According to this week’s release from the commerce department, the US economy has been growing at its fastest pace in almost 40 years. Corporate profits are their highest in 70 years. And the stock market, although gyrating wildly of late, is still scoring record gains.
So why do most Americans remain gloomy about the economy? Mainly because their real (inflation-adjusted) wages continue to go nowhere.
Steeply-rising profits, economic growth and stock market highs – coupled with near-stagnant wages – has been the story of the American economy for decades. Most economic gains have gone to the top.
So why not share the profits?
Profit-sharing was tried with great success in the early decades of the 20th century but is now all but forgotten. In 1916, Sears, Roebuck & Co, then one of America’s largest corporations with more than 30,000 employees, announced it would begin to share profits with its employees, giving workers shares of stock and thereby making them part-owners.
The idea caught on. Other companies that joined the profit-sharing bandwagon included Procter & Gamble, Pillsbury, Kodak and US Steel.
The Bureau of Labor Statistics suggested profit-sharing as a means of reducing “frequent and often violent disputes” between employers and workers. Profit-sharing gave workers an incentive to be more productive, since the success of the company meant higher profits would be shared. It also reduced the need for layoffs during recessions because payroll costs dropped as profits did.
By the 1950s, Sears workers had accumulated enough stock that they owned a quarter of the company. And by 1968, the typical Sears salesperson could retire with a nest egg worth well over $1m, in today’s dollars.
The downside was that when profits went down, workers’ paychecks would shrink. And if a company went bankrupt, workers would lose all their investments in it. The best profit-sharing plans took the form of cash bonuses that employees could invest however they wish, on top of predictable wages.
But profit-sharing with regular employees all but disappeared in large US corporations. Ever since the early 1980s when corporate “raiders” (now private-equity managers) began demanding high returns, corporations stopped granting employees shares of stock, presumably because they didn’t want to dilute share prices. Sears phased out its profit-sharing plan in the 1970s.
Yet, just as profit-sharing with regular employees disappeared, profit-sharing with top executives took off, as big Wall Street banks, hedge funds, private equity funds and high-tech companies began doling out huge wads of stock and stock options to their MVPs.
The result? Share prices and chief executive pay (composed increasingly of shares of stock and options to buy stock) have gone into the stratosphere, while the wages of the typical worker have barely risen.
Researchers have found that before…
Read More: Share the profits! Why US businesses must return to rewarding workers