by Christopher Mackin
[This article first appeared in The New Republic and is reprinted here by permission of the author.]
The most fundamental tragedy
of the coronavirus crisis is human. It is lives being lost. Somewhere close
behind is the feeling of desperation shared by working people. In an economy
where it is estimated that 50 percent of the labor force survives from paycheck
to paycheck, we are facing an economic crisis of unprecedented proportions that
exposes a fundamental flaw in our widely accepted idea of the relationship
between working people and their places of work.
That fundamental flaw is a
long-standing acceptance across the ideological spectrum of a division between
wage earners and the owners of capital assets. While owners of businesses are
able to fall back on accumulated wealth and assets in a crisis, it has become
abundantly clear that a majority of workers are prisoners of wage income. As
long as that divide persists, the threat of economic breakdown will loom both
in the coming months and into the next crisis. That divide is the heart of
economic inequality. Near-term measures that maintain or increase wage income
should be implemented. But it is time to think more deeply about the causes of
inequality, and it is time to introduce remedies that serve as conditions for
the provision of federal government assistance.
As Mark Cuban, owner of the
NBA’s Dallas Mavericks, has wisely counseled, no governmental interventions
now being considered should be entered into without consideration of how that
intervention will address inequality.
A prominent test
case—the airline industry—can help lead the way. Any federal funds loaned to
the airlines should be repaid in two steps. The first dollar repaid should be
directed to newly established Employee Stock Ownership Plans, or ESOPs, at each
company whose beneficiaries are the more than 500,000 airline workers, from
luggage handlers and flight attendants to mechanics and pilots. The second
dollar repaid should return directly to the federal government. Using that
formula, over a short period of time, employees will accrue a substantial stake
in these companies. They or their selected professional representatives should
serve prominently on company boards of directors to give voice to the employees
that make the business work.
As
Columbia law professor Tim Wu points out, the American public also deserves corporate
governance representation to help steer the airlines back to responsible
stewardship. Narrowly focused stock buybacks in public companies that have
enriched a small set of the corporation’s stakeholders, senior management, and
quick-flipping, short-term shareholders should end. If management balks, they
should be educated on how this arrangement is a superior corporate model for
workers, shareholders, and the public. There is abundant empirical evidence that it is. It simply requires more of management.
A
second mechanism to use with the airlines and with any other private-sector
company receiving governmental support can also speed up the process toward
greater wealth participation by ordinary working people. Business taxes should
be rethought. They should be paid in full if they perpetuate status quo
arrangements that keep workers on the outside of ownership. A necessary reform
would simplify [...]
The post Toward an Economic Democracy appeared first on Employee Owned America.
]]>by Christopher Mackin
[This article first appeared in The New Republic and is reprinted here by permission of the author.]
The most fundamental tragedy of the coronavirus crisis is human. It is lives being lost. Somewhere close behind is the feeling of desperation shared by working people. In an economy where it is estimated that 50 percent of the labor force survives from paycheck to paycheck, we are facing an economic crisis of unprecedented proportions that exposes a fundamental flaw in our widely accepted idea of the relationship between working people and their places of work.
That fundamental flaw is a long-standing acceptance across the ideological spectrum of a division between wage earners and the owners of capital assets. While owners of businesses are able to fall back on accumulated wealth and assets in a crisis, it has become abundantly clear that a majority of workers are prisoners of wage income. As long as that divide persists, the threat of economic breakdown will loom both in the coming months and into the next crisis. That divide is the heart of economic inequality. Near-term measures that maintain or increase wage income should be implemented. But it is time to think more deeply about the causes of inequality, and it is time to introduce remedies that serve as conditions for the provision of federal government assistance.
As Mark Cuban, owner of the NBA’s Dallas Mavericks, has wisely counseled, no governmental interventions now being considered should be entered into without consideration of how that intervention will address inequality.
A prominent test case—the airline industry—can help lead the way. Any federal funds loaned to the airlines should be repaid in two steps. The first dollar repaid should be directed to newly established Employee Stock Ownership Plans, or ESOPs, at each company whose beneficiaries are the more than 500,000 airline workers, from luggage handlers and flight attendants to mechanics and pilots. The second dollar repaid should return directly to the federal government. Using that formula, over a short period of time, employees will accrue a substantial stake in these companies. They or their selected professional representatives should serve prominently on company boards of directors to give voice to the employees that make the business work.
