There is little doubt that free-market capitalism has generated more wealth for more people than any other economic system that has ever existed. The freedom it has provided to many people for them to pursue their interests is unprecedented. Because it operates to promote competition and prevent the concentration of power in monopolies, it ensures relatively low prices for goods and services and a measure of economic choice and freedom for consumers. In addition, because it allows the producers and consumers in a free market to make free choices, capitalism is very efficient, even ruthless, in allocating resources and adapting to change. Finally, the profit motive in capitalism promotes the dissemination of technology quickly and efficiently throughout society, locally and globally.
However, the same free-market capitalism that has done an effective job in creating wealth has not always been viewed as fair in terms of how it distributes wealth. In 2014, The New York Times reported that “Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.”
The disparity in wealth between senior executives, typically CEOs, and other non-executive employees often comes under scrutiny and attack. The cause of this disparity is that nonexecutive employees usually receive only a base wage, while the compensation offered to most executives comprises a base salary with additional cash and, often, stock-based awards. In 2015, Fortune reported that the “ratio between average American CEO pay and worker pay is now 303-to-1.”
Notwithstanding the fact that the methodology supporting such studies is open to interpretation, the fact is that there is uneasiness about how wealth is distributed in our society. In short, too many hardworking people earn too little. And, so, most Americans are uncomfortable with the distribution of wealth. According to a Gallup poll, “Two out of three Americans are dissatisfied with the way income and wealth are currently distributed in the U.S.”
Wealth disparity also may contribute to low worker productivity. The same Gallup poll found that “less than one-third (31.5%) of U.S. workers were engaged in their jobs in 2014 ... and 17.5% were actively disengaged.” A more productive workforce would sustain higher wages and profits. Companies with engaged workers have 6% higher net profit margins, according to Towers Perrin (now Willis Towers Watson) research, and engaged companies have five times higher shareholder returns over five years, according to Kenexa research.
A Positive Relationship Between Profit-Sharing and Productivity
The way forward is to share wealth more equitably through employee ownership of companies and a more aggressive use of profit-sharing plans. I refer to this approach as micro-socialism.
Although somewhat misunderstood in our time, the word socialism refers to an economic system in which the government owns and operates the means of production to create a more equitable distribution of wealth. Micro-socialism promotes the ownership of the means of production (the company) by the employees (not a central government). So, what outcomes might we expect from an economy based, in significant part, on micro-socialism? It would:
- Deliver more wealth to more of the people who contributed to its creation.
- Reconnect people with the work they do and promote greater productivity.
- Operate within the American paradigm of fairness.
- Require minimal involvement on the part of federal or state government bureaucracies.
- Promote individual accomplishment and ambition.
Micro-socialism meets these requirements. The goal of micro-socialism is to provide employees a greater share in the profits of the company when profits are made. This is accomplished through either employee ownership of the company or the use of more aggressive profit-sharing plans that are provided by companies that are not employee-owned. Let’s review this solution in light of the expectations listed.
Deliver More Wealth to the People Who Contributed to Its Creation
If a meaningful share in the profits (when earned) of a company is distributed to its employees, then the disparity in wealth that currently exists would be diminished. In other words, a greater portion of the wealth created will be shifted from the owners, executives and investors to those people at the lower end of the compensation scale.
For many years, the growth in real wages has been flat. “A crucial measure of how far from full recovery the economy remains is the growth of nominal wages (wages unadjusted for inflation). Nominal wage growth since the recovery officially began in mid-2009 has been low and flat,” according to the Economic Policy Institute (April 2016). In contrast, corporate profits over a six-year period from the fourth quarter of 2011 to the fourth quarter of 2017 have increased by 12.2%, according to Statista.com (2018).
Because the labor market and the goods and services market operate independently, it is possible that company profits can, at times, be very high and wages remain very low. Very profitable companies, in fact, may employ people that are living on the edge of poverty.
One modern response to this situation is the recurring outcry for a higher minimum wage. Although there are proponents on both sides of this issue, many credible studies contend that increasing the minimum wage causes a loss of jobs and does very little in alleviating the economic challenges faced by those employees in low-paying jobs. In their 2015 study, Douglas Holtz-Eakin and Ben Gitis projected that raising the federal minimum wage to $15 per hour could eliminate 6.6 million jobs.
