Profit Sharing: Labor's New Opportunity

This Labor Day, American workers want two things: more pay and some concrete evidence that their incomes could rise. According to recent Labor Department data, civilian labor costs rose this past spring at the smallest rate in three decades, only 0.2% for wages and salaries. Having been faced with stagnating wages for 30 years now, workers are not in the mood to hear about reforms or programs or policies from economists and politicians that will take years or decades to implement and are pipe-dreams. Wage stagnation for the middle class is now the iconic economic reality of our society, and workers want solutions now. Cash profit sharing, led by private sector businesses, is one possible solution that could be implemented immediately.

Hillary Clinton recently brought profit sharing into the spotlight when she proposed two years of tax credits for more American businesses that implement broad profit sharing plans over the next decade. Implementing these tax incentives will be an important step, but we do not only have to wait for government policies - businesses can choose to share profits now, and workers can now begin to create demand for profit sharing as part of a national recognition that worker shares are an economic necessity. If one's employer commits to a cash profit sharing plan this year and profit goals are met, workers can have more money in their pockets next year, on top of their fixed wages. Cash profit sharing requires no fancy far-reaching complicated reform of the entire economic system, no impossible attempt to bring together Republicans and Democrats, and no new giant government programs. The idea has immediacy and it has clarity. If one stops ten citizens on the street and asks for a definition of cash profit sharing for labor, a majority will provide a solid and clear working definition. If citizens create some serious demand for profit sharing, government policies are more likely to take root in the future.

What would it take to turn America into a profit sharing economy? First, labor - individual workers, company workforces, unions, and job candidates - must go first and bring up profit sharing. Individual workers separately and company workforces as a whole must approach their managers and firms to ask if cash profit sharing can be considered. Most people will know at least one example of a friend, family member or local company where profit sharing has been practiced. It is time to dig up, question, and talk about those examples. When these conversations happen passionately and nationwide, it will create a grassroots demand for managers to explore the idea and start internal discussions about it. This is change one company at a time. Where companies have unions, union leaders can begin discussions with company management about the role of cash profit sharing or its related cousin, gain sharing, (where workers share the gains from achieving a particular departmental goal) in its next labor contract. Unions have a long history and a lot of experience negotiating profit sharing. Every worker interviewing for a job should ask a question about the possibility for cash profit sharing, from college student interviewees to middle age and older adults who are changing jobs. An economy where there is strong demand from the grassroots for cash profit sharing is an economy where managers, business owners and boards of directors will start discussing the idea, and then seeking out knowledge from conferences, their local Chamber of Commerce, and others in their network.

Next, management -- small business owners, top and middle managers, startup entrepreneurs, CEOs and members of boards of directors of larger companies -- need to seek out companies that share profits, and explore what makes them successful. Profit sharing is good business and it can pay for itself if done correctly. Management will ultimately implement cash profit sharing because it is good for both the business and for the workers. As managers look to profit sharing companies to benchmark their own plans, they will typically find evidence of this, but every industry will do profit sharing in its own unique way. In my visits to companies, I have learned that executives are already deeply familiar with the concept of sharing a piece of the action of improved company performance. Many have personally experienced the motivational impact of knowing one will have a meaningful share of profits for increasing the value of the company. Management needs no education on the basic concept. They need current examples to learn from and emulate and other managers with whom to speak.

The stand-out national problem we have today is that in recent decades, profit sharing examples in industry have declined and fallen out of media attention. Profit sharing was commonplace in the first half of the 20th century, but several decades of strong post-World War II growth persuaded many American managers that regular wage and benefit increases could effectively share the wealth with the workforces. There was a revival after 1940 by both union and non-union firms, but the Federal Government did not make it an ongoing top priority to strongly encourage profit sharing. As time passed, with less profit sharing in the overall economy, managers lost all the networking connections that encouraged them in the first place: the pressure to keep up with competitors to implement their own profit sharing plans; the business advisors to help set up these plans; the fellow managers across town who could share their experiences. Now is the time for every business owner, manager, and board member to find another company practicing cash profit sharing successfully and visit them to explore the possibility. Local universities and colleges can study these cases and make themselves available. There are examples in nearly every industry according to various newspaper reports: from industry giants like Procter & Gamble and Southwest Airlines to smaller, regional companies like York, Pennsylvania kitchen cabinet supplier The Wolf Organization, Santa Fe's El Ray Inn, and New England grocer Market Basket.

Both labor and management can lead the renaissance of the profit sharing economy, and they can start today, but that too is simply not going to be enough. The crisis of labor not receiving its fair share is so extreme that there is now a compelling role for government to help examples multiply in the short term. Just as tax incentives for electric cars and residential and commercial solar panels have helped seed those ideas across the country until they gained wider acceptance, cash profit sharing can benefit from a little push so that companies will at least consider the idea. Hillary Clinton's recent proposal is a start. The decade of two-year per company tax credits she proposes would significantly jumpstart the consideration of profit sharing by companies of all sizes. We need a Federal policy on profit sharing to help industry voluntarily consider a move in this direction, and it's time for more Congressional leaders and presidential candidates to take a stand on profit sharing and join the conversation Mrs. Clinton has started.

Like any idea, cash profit sharing is not a panacea and it has its qualifiers. First, research shows that profit sharing can increase productivity, improve corporate performance and even pay for itself by growing the pie bigger, but only if it is part of a more participative corporate culture with training for workers who need the right skills to figure out how to make the firm more valuable. Cash profit sharing adds to worker income and wealth, but only if it is on top of, and not a substitute for, current wages. Further, profit sharing is not the only option available. Some companies, especially stock market companies, will prefer to grant shares of stock, as in Employee Stock Ownership Plans (ESOPs) and other share plans, rather than shares of profits, to workers. Closely-held businesses that are also close to their workforces and want to maintain ownership control tend to favor cash profit sharing over stock sharing plans.

All of these elements could become part of the new profit sharing economy. This is no impossibility. Recently, Southwest Airlines shared $355 million of more than $1 billion in profits with all of its union and non-union workers. Profit sharing is common in the big auto companies and with many small family businesses that the media never talks about. What is needed is a national discussion of profit sharing's benefits and potential, so that more and more companies will consider profit sharing at meaningful levels. Cash profit sharing is not the only solution to flat wages. Low wage workers desperately need a minimum wage, and all workers need their basic rights protected at work. On this Labor Day, the profit sharing opportunity is a practical policy that labor, management, and politicians can discuss and begin to practically explore.

Blasi is the J. Robert Beyster Distinguished Professor at Rutgers University's School of Management and Labor Relations. His book, The Citizen's Share, (Yale University Press, 2015) written with Harvard's Richard B. Freeman and Rutgers colleague Douglas L. Kruse, is an American history of the profit sharing and the broad-based employee share ownership idea.