As Columbia law professor Tim Wu points out, the American public also deserves corporate governance representation to help steer the airlines back to responsible stewardship. Narrowly focused stock buybacks in public companies that have enriched a small set of the corporation’s stakeholders, senior management, and quick-flipping, short-term shareholders should end. If management balks, they should be educated on how this arrangement is a superior corporate model for workers, shareholders, and the public. There is abundant empirical evidence that it is. It simply requires more of management.
A second mechanism to use with the airlines and with any other private-sector company receiving governmental support can also speed up the process toward greater wealth participation by ordinary working people. Business taxes should be rethought. They should be paid in full if they perpetuate status quo arrangements that keep workers on the outside of ownership. A necessary reform would simplify existing rules by crediting a company’s tax payments dollar for dollar against its federal tax obligations. Payments that would ordinarily be directed to the federal government should instead be directed to purchase company stock that would be held by trusts for company employees. Over time, working people would become substantial owners of the companies they work for and enjoy a voice and a share in the wealth they have helped create.
The idea of restructuring our economy so that capital is a resource that works for labor and not just for itself is not a new one. Workers didn’t always work solely for wages. They used to work in small shops and on farms. In the middle of the nineteenth century, as industrialization was taking hold, some labor leaders warned that an employer-employee relationship where the first group owned and the second group was expected to survive on wages was a trap that would result in dependence and servility. They argued for employee ownership of the newly emerging industrial economy as an alternative where labor should work for both wages and capital ownership.
Strangely enough, so did a smattering of legendary industrialists, including Robert Brookings, Leland Stanford, and, early in the twentieth century, the chairman of the General Electric Corporation, Owen D. Young. On July 4, 1927, Young took the podium on the newly installed granite steps of the Baker Library at the Harvard Business School. He was the guest speaker for the opening of that grand building, and he had a surprise vision to share with the audience. He asked his audience to consider whether American capitalism, then barely a century old in its industrial form, had been launched on the right foot.
Into these [larger-scale businesses] we have brought together larger amounts of capital and larger numbers of workers than existed in cities once thought great. We have been put to it, however, to discover the true principles which should govern their relations. From one point of view, they were partners in a common enterprise. From another they were enemies fighting for the spoils of their common achievement.
He spoke hopefully that the Harvard Business School might be a place where his alternative vision could be fleshed out and made to work.
Perhaps someday we may be able to organize human beings engaged in a particular undertaking so that they truly will be the employer buying capital as a commodity in the market at the lowest price.… I hope the day may come when these great business organizations will truly belong to the men who are giving their lives and their efforts to them, I care not in what capacity.… Then we shall dispose once and for all, of the charge that in industry organizations are autocratic and not democratic.… Then, in a word, men will be as free in cooperative undertakings and subject only to the same limitations and chances as men in individual businesses. Then we shall have no hired men. That objective may be a long way off, but it is worthy to engage the research and efforts of the Harvard School of Business.
It takes a crisis of the magnitude of the coronavirus to reveal to us how poorly designed the dominant U.S. corporate economic arrangements are from the point of view of sharing the common wealth all workers help create. There are alternative wealth-sharing arrangements to the dominant U.S. corporate structure that are within reach. Some of them, like the 7,000 companies across the U.S. that are owned by their employees through ESOPs, have survived and prospered on the margins of this dominant structure. It is time to expand the reach of these ideas to the commanding heights of the American economy in order to design an inclusive form of capitalism that ends the utter dependence of most working people on their weekly paycheck.
The wealthy in America are disturbed by the coronavirus crisis, but they can sleep at night knowing that they have reserves that can get them through these difficult times. It is now painfully evident at this moment that that same comfort of having stored up wealth through your life’s work must be an opportunity extended to the rest of working America.
Finally, we need to appreciate that this is a root-and-branch moment. Owen Young is not the only neglected prophet whose stock is rising. Visionaries and critics who have warned about the dangers of unchecked economic growth, industrial agriculture, and remote supply chains must get a new hearing. Private patents on life-saving technologies should be terminated. Stock buybacks limited to grasping senior managements should be officially over.
But an economy where workplaces are comprised of fellow owners, where there are “no hired men,” can still sound, at this acute moment of crisis, like a special pleading. What about all of those outside the reach of the workplace? How are these ideas going to help them?
