Political conventions aren’t typically the place to bring campaign white papers to life. But I kept hearing the same phrase in speech after speech in Philadelphia last week, obviously shorthand for some Hillary Clinton policy that must have been released to great fanfare at some point, but which had escaped me this election season.
Hillary’s “got specific ideas to help workers share in their company’s profits,” President Obama said in his convention address. “If a company offers stock options to its senior executives, it ought to offer stock options and profit sharing for all its employees,” said Virginia Sen. Mark Warner at a panel discussion put on by the centrist group Third Way. “If you believe that companies should share profits, not pad executive bonuses, join us,” thundered Hillary Clinton herself, in her nomination speech.
I do believe that. But I’d be more full-throttle about it if I actually knew what Clinton was talking about.
So I went to where all well-intentioned policies go to die: the campaign issues page. And buried in among 30-plus other ideas, I found “Clinton’s plan for a profit sharing tax credit,” originally announced over a year ago in New Hampshire.
The plan attempts to solve a very real conundrum: how to increase the labor share of national income, which has been dropping consistently for the past 15 years. This translates into a loss of $535 billion for workers since 2000, according to the Economic Policy Institute. And it obviously exacerbates income inequality, as the share of income increasingly flows to managers and financiers at the very top.
A small group of academics believe one answer to this lies in creating incentive compensation systems, in which all workers, not just executives, get performance bonuses when their employer’s profits rise. Profit sharing was relatively commonplace in the early 20th century, and many corporations still retain such programs, from tech firms Google and Cisco to household product maker Procter & Gamble to Southwest Airlines, which paid out $620 million last year. The idea is to give workers a bigger stake in their company’s success, increasing productivity, worker morale, and of course, pay.
Here’s the Clinton plan: She would encourage inclusive profit-sharing plans in which workers in high-performing companies would receive 10 percent on top of their wages. To get companies to make the switch, she would offer a corporate tax credit for up to 15 percent of the profit-sharing pool. Small businesses would be eligible for an even higher credit. This would defray the cost of setting up the profit-sharing plan, and would phase out after two years. The business would retain the program, theoretically, out of recognition for its benefits. Clinton expects this to cost $20 billion for those two years, but that leverages about $133 billion in returns to workers, which continue long after the tax credit expires.
I appreciate the thinking behind this, but I can think of about a half-dozen ways to game it. The most obvious one stems from the fact that corporations often boost profits in the modern age by downsizing workers, cutting hours, eliminating benefit packages like health insurance and otherwise slashing labor costs. Those cuts would expand profits, and only a portion of them (not as much as the labor cuts) would go back to workers, with the company getting a nice tax break out of it.
In the end, the corporation does better but workers have a net loss, with the profit sharing a poor substitute for wages. This would make workers more reliant on the profit-sharing bonus, and since the business cycle produces ups and downs, some years would cause real hardships.
On the flip side, if a CEO wants corporate profits to shrink, he can just siphon money out of the company through stock buybacks or dividends to shareholders or executive compensation and benefits. Productivity may rise because workers expect to share in the company’s success, but the investors would really see the windfall.
A bigger problem could arise with the structure of the profit-sharing program. In banking, bonus culture leads to more risk-taking; policymakers are busy trying to de-link compensation from financial industry performance. A similar dynamic could arise once profit sharing is instituted more widely.
Then there are non-cash forms of profit sharing. For example, many companies offer plans where workers get shares of company stock, sometimes called an Employee Stock Ownership Program, or ESOP. In fact, there are already tax credits in place to encourage them. But undiversified portfolios can really nosedive when company stock falters. When Procter & Gamble fell 52 percent in three months in 2000, employees lost millions in accumulated savings. At Enron over half of employee 401(k) investments were tied up in company stock. Though top executives cashed out over $1 billion in shares in the final days, the employees, unaware of the state of the company, lost everything.
To her credit, Clinton acknowledges the possibility of limiting wages or other gaming to get the tax credit, and would seek ways to tailor it to avoid those outcomes. But the bigger problem here is that, in order for workers to get a fair deal on the job, they don’t need just a bigger share of profits; they need a bigger share of power.
Even Joseph Blasi of Rutgers University, the academic perhaps most associated with the profit-sharing idea, admits that it can only work if paired with “a more participative corporate culture with training for workers who need the right skills to figure out how to make the firm more valuable.” If workers have no way to affect the decision-making of a firm, they cannot be certain their labor will make a difference in the company’s success, defeating the purpose of profit sharing.
Worker power doesn’t magically follow a profit-sharing plan, especially not one coerced through a tax break. That expanded worker voice needs to be fought for and won through collective bargaining. The labor movement elicits profit sharing every time they hammer out a new contract. But they don’t just gain shares in a company, or cash when that company does well; they demand a seat at the table.
If we want to foster greater worker voices in companies, we could encourage German-style works councils, where labor representatives sit on corporate boards and help determine compensation schedules, capital expenditures and product development. Or we could do the same for worker-owned co-operatives, where employees have even greater control of a company’s decision-making. We know that profit sharing like ESOPs flourish best when worker participation increases; the latter needs to be foregrounded and the former will follow.
Clinton has the right idea in trying to make workers succeed when their businesses succeed. But those businesses would succeed more if they used their workers as a resource rather than productivity machines. When we all can use our talents and skills to full potential, everybody wins. Find a way to build incentives for that, and you’re onto something.