The Argument for Profit Sharing

03/16/2015 07:55 pm ET | Updated May 16, 2015

It has been widely reported in the media for several weeks that the Democratic Party is considering support for profit sharing in American business as part of an "inclusive prosperity" theme in the coming election. Encouraging profit sharing with workers must be a top national economic priority. This is because profit sharing is a sensible response in an economy where wages have been mostly flat for decades, where income is flowing mostly to the top of the economy, and where wealth is highly concentrated. The critical question is whether politicians and policy-makers and the public can actually be persuaded by the arguments for encouraging profit sharing.

If these groups do not understand and accept the reasoning for meaningful profit sharing, it will simply never happen. There will be little passion and practical support for the idea in the living rooms of citizens, the board rooms of CEOs, the sitting rooms of elected officials, and the email inboxes of thought leaders and journalists. With increasing agreement across the political spectrum that the middle class is in a deep irreversible economic crisis that the formal end of the Great Recession is not going to solve, the stage has now been set for a national conversation and perhaps a national debate about profit sharing. Let's examine the principal arguments.

What does profit sharing practically mean? Cash profit sharing is when a firm tells the workers employed there that the workers have the future opportunity to receive a meaningful share of the company's pre-tax profits in cash as an incentive to make the enterprise more successful. Every quarter workers receive a check that they can immediately cash which supplements their wages and salaries. Southwest Airlines just announced that the airline shared $355 million with all of the workers out of a $1.4 billion total profit for all of 2014. This amounted to almost 10 percent on top of workers' wages or five weeks of extra pay.

To be clear, shareholders received 77 percent of the profits, although, by the way, the shareholders included Southwest's workers as investor capitalists with four percent broad-based ownership of shares in the hands of the workforce. Managers educate the workforce on what profit sharing means and strive to create a culture that involves employees in solving important company and customer problems. Congress can get involved by figuring out how to encourage every company to at least seriously consider voluntarily doing profit sharing. This can only happen nationally if a president makes a strong national argument for profit sharing as a necessary part of economic policy.

Fairness is the all-embracing argument for widespread profit sharing. From 1948 to 1973 according to the Economic Policy Institute, productivity went up about 97% and typical hourly compensation went up about 91 percent. However, from 1973-2011, productivity went up about 94 percent while typical hourly compensation only went up about 9 percent. This is unfair and no economy can sustain itself into the future with so little of the economy's prosperity being widely shared. Most new wealth is going to the investors who provide capital to businesses who are rapidly investing in technology and robots and other efficiencies.

One stunning indication of the returns to capital is that 86 percent of all capital gains and also all capital income such as interest and dividends in the entire economy in 2011 was paid to the richest 20 percent income group in the country. Since most workers are dependent mainly on wages and are not the investors or shareholders who put up the capital for the development of new businesses or technologies, the average middle class worker simply does not share in this prosperity. This is where profit sharing comes into play.

Providing American companies a practical approach to share is another argument for profit sharing. Pointing out that the middle-class circumstance is unfair is vastly different than judging that every firm or every manager are themselves unfair. Maybe companies also need a way out of the wage stagnation dilemma. With the collapse of the post-World War II wage system for sharing prosperity in the country, most businesses, unlike Southwest Airlines and a few similar companies, have evidently not figured out a workable mechanism for sharing new prosperity on top of wages. Profit sharing had long ago fallen out of the corporate memory and popular discussion in the U.S. Now it is time to bring it back.

While there are certainly corporate leaders who want to share as little as possible with workers, American enterprises are operating in an overarching set of new circumstances that helped lead them into the current dilemma of wage stagnation. Globalization of production, open trade, and the decline of unions have stoked raging competitive fires and dampened fixed wage growth in the U.S. Technology increasingly replaces the armies of workers that the old economy used to hire to carry things, build things, sell things, design things, and talk to customers. Widespread cash profit sharing can provide thoughtful business leaders with precisely that new mechanism to include more workers in sharing the expanding productivity of companies. Entrepreneurs in small and large family businesses, who are often closer to the workers than some executives in mega-companies, are generally sympathetic to the idea of profit sharing. Elected officials need to figure out a way to give every businessperson a strong reason to seriously consider implementing profit sharing.

The most level-headed argument for profit sharing has to do with the core values of personal responsibility and meritocracy that should go to the heart our economic system, if we really practice the value of individual and team achievement that we often preach. Profit sharing is not a hand out by companies. It is not an unmerited benefit. It is not corporate welfare. Cash profit sharing, as in the Southwest case, is paid, after the profits are made, and after the corporate performance has already been demonstrated and achieved, and after shareholders and investors have received a large share of the pie. It is a solution to the "inclusive prosperity" problem that is in tune with the "reward for performance" values espoused by many business, economic, and political leaders. No other proposed solution to the middle-class dilemma meets this clean political and ideological test of being based on performance and merit, and expanding the wealth pie.

Another argument comes from research. Over a hundred years of studies lead to one clear-cut conclusion. On average the promise of cash profit sharing increases the performance of companies as long as there is basic fair treatment of workers and realistic levers for workers to make improvements. A few economists have wrongly claimed that in an efficient market economy if a company provided a 10 percent increase in compensation to workers through cash profit sharing every year, the same firm would have to cut workers fixed wages by 10 percent each year. The notion is that there is a compensation budget that is hard and fixed. Such wage cuts have never happened at Southwest Airlines in the company's 41 consecutive cash profit sharing payments. So, is economic thinking wrong or is Southwest an aberration? Neither. Since cash profit sharing is a reward for new performance, workers earn it by potentially increasing the size of the pie. No bigger pie, no cash profit sharing. Studies indicates that most managers do not cut workers' pay when they offer cash profit sharing. If they did, profit sharing would certainly be a terribly unfair idea and those workers would be attracted to the fairer firms.

Profit sharing appeared in American industry in the 1880's as influential trailblazers began to see large and fabulous profits from industrialization. Practical CEOs, some motivated by the Social Gospel, such a William Cooper Procter of Procter & Gamble in Cincinnati, and George Eastman of Eastman Kodak in Rochester, and Charles Pillsbury of the Pillsbury mills in Minneapolis, perfected the idea and publicized their experience widely in the press. The concept had a heyday in the early 20th century and then after World War II, with the input to profit sharing designs by many business associations and unions at the time.

The post-war boom led many to believe that wages would never stagnate again. In retrospect, that was simply wrong. In the last half century, Federal policy-makers and political leaders have almost completely lost their memory and their focus on profit sharing, and the policies and mechanisms to support and encourage it have become stale, out-of-date, and insignificant in the economy. When is the last time you remember hearing an American President talk about worker shares in companies? That used to happen. It was a theme of one of Theodore Roosevelt's major addresses to Congress! Today, according to the General Social Survey, about a quarter of workers receive some form of profit sharing but the amounts are extremely thin for most and fall far short of the 10 percent on top of wages that Southwest shares.

It is now time to turn the nation towards a profit sharing economy. Profit sharing is an idea that is widely appealing to the average citizen regardless of political affiliation. It may be one of the best inclusive prosperity ideas out there. We need a determined effort to design new government policies to encourage profit sharing as part of a much wider national conversation about worker shares. Profit sharing's time has come.

Joseph Blasi tells the American history of shares in The Citizen's Share, written with colleagues Douglas Kruse and Richard Freeman. He is the J. Robert Beyster Professor at Rutgers and a visiting fellow in the sociology department at Princeton University.