The best answers to that challenge are partial. And while there are concrete advances that should follow from reengineering the ownership and governance of the modern workplace, the responses on offer are also necessarily abstract. Perhaps the broadest claim that can be made in favor of these reforms is that the vitality and the moral responsibility of an economy is the single best guarantee that society can extend to all of its members. The economy is what will make and deliver their resources, food, shelter, health, and technology. It is where our problems will be solved or allowed to fester.
The reigning, now staggering, modern structures of economic life have arguably delivered on something we can narrowly describe as vitality. Technology has achieved wonders. Increases in productivity have reduced poverty. But modern economic life has also become significantly unmoored from responsibility to people and the planet. There is not only a coronavirus loose upon the land. When inequality is allowed to reach the unprecedented heights that prevail today, we are also confronting a historic responsibility deficit that traces back to a lack of accountability, a lack of democracy, in our economic institutions.
Unless we are going to fall for an even more romantic and already historically discredited idea of government ownership, a “do-over” for the socialism of the twentieth century, we can hope and reasonably expect that workplaces that are governed from within, not by the state but by their workers, engineers, and managers, will lead to a more responsible economy. That is economic democracy, the long-neglected complement to political democracy. It is not socialism.
And what standards of social responsibility might we expect from firms that are owned and governed democratically? Workers are also citizens. They drink the same water that consumers in their communities drink. They are not absentee investors, buying and selling their stock in nanoseconds. It seems reasonable to bet that if given the chance, they and their counterparts in management can be counted upon to arrive at answers about how best to carry out our economic life far better than the impersonal stewards of modern finance. The regulatory power of the state would not disappear under economic democracy. It would remain as the vigilant protector of the public interest. But for democracy to live up to its potential in society at large, the realms of the polity and the economy must remain distinct and in constructive tension.
Exactly 20 years ago, in a neglected book called Democracy at Risk, attorney Jeff Gates coined a metaphor that aptly described the “maximizing shareholder value” framework that has served as the conceptual North Star for elite opinion and for our business and law schools across the land. Ralph Nader was one of Gates’s most prominent supporters. Gates referred to the prevailing economic regime as “money on autopilot.” It is time that we design an economy where we confront our responsibility deficit, where we disable the autopilot machinery and replace it with an “eyes wide open” ethos and regime of law and corporate governance that manages consciously, ethically, and with responsibility.
Christopher Mackin is a Ray Carey and a Louis Kelso Fellow at the Rutgers University School of Management and Labor Relations. He also serves as a strategic adviser to companies, employee groups, and governments on the topic of broad-based employee ownership. @ChrisMackin48
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]]>How to do it? Simple: require that employee ownership be attached to any sort of federal bailout or stimulus package. Companies receiving a bailout or any other form of “corporate welfare” benefits should be required to adopt employee ownership programs such as broad-based stock grants, options, or employee stock ownership plans (ESOPs) so that over time a meaningful percentage of their equity is held by their employees. Such a requirement would begin to provide the foundation for long-term economic security—security that is persistently out of reach for most ordinary Americans.
Academics
and other researchers have studied the effects of ESOP ownership over many
years, and their findings are remarkably consistent. Employee ownership
companies outperform similar companies with conventional ownership. They put
more money in the hands of their workers. For example:
- Better corporate performance. Adjusting for changes in overall industry growth, ESOP companies grow about 2.5 percentage points per year faster in sales, employment, and productivity after they set up an ESOP than would have been expected if they had not set up an ESOP. Other studies have found productivity increases of up to 4-5%, on average, in the year an ESOP is adopted.
- Higher survival rates. A study tracking the entire population of ESOP companies over ten years found that privately held ESOP companies were only half as likely as non-ESOP firms to go bankrupt or close, and three-fifths as likely to disappear for any reason.
- Fewer layoffs. Nationally representative surveys consistently show employee-owners less likely to report being laid off in the previous year. In 2014, the layoff figure was 9.5% for all working adults compared to 1.3% for employee-owners.
- Better employee compensation and benefits. One study found employee-owners earning between 5% and 12% more in median wages compared to employees in matching non-ESOP companies. The same study found that ESOP participants have 2.5 times as much in retirement plans and 20% more financial assets overall than employees of the comparison group of non-ESOP companies. Higher compensation and retirement benefits mean fewer demands on public social services.
