Successful Businesses Should Share Profits With Employees

Since 1980, income for the richest Americans has grown by nearly 400%. Meanwhile, worker salaries have barely kept up with inflation, and some workers have fallen behind in buying power. This dilemma must be solved. One solution would be higher wages. Another would be for businesses should give employees a share of profits.

Here is part of what Robert Reich has to say about profit-sharing:

In light of the news this week that the economy has been growing at a record rate (and corporate profits are also hitting record highs, the stock market notwithstanding), several of you have asked me specifically what can be done to spread the benefits of economic growth. . . .

One idea is an old one that was tried with great success but is now all but forgotten. It’s called profit-sharing. It emerged from the tumultuous period when America shifted from farm to factory. In 1916, Sears, Roebuck and Co., then one of America’s largest corporations with over 30,000 employees, announced that it was embarking on a major experiment — profit-sharing. The firm gave workers shares of stock, making them part owners.

Shortly thereafter, the Bureau of Labor Statistics issued a report on profit-sharing, suggesting it as a way to reduce the “frequent and often violent disputes” between employers and workers. Profit-sharing gave workers an incentive to be more productive since the success of the company meant higher profits would be shared. It also reduced the need for layoffs during recessions because payroll costs dropped as profits did. 

Profit-sharing proved a huge success. Other companies that joined the profit-sharing movement included Procter & Gamble, Pillsbury, Kodak, and U.S. Steel.

By the 1950s, Sears workers had accumulated enough stock that they owned a quarter of the company. And by 1968, the typical Sears salesperson could retire with a nest egg worth well over $1 million (in today’s dollars).

There was a downside. When profits went down, workers’ paychecks would shrink. And if a company went bankrupt, workers would lose all their investments in it.  

The best profit-sharing plans have been in the form of cash bonuses that employees can invest however they wish, on top of predictable wages. At Lincoln Electric, for instance, which has had profit-sharing since 1934, employees receive a profit-sharing cash bonus worth, on average, 40 percent of their annual base earnings.

But profit-sharing with employees has all but disappeared in large corporations, which since the start of the 1980s — and the advent of corporate “raiders” (now private-equity managers) — have focused on maximizing shareholder returns. Sears phased out its profit-sharing plan in the 1970s (and filed for bankruptcy protection in 2018). 

Yet profit-sharing with top executives has soared — as big Wall Street banks, hedge funds, private-equity funds, and high-tech companies have doled out huge amounts of stock and stock options to their MVPs.

The result? Share prices have gone into the stratosphere while wages have barely risen. Researchers have found that increases in share prices before the late 1980s could be accounted for by overall economic growth. Since then, a large portion of the dramatic increases in share prices have come out of what used to go into wages. . . .

America’s trend toward higher profits, higher share prices, mounting executive pay, but near stagnant wages is unsustainable, economically and politically. How to encourage profit sharing? Corporate taxes should be lower on corporations that share profits with all their workers, and higher on those that don't. 

Sharing profits with all workers is a logical and necessary step to making the system work for the many, not the few.