As a final point on this topic, it should be noted that, based on research reported on the National Center for Employee Ownership website, the wages for employees in companies with an employee stock ownership plan (ESOP) were 5% to 12% higher than in companies with no ESOP.
Reconnect People with the Work They Do and Promote Greater Productivity
Research has suggested a positive relationship between profit-sharing and productivity. The Brookings Institution’s 1990 “Profit Sharing and Productivity” study provided strong evidence that profit-sharing and productivity are positively related. In fact, micro-socialism would release higher levels of worker productivity currently held captive by disengaged workers, making America more competitive in world markets.
We might reasonably expect additional benefits such as a reduction in employee turnover and absenteeism. Employee turnover results in added costs due to lower productivity, overworked staff, training costs and other factors. In an article published by TLNT, a calculation on the cost of employee turnover was done based on the loss of 12 employees ... six at $40,000 per year, four at $80,000 per year and two at $120,000 per year. The total cost was calculated to be $1.5 million to replace these employees.
As for absenteeism, a July 2013 Forbes article quoted Circadian, a workforce solution company, as stating that “unscheduled absenteeism costs roughly $3,600 per year for each hourly worker and $2,650 each year for salaried employees.”
Operate Within the American Paradigm of Fairness
The idea of “fairness” can be difficult to define, and yet it seems to be deeply ingrained into our cultural sense of right and wrong. “The core insight that economists have gleaned from ultimatum-game experiments is that people care quite a bit about fairness and are actually willing to turn down free money if they feel that the amount of money they’re being offered is unfair,” pointed out James Surowiecki in a 2009 New Yorker piece.
Micro-socialism does not involve any massive government programs that transfer wealth from one class of citizen to another. Americans bristle at the notion of giving money to healthy adults who haven’t earned it.
Micro-socialism operates within the American sense of fair play and social justice because the people who worked to create wealth can legitimately claim a share in it.
Minimize Involvement on the Part of Federal or State Government Bureaucracies
Government bureaucracies are notoriously inefficient and wasteful. A Heritage Foundation Study in 2009 found that “A GAO audit classified nearly half of all purchases on government credit cards as improper, fraudulent, or embezzled.”
Implementing micro-socialism would require only relatively small levels of additional government involvement: First, to pass tax measures and other regulations to support and encourage the growth of micro-socialism; and second, to ensure compliance with the laws and regulations that are implemented.
Promote Individual Accomplishment or Advancement
Under micro-socialism, the American promise of working hard and elevating the economic well-being of yourself and your family would be more attainable. The extra wealth earned by employees in the form of higher wages and shared profits might be used for education and training to learn new skills or perhaps to open a small business. As it is used today, profit-sharing also could provide an opportunity to increase retirement savings.
The wealth-distribution mechanisms being presented here are not new. There currently are entirely employee- owned companies, such as Publix Supermarkets and Lifetouch. In fact, the top 100 employee-owned companies currently employ more than 600,000 people. In addition, many companies already offer profit-sharing plans to their employees. Implementing micro-socialism, then, would be a matter of becoming more aggressive in promoting these kinds of organizations.
Implementing such a change on a broad scale would require governmental action at the federal and state levels, using taxation and regulatory strategies to create the environment that will promote micro-socialism. Implementation strategies might include:
- Creating significant tax advantages and low-cost loan opportunities for employee-owned companies. Every year thousands of companies fail. Many such companies would provide an opportunity for being transformed into employee-owned businesses.
- Providing higher levels of tax deductions to companies that offer aggressive prof-it-sharing plans to their employees.
- Requiring federal and state contractors to give preferential treatment to employee-owned companies or provide a minimum standard profit-sharing program to their employees.
- Giving preferential tax treatment to encourage the founders of companies, upon retirement, to sell their companies to their employees.
Free-market capitalism based on individual effort and ownership has taken us far ... very far. But can we regard it as the best of all possible worlds? A free-market approach to redistributing wealth is a better way.
The author wishes to express his deep appreciation to Richard Dibble, Ph.D., New York Institute of Technology, for his assistance in the completion of this article.
Ted Turnasella is a compensation consultant with more than 35 years of experience in the compensation practice, both in the corporate world and as an independent consultant. Connect with him on LinkedIn.