- Greater opportunity for young workers. A recent survey, which looked at workers’ economic circumstances over time, compared people age 28 to 34 with employee ownership to their peers without. The study found that those with employee ownership enjoyed 92% higher median household wealth, 33% higher income from wages, and 53% longer median job tenure.
-
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]]>
How to do it? Simple: require that employee ownership be attached to any sort of federal bailout or stimulus package. Companies receiving a bailout or any other form of “corporate welfare” benefits should be required to adopt employee ownership programs such as broad-based stock grants, options, or employee stock ownership plans (ESOPs) so that over time a meaningful percentage of their equity is held by their employees. Such a requirement would begin to provide the foundation for long-term economic security—security that is persistently out of reach for most ordinary Americans.
Academics and other researchers have studied the effects of ESOP ownership over many years, and their findings are remarkably consistent. Employee ownership companies outperform similar companies with conventional ownership. They put more money in the hands of their workers. For example:
- Better corporate performance. Adjusting for changes in overall industry growth, ESOP companies grow about 2.5 percentage points per year faster in sales, employment, and productivity after they set up an ESOP than would have been expected if they had not set up an ESOP. Other studies have found productivity increases of up to 4-5%, on average, in the year an ESOP is adopted.
- Higher survival rates. A study tracking the entire population of ESOP companies over ten years found that privately held ESOP companies were only half as likely as non-ESOP firms to go bankrupt or close, and three-fifths as likely to disappear for any reason.
- Fewer layoffs. Nationally representative surveys consistently show employee-owners less likely to report being laid off in the previous year. In 2014, the layoff figure was 9.5% for all working adults compared to 1.3% for employee-owners.
- Better employee compensation and benefits. One study found employee-owners earning between 5% and 12% more in median wages compared to employees in matching non-ESOP companies. The same study found that ESOP participants have 2.5 times as much in retirement plans and 20% more financial assets overall than employees of the comparison group of non-ESOP companies. Higher compensation and retirement benefits mean fewer demands on public social services.
- Greater opportunity for young workers. A recent survey, which looked at workers’ economic circumstances over time, compared people age 28 to 34 with employee ownership to their peers without. The study found that those with employee ownership enjoyed 92% higher median household wealth, 33% higher income from wages, and 53% longer median job tenure.
- Higher levels of innovation. Companies with broad-based employee-ownership programs are more likely than others to introduce high-engagement, team-based management practices. These practices create more opportunities for idea generation and internal entrepreneurship than conventional top-down management.
As Mr. Cuban has said: “If we are going to bail out firms let’s make sure all their employees benefit from a turnaround.”
Requiring that employee ownership mechanisms be part of any corporate bailout would constitute significant progress towards mitigating income and wealth inequality in the midst of the greatest economic crisis of our lifetimes. Now is our opportunity to act.
Media Contact Jack Moriarty, Executive Director, Employee Owned America
[email protected] or (978) 886-5071
About Employee Owned America:
Employee Owned America is building a bipartisan movement for employee ownership, which has the power to create a prosperous, dynamic, and equitable economy for all. We aim to produce thought leadership and lead the conversation on opportunities to scale employee ownership for every American. Read our full white paper “Turning Americans Into Owners” here.
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]]>made money—and it’s sharing that profit with its 60,000 employees (many of whom
also own stock). The profit share amounts to about an additional six weeks of
pay.
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]]>[Editor’s note: The Washington think tank Center for American Progress (CAP) recently released a report advocating extensive state and local support for employee ownership. What are the best methods? The excerpt published here lists several policies that, if widely implemented, would substantially increase the number of employee owners. This material was published by the Center for American Progress, copyright © 2020. Sources can be found in the original.]
Policymakers
in cities and states across the country are taking action to expand support for
employee ownership. While the renewed interest in these sorts of policies is
encouraging and will likely be expanded to more jurisdictions, there is far
more that policymakers can do to support the growth of employee ownership and
broad-based profit-sharing both in terms of expanding the public’s
understanding of the benefits of profit-sharing and ensuring that government
spending programs are deployed in ways that facilitate the expansion of these
sorts of programs.
