growing the wealth

7/28/2019 Growing the Wealth

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EMBARGOEDNOT FOR DISTRIBUTION OR CITATION

Growing the WealthHow Government Encourages

Broad-Based Inclusive Capitalism

David Madland and Karla Walter April 2013

WWW.AMERICANPROGRESS.O


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EMBARGOEDNOT FOR DISTRIBUTION OR CI TATION

Growing the WealthHow Government Encourages

Broad-Based Inclusive Capitalism

David Madland and Karla Walter April 2013

Cover photo: Airline workers celebrate receipt o $111 million in prot-sharing checks Wednesday, Feb. 14, 2007, atHoustons Bush Intercontinental Airport. (AP Photo/Pat Sullivan)


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EMBARGOEDNOT FOR DISTRIBUTI ON OR CITATION

Contents 1 Introduction and summary

7 Inclusive capitalism 101

11 History of American policies promoting inclusive capita

21 Policy mechanisms

41 Conclusion


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| www.americanprogress.Introduction and summary | www.americanprogress.

Introduction and summary

American companies use a variey o nancial incenives, rom broad-based pro

sharing and sock opions o worker cooperaives and employee sock ownership

plans, o reward heir employees wih a porion o he wealh hose workers help

generae. Tis kind o compensaion goes well beyond simply paying wages or

providing individual incenives, bu raher involves graning workers ownership

sakes in he company or a share o is pros based on workers collecive peror-

mancea concep we describe as inclusive capialism.

Inclusive capialism, when parnered wih democraic workplace pracices, has

a proven record o helping workers and businesses alike in a myriad o ways.

Addiionally, i is an economic philosophy ha can draw biparisan suppor. Ye

policy o advance inclusive capialism has no been par o he naional dialogue

or quie some ime.

Te purpose o his repor is o change his dynamic and jump-sar a policy con-

versaion aimed a promoing inclusive capialism. While we do no advocae or

specic policy changes in his repor, our hope is ha i will spark dialogue among

policymakers and advocaes abou how inclusive capialism can help address some

o he mos undamenal problems acing our economy; wha governmen can do

o encourage employers o use i more; and how o ensure ha inclusive capial-

ism is done righ so workers can enjoy he upsides o broad-based sharing and

having an increased say on he job wihou being exposed o undue risk.

Inclusive capialism is by no means a new or rare phenomenon in he Unied

Saes. Companies and workers have praciced inclusive capialism since he

ounding o our naion.1 oday almos hal o U.S. workers receive some sor o

inclusive capialism compensaionhough in mos rms is use is quie limied.2

Companies pracicing broad-based inclusive capialism range rom unionized

American seel manuacurers and air carriers o leading echnology rms o

growing, socially minded companies. Te Unied Saes Seel Corporaion, or


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2 Center or American Progress | Growing the Wealth

example, pays quarerly cash pro-sharing paymens o is unionized workorce,

while a signican porion o Souhwes Airlines sock is owned by is employees.3

Likewise, he high-ech rm Inel Corporaion rewards is employees wih boh

cash pro sharing and broad-based sock ownership hrough resriced sock and

sock opions.4 And hen here are he socially minded companies such as he ea

and coee purveyor Equal Exchange and he beer maker New Belgium Brewingha are boh employee-owned, he ormer hrough a worker cooperaive and he

oher hrough an employee sock ownership plan.5

A is bes, inclusive capialism aligns he ineress o workers and employers in

ways ha bene boh paries. Workers are respeced and compensaed or heir

conribuions oward he rms success. Firms bene rom increased worker pro-

duciviy, greaer worker saisacion, and employees wih he drive o sugges and

make changes o improve company perormance.

Consequenly, inclusive capialism can improve company perormance whilea he same ime improving worker wellbeing. As such, hese programs are no

abou redisribuing wealh bu abou creaing addiional wealh shared beween

American workers and businesses.

