment, which will then hurt anyone who has pension or a retirement investment fund.

Also, don’t assume that everyone agrees with you about Reagan’s economic policies.

11

I’d prefer majority (if not full) employee ownership of most companies.

12

While your concept sounds intuitively correct the fundamental flaw in your logic is:

Employees are only one small part of profit. There are many many factors that directly influence profit that are outside of the control of most employees. Some big examples include competitor’s actions, government regulations, raw material prices, even things like fuel prices, rent etc.

As noted by Max S. the objective of any “bonus” program should be to provide an incentive for employees to at least meet or exceed their personal performance objectives, it shouldn’t be “found money”. Employee personal performance goals should be linked back to what they personally do to help the company achieve its objectives.

13

Corporations typically compensate employees, in times or high profitability, with wage increases and bonuses. It isn’t a perfect system, but it’s been working well enough so far. Dividends are paid to shareholders in times of high profitability in return for SH’s providing capital to the company which it uses to do business. I don’t see the need to mix up these two systems.

Or is it you just feel that employees deserve more than they are currently getting as compared to the shareholders? Show me the math.

14

What happens if the company loses money, for reals or on paper?

15

I would presume, as now, that the Board would be able to cut or eliminate the dividend.

As in understand the proposal, 10% of the company’s dividend is paid to employees. So if the board eliminates the dividend employees get nothing as well.

I’d also challenge the earlier statement that companies use dividends to reward shareholders in times of profit. There are, in fact, many reasons for a dividend to be declared. A company may use it to defend its share price during hard times. It may use it to disburse excess cash from a one-time event.

Contraiwise, Apple needed to be dragged kicking and screaming - and almost lawsuited - into declaring a dividend when it was one of the most profitable companies on Earth and absolutely flush with cash.

16

That’s what I was wondering. I’m sure employees would love it if their employer was forced to give them a percentage of the profit. I can’t imagine too many of them would be happy during slower times when they got a bill instead.

To me, this reads as the employer giving the employees money from their pocket (the profit) during good times. During bad times the employer is helping float the company with money out of their pocket.

What incentive is there for employers to get on board with a system like this verses just moving more of their operations to other countries?

17

You think that doesn’t happen?

IBM had a big furlough of workers a couple of years before I quit working for them (2013). That was after announcing an increase in dividend and billions for share buybacks. When a company does poorly, workers get pink slips, fewer hours, the whole gamut of “fuck you’s” that a company can give to their workers. Pretending that employees are somehow insulated from a company’s failures because they get paid X dollars for Y hours worked is a nonsense point of view. As much as you can argue that it’s true, it isn’t true, and never in the history of business has it ever been true.

Not to mention, as a person who has owned stock, I’ve never been presented with a bill. Not ever. Not once.

18

Well, in certain companies it can happen. Some partnerships, for instance. But it’s rare. And shareholders can be wiped out via bankruptcy.

Still, the focus on dividends is where this gets interesting as they are not directly tied to profitability. Ditto share issuances - which cost employers no direct cash - in lieu of cash dividends. Both provide a stronger incentive for employees to want the company to thrive.

19

Like so many “progressive” ideas, this proposal is very generous with other people’s money.

20

Shareholders are specifically compensated for the risk they are taking, and anyone who is investing smartly knows to diversify.

The problem with employees being paid in shares is that they are undiversifying their risk. They already hold financial risk associated with Company X, by virtue of relying on X for a job, adding piles of stock increases that risk.

Now, you say it provides incentive, and it does, but it’s basically constrained by the prisoner’s dilemma. I could bust my ass all year and drive up the stock price by one cent. What really matters is what everyone else does, and I don’t control that.