Specifically,
CAP recommends that cities and states:
- Establish an office of employee ownership and broad-based profit-sharing
- Use public financing to facilitate ownership conversions
- Encourage government contractors to share ownership and profits with their workers
- Require government-supported tech startups to share equity, profits, or ownership with their workers
Establish
an office of employee ownership and broad-based profit-sharing
Cities
and states can encourage more companies to adopt well-designed sharing programs
by creating an office of employee ownership and broad-based profit-sharing.
Housed in a jurisdiction’s commerce department or economic development
authority, this office would provide outreach and technical assistance to
private sector businesses and workers and serve to improve government knowledge
and support for all types of broad-based sharing.
Successful
sharing programs are not always well understood by the business community or
workers. The benefits and mechanisms for sharing capital broadly with
workers are largely absent from higher education curricula, and companies often
report that they are unaware of the benefits of sharing capital income and
ownership broadly. They thus lack the technical knowledge to evaluate whether
to adopt these programs or how to do so.
However,
employee ownership and broad-based profit-sharing could provide important
benefits to privately held businesses. Recent analysis by Project Equity—a
nonprofit advocacy organization and consultant for companies interested in
selling to their employees—estimates that Baby Boomers nearing retirement own
more than 2.3 million businesses, employing nearly 25 million workers
nationwide. Selling to employees—rather than to a competitor, larger
company, or private equity fund—is one way for these owners to ensure that
local jobs and the legacy of their company are preserved. But few owners know
that employee ownership is a viable option. Additionally, companies are often
unaware of how employee involvement in programs paired with profit-sharing or
gain-sharing can improve business performance.
An
office of employee ownership and broad-based profit-sharing should award
grants—at a maximum value of $500,000 per year—to a university, nonprofit, or a
partnership between these entities. The goal should be to create a center of
employee ownership and broad-based profit-sharing as well as to promote these
sorts of programs among existing business owners and develop this knowledge
among future leaders. To the extent that a similar center already exists in the
state, it would also be eligible for support.
These
centers would promote [...]
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]]>[Editor’s note: The Washington think tank Center for American Progress (CAP) recently released a report advocating extensive state and local support for employee ownership. What are the best methods? The excerpt published here lists several policies that, if widely implemented, would substantially increase the number of employee owners. This material was published by the Center for American Progress, copyright © 2020. Sources can be found in the original.]
Policymakers in cities and states across the country are taking action to expand support for employee ownership. While the renewed interest in these sorts of policies is encouraging and will likely be expanded to more jurisdictions, there is far more that policymakers can do to support the growth of employee ownership and broad-based profit-sharing both in terms of expanding the public’s understanding of the benefits of profit-sharing and ensuring that government spending programs are deployed in ways that facilitate the expansion of these sorts of programs.
Specifically, CAP recommends that cities and states:
- Establish an office of employee ownership and broad-based profit-sharing
- Use public financing to facilitate ownership conversions
- Encourage government contractors to share ownership and profits with their workers
- Require government-supported tech startups to share equity, profits, or ownership with their workers
Establish an office of employee ownership and broad-based profit-sharing
Cities and states can encourage more companies to adopt well-designed sharing programs by creating an office of employee ownership and broad-based profit-sharing. Housed in a jurisdiction’s commerce department or economic development authority, this office would provide outreach and technical assistance to private sector businesses and workers and serve to improve government knowledge and support for all types of broad-based sharing.
Successful sharing programs are not always well understood by the business community or workers. The benefits and mechanisms for sharing capital broadly with workers are largely absent from higher education curricula, and companies often report that they are unaware of the benefits of sharing capital income and ownership broadly. They thus lack the technical knowledge to evaluate whether to adopt these programs or how to do so.
However, employee ownership and broad-based profit-sharing could provide important benefits to privately held businesses. Recent analysis by Project Equity—a nonprofit advocacy organization and consultant for companies interested in selling to their employees—estimates that Baby Boomers nearing retirement own more than 2.3 million businesses, employing nearly 25 million workers nationwide. Selling to employees—rather than to a competitor, larger company, or private equity fund—is one way for these owners to ensure that local jobs and the legacy of their company are preserved. But few owners know that employee ownership is a viable option. Additionally, companies are often unaware of how employee involvement in programs paired with profit-sharing or gain-sharing can improve business performance.
An office of employee ownership and broad-based profit-sharing should award grants—at a maximum value of $500,000 per year—to a university, nonprofit, or a partnership between these entities. The goal should be to create a center of employee ownership and broad-based profit-sharing as well as to promote these sorts of programs among existing business owners and develop this knowledge among future leaders. To the extent that a similar center already exists in the state, it would also be eligible for support.