Sudies o inclusive capialism bear his ou. For boh lower- and middle-income

workers, inclusive capialism is associaed wih higher pay, expanded benes and

greaer job securiy, paricipaion in decision making, rus in he company and

managemen, and beter labor-managemen relaions.6

For businesses, inclusive capialism is oen associaed wih increased produciviy

and proabiliy and a greaer likelihood o corporae survival. In addiion, com-

panies bene rom greaer worker loyaly and eor, lower urnover raes, and

an increased willingness on he par o workers o sugges innovaions.7 Looking

specically a one ype o inclusive capialismemployee sock ownership plans,

or ESOPsDouglas Kruse, proessor and direcor o he docoral program in

indusrial relaions and human resources a Rugers Universiy, ound ha produc-

iviy improved by 4 percen o 5 percen on average in he year o ESOP adopion

and coninues aer adopion, more han doubling he rae o annual produciviy

growh o he U.S. economy over he pas 20 years.8


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Introduction and summary | www.americanprogress.

Anoher sudy examining he eecs o sock opions ound ha companies ha

oered opions broadly o heir employees showed signican improvemens in

heir rms operaing perormance. 9

Invesors also come ou ahead when companies adop capial-sharing programs.

Companies and invesors ha adop parnership approaches make pros overand above he cos o sharing ownership wih employees, according o a review o

more han 70 empirical sudies.10

Finally, inclusive capialism in he orm o worker-ownership is oen hough o

bene democracy by giving workers a real, paricipaory role in heir work lie

ha can ranslae ino heir civic lie.11

In shor, inclusive capialism can encourage compeiion and pro-seeking

behavior ha can bene invesors, managers, and workers, which is why he

concep has atraced believers o all poliical sripes. Former Presiden RonaldReagan called hese sors o programs Peoples Capialism and argued ha he

energy and vialiy unleashed by his kind o Peoples Capialismree and open

markes, robus compeiion, and broad-based ownership o he means o produc-

ioncan serve his naion well.12

Similarly, he liberal icon Sen. Huber Humphrey Jr. (D-MN) called capial shar-

ing one o he win pillars o our economy.13

No only can inclusive capialism help workers and business and draw biparisan

suppor, bu i has he poenial o address a leas parly some o he mos unda-

menal problems acing our counry: weak economic growh, excessive specula-

ive economic aciviies ha ail o build socieal wealh, high unemploymen,

sagnan worker compensaion, and he dramaic dierences in income and wealh

beween he sruggling middle class and he very rich.

oday policymakers coninue o suppor inclusive capialism. A biparisan lis

o advocaes ranging rom Sen. Bernie Sanders (I-V) and Rep. Chaka Fatah

(D-PA) o Sen. Kelly Ayote (R-NH) and Rep. Dana Rohrabacher (R-CA) sepa-

raely inroduced legislaion in he 112h session o Congress o expand govern-men suppor or inclusive capialism.14 Bu only he mos modes o hese bills

received any legislaive acion and inclusive capialism has no ye become a par

o he larger naional debae on how o address he naions economic problems.

Inclusive capitalin the orm o

worker-ownersh

is oten thought

beneft democr

by giving worke

a real, participat

role in their wor

lie that can

translate into th

civic lie.


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Despie his across-he-board suppor or he concep o wealh sharing, ar oo

ew workers enjoy he benes o broad-based sharing programs. More han hal

o American workers do no have access or choose no o paricipae in inclusive

capialism programs and mos paricipaing workers receive only very modes

amouns o income rom hese programs.15

Whas more, sharing programs are someimes implemened in ways ha ake advan-

age o workers. On occasion companies have implemened sharing programs ha

expose workers o excessive risk, using he programs as a subsiue or good wages

and benes or providing heir workers litle say on he job. Neiher workers nor

rms bene rom inclusive capialism when workers are marginalized.

