John Hoffmire: Wage economy vs. employee ownership economy
Ted S. Warren, Associated Press
Two weeks ago, a meeting of global business leaders took place in London, England. Titled the Conference on Inclusive Capitalism, the event focused on addressing a critical flaw in the current application of capitalism: rising inequality in a wage economy.
In the end, the meeting itself did little more than promote discussion; however, it still provided some interesting insights, especially considering the aggregate wealth of those who attended. Summing up available wealth, participants from this meeting help control a staggering $30 trillion, or one-third of global liquid assets. To earn that much money at the current minimum wage, it would take the entire population of the United States six years, working eight hours a day, every day, each year.
Herein lies one of the major challenges in a wage economy: wages do not often create material wealth. For most, wages simply cover day-to-day expenses and, with careful planning, provide enough to put aside a portion for a rainy day. Some place money in 401(k) plans and other basic investments, but these are often entirely dependent on employee contributions and require long term consistency, something many people lack in a rapidly changing economy.
Real, long-term wealth comes from owning a portion of a company. These holdings can pay out dividends as long as they are held and can be sold at a profit as businesses mature. They also enjoy tax benefits as profits that come as a result of capital gains are taxed at a lower rate. However, given the high entry cost of purchasing stock in larger private companies, where big money is often made, this type of acquisition is out of reach for the majority of families worldwide.
One solution to this problem that is gaining traction is called employee ownership. Just like it sounds, employee ownership is a fundamental change in how a company is owned: rather than having most of the shares of a company concentrated in the hands of a few, the employees themselves buy shares through a trust, and, in aggregate, become significant stock holders in the company.
The mechanics of a transition to employee ownership sound quite simple. The company, after deciding to make the change, sets up an employee benefit plan that includes a contribution of stock towards ownership. A trust is set up to house the shares, which are then allocated to individual employee accounts based, usually, on the same allocation of wages within a firm. In other words, someone who gets paid twice as much gets twice as many shares. After the transition is made, employees often also take on more responsibilities for the business.
Research over the last couple of decades has shown a great deal of benefit directly related to employee ownership. One major benefit is more dedication from employees. Those who own a portion of the company they work for tend to exhibit higher motivation and increased job satisfaction. Also, the interests of shareholders and employees are correlated since they are one and the same.
Of course, there wouldn’t be success attached to employee ownership if there wasn’t a way for employees to sell their shares. After an employee leaves the company, the firm repurchases the shares at market value. The employee can roll the proceeds into a retirement account or take a cash distribution.
Employee ownership has the potential to create enormous long-term benefits across the entire economy. Superior to the wage economy model, an employee ownership economy enables businesses to provide material returns for everyone involved. There are also significant tax advantages available to those who sell to qualified employee ownership plans.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the School of Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Ben Young, Hoffmire’s colleague at Progress Through Business, did the research for this article.