These centers would promote employee ownership and profit-sharing as well as democratic workplace culture that allows workers a stronger voice on the job by providing education and outreach, technical assistance, training, and even modest grants to small businesses to conduct feasibility studies. Grants would also fund the development of various levels and types of curricula and courses on the topic as well as academic research looking at the effects of profit-sharing broadly and its effects on women, workers of color, and low-income workers. These efforts should prioritize recipients that target assistance to support the retention and creation of businesses in low-income communities.
In order to build knowledge of sharing programs and the impact of outreach, the office would also track various measures—including growth in the number of businesses and workers participating in these sorts of programs, participant demographics, and the effect of sharing programs on the state’s economy.
This concept builds on a successful model for increasing one type of sharing. As discussed above, employee ownership centers in Vermont and Ohio have successfully increased awareness and facilitated the conversion of small- and medium-sized businesses to an employee ownership structure. For example, a 2013 report found that the Ohio Employee Ownership Center has assisted about 15,000 employees in the purchase of all or part of their respective companies, adding an average of $40,000 to their individual wealth.
While several cities and states have recently funded new centers focused on ESOPs and worker cooperatives, state and local officials should also promote the benefits of stock ownership and profit-sharing in order to ensure that workers at larger companies enjoy the benefits of broad-based sharing programs. They should also support low-cost options such as employee ownership trusts that make sense for smaller companies.
Finally, the office of employee ownership and broad-based profit-sharing should help improve governmentwide support for employee ownership and profit-sharing programs. The office should serve as an advocate for improving government knowledge and support for well-designed, broad-based sharing. It should also increase awareness of how agency programs affect companies with sharing programs and promote the legislative or regulatory changes necessary to ensure that government policies encourage the adoption of existing and emerging sharing programs.
For example, these offices should evaluate the effects and total cost of providing additional tax incentives to business owners selling to an ESOP as well as how the government should promote and potentially regulate new forms of sharing—such as employee ownership trusts (EOTs)—and make recommendations on whether to pursue new policy in these areas.
Use public financing to facilitate ownership conversions
Employee ownership structures—including worker cooperatives, ESOPs, and now EOTs—are most frequently adopted by small businesses. According to the National Center for Employee Ownership, nearly 60 percent of ESOPs nationwide include 100 or fewer employees. Moreover, the ongoing wave of Baby Boomer retirements provides a significant opportunity to convert thousands of businesses.
Several cities and states help fund feasibility studies and transition plans for existing businesses, but policymakers should also ensure that businesses have access to sufficient capital to sell to their employees. For example, at the federal level, Congress recently enacted Sen. Kirsten Gillibrand’s (D-NY) Main Street Employee Ownership Act to ensure that small businesses selling to an ESOP or worker cooperative are able to access a U.S. Small Business Administration loan guarantee program.
Additionally, as discussed above, the city of Newark and the Newark CEDC are going further to target local business owners who are nearing retirement. The CEDC will finance not only the cost of hiring an independent trustee and appraiser, but also—in partnership with commercial lenders and private investors—the acquisition of the business by the ESOP trust.
The program should allow the CEDC as well as partnering investors to secure a moderate return on the investment while delivering cash at sale to selling owners and allowing them to avoid business broker fees. After a sale, the company will be required to train workers on their new roles as owners as well as the benefits of ownership. While the program is in its earliest stages, it is working with a handful of midsize companies on executing a sale to an ESOP.
Cities and states should ensure that all existing loan guarantee and loan programs aimed at supporting small businesses and economic development in the jurisdiction are available to firms transitioning to an employee-owned structure. In addition, cities and states—in partnership with the state or local economic development authority—should consider adopting Newark’s more active investment model.
Encourage government contractors to share ownership and profits with their workers
State and local governments finance millions of jobs across the U.S. economy with the hundreds of billions of dollars that they spend each year to purchase goods and services. Yet, jobs created through government contracting are often substandard, paying very low wages and involving poor working conditions.
Some governments have developed ways in the contractor selection process to give extra consideration to employers that create good jobs. Basing bidders’ scores in part on the quality of workplace practices, as well as other comprehensive criteria, can increase the likelihood that companies with better practices will win contracts and help motivate companies to improve their working conditions.
Government agencies frequently evaluate bidders’ proposals based on the strength of their technical ability and past performance record as they seek contractors that will provide the best value for the taxpayers—not simply the lowest price. They should use the same type of system to evaluate contractors on the quality of their workplace practices. Government agencies should give significant weight to those employers that provide decent jobs, including those that pay market wages, provide benefits, and share profits with their employees.
Incentives can potentially play a useful role in improving job standards beyond the contracted workforce and can reward employers that successfully create quality jobs.
Cities and states can encourage employers to improve job standards broadly by evaluating job quality across a bidder’s entire workforce that is located within the jurisdiction rather than evaluating only standards for contracted workers. While this sort of evaluation is not without precedent, state and local policymakers should nonetheless carefully consider the criteria for measuring work quality.
As discussed above, 36 states have adopted benefits corporation laws that require third party evaluations of qualifying companies’ workplace practices. Cities including El Paso, Texas, and San Jose, California, already consider the quality of jobs provided by a contractor when determining a winning bidder. Similarly, California and Texas are debating legislation that would provide a contracting preference for companies that workers own through an ESOP.
Finally, policymakers should ensure that a firm’s status as an ESOP does not preclude it from qualifying for contracting set-aside programs. Rules governing contracting set-asides for minority-, women-, and veteran-owned businesses should ensure that employee-owned companies are able to access these programs by counting each stock trustee and plan member as an owner.
Require government-supported tech startups to provide their employees equity
State and local governments frequently promote entrepreneurship and the growth of innovative startups through various types of economic development subsidies and assistance. These incentives can include grants, direct loans, support for private venture capital companies, and tax benefits for companies and investors.
For example, New York’s START-UP NY program allows growing businesses to partner with eligible university or college campuses and to operate tax free for 10 years. And Massachusetts’ MassVentures was formed in 1978 as a quasi-public venture capital firm to provide early-stage funding as well as grants to startups working to commercialize a product.
This early-stage seed funding often represents a relatively high-risk venture and is granted in cases when obtaining government support is essential to a firm’s survival. Many of today’s leading technology and biotechnology firms—such as Google, Apple, Tesla, Symantec, and MedImmuneC—were recipients of government support in their early years.
Tech startups pioneered the use of stock ownership programs in the mid-20th century as a way to reward all employees upon a company’s sale, but companies such as Intel, Hewlett-Packard, Science Applications International Corporation, Apple, Microsoft, and Google broadened the application of these programs over the next three decades to ensure that all employees were oriented toward the success of the company.
Yet, many tech companies have abandoned this practice in recent years, offering stock ownership to a much smaller sliver of top talent. For example, one study found that from 2002 to 2010, the portion of workers in the computer services industry benefiting from employee stock options fell by nearly 70 percent.
In order to help reverse this trend, whenever a government provides at least $1 million in assistance to a company, the recipient should be required to share profits or ownership with its workers when the company goes public or is sold to another firm. Companies should be required to demonstrate that the value expended on the top 5 percent of employees is equal to the amount spent on the bottom 80 percent of workers at the time of sale or public offering.
Recipients could comply with this requirement by setting up broad-based incentive programs with an ongoing awards system through grants of restricted stock unions, stock options, or an employee stock ownership plan. Alternatively, they could fulfill these requirements at the point of going public or a private sale, with the award of unrestricted stock with full voting rights or cash profit-sharing.
Government assistance can include grants, loans, loan guarantees, access to government-developed technology, and even tax incentives. Support would be measured cumulatively; a company receiving $1 million in assistance from multiple programs or at different phases of development would be required to meet these profit-sharing requirements.
While attaching a profit-sharing requirement to economic development subsidies would break new ground, many tech companies embrace broad-based equity programs and would likely already comply under this policy.
Conclusion
Employee ownership and broad-based profit-sharing programs can help to ensure that workers are rewarded for the wealth they help create, close racial wealth disparities, and strengthen local economies. While less than half of working Americans benefit from these sorts of sharing plans, state and local policymakers are increasingly interested in supporting their growth. In order to do so, cities and states should adopt policies to ensure that companies know about the benefits of sharing and that government spending programs are deployed in ways that facilitate the expansion of these sorts of programs.
Karla Walter is the director of Employment Policy at the Center for American Progress.
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