Research suggess ha he mos successul broad-based sharing programs are

hose in which workers have a high level o rus o managemen, are paid wages a

or above he marke rae, and have a high level o job securiy and involvemen in

decision making over heir work a he job and deparmen level.16 A recen sudyo 780 companies employing more han 300,000 workers conrms ha he bes

resuls happen when broad-based inclusive capialism is combined wih a suppor-

ive company culure.17

Ye oday mos companies provide generous incenive pay only o op execuives

providing rewards or he shor-erm success o he company.18 While srong

evidence suggess ha providing workers wih a sake in a rms perormance

leads o good resuls or boh he rm and he workers, paying execuives based on

company perormance has a very mixed record and is a major cause o he grow-

ing income gap beween he middle class and he op 1 percen.19

Governmen should do more o limi excessive op execuive pay and ensure ha

incenive pay or corporae execuives encourages decision making o suppor he

long-erm, susainable growh o he company. Te Cener or American Progress

has recommended closing loopholes in he ax code ha allow rms unlimied

deducions on execuive compensaion in he orm o incenive-based pay.20

Similarly, Germany passed a law in 2009 reining in excessive execuive compen-

saion, which included provisions sipulaing ha managemen boards should

reduce execuive compensaion when companies perorm poorly and requiringha incenive compensaion be deermined based on longer-erm perormance.21


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Introduction and summary | www.americanprogress.

While he debae surrounding reining in execuive pay has received a good deal o

atenion, how o encourage real broad-based sharing has no been included in his

conversaion and ouside he personal knowledge o a narrow group o expers,

litle inormaion is available or ineresed paries seeking o undersand he

relevan policy issues.

Te purpose o his repor is o provide baseline knowledge ha is essenial o

creaing a broad discussion abou inclusive capialism policy. o help achieve his

goal, he repor describes he ypes o inclusive capialism ha rms currenly

pracice and briey reviews he hisory o ederal policy in his area.

Mos imporanly, our repor caalogs exising governmen policies ha suppor

inclusive capialism programs providing one-sop shopping or hose seeking

o undersand wha governmens are doing in his area. Boh ederal and sae

governmens have a long hisory o supporing inclusive capialism programs

wih policy mechanisms ha range rom ederal ax incenives o sae echnicalassisance programsbu hese eors have no been compiled in a comprehen-

sive way.

Addiionally, we highligh some key quesions abou how exising inclusive capi-

alism policy is working and he challenges o ensuring ha inclusive capialism

helps all workers. Addressing hese quesions will be imporan or any uure pol-

icy developmen. Lasly, we discuss he poenial o inclusive capialism o address

a leas parly some o he mos undamenal problems acing our economy.

Tis repor is an iniial analysis o he curren policy landscape supporing inclu-

sive capialism. We hope ha i helps provide a pah orward or policymakers o

suppor broad-based and susainable capial-sharing programs.


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| www.americanprogress.Inclusive capitalism 101 | www.americanprogress.

Inclusive capitalism 101

Te privae secor has adoped a variey o programs o share capial owner-

ship and capial-relaed income wih heir workers. Tese pracices range rom

employee sock-ownership plans and worker cooperaives, which allow work-

ers an ownership sake in he company, o cash-based pro- and gain-sharing

programs, which pay workers a porion o he capial-relaed income hey helped

generae bu do no gran ownership.

Te connecion beween all ypes o inclusive capialism is ha hey compensaea broad base o workersno jus op execuiveson he basis o group peror-

mance raher han individual perormance. Some o hese programs undamen-

ally change workers relaionship wih heir employer and provide signican

capial paymens, while ohers have airly modes eecs on workers.

Wha ollows is an overview o he various ypes o inclusive capialism ha U.S.

rms currenly pracice ollowing he caegorizaions oulined in he bookShared

Capitalism at Work: Employee Ownership, Prot and Gain Sharing , and Broad-Based

Stock Options, edied by Douglas Kruse, Richard Freeman, and Joseph Blasi and

published by he Universiy o Chicago Press in coordinaion wih he Naional

Bureau o Economic Research.22

Employee ownership:Employee ownership reers o relaionships where employ-

ees own shares o heir company. Te exen o ownership ranges rom workers

having complee ownership o a rm o a minoriy sake, which is usually managed

hrough a rus or anoher legal eniy.

Worker cooperatives:Co-ops are ypically sared by ideologically afliaed

workers and are owned and democraically conrolled by heir member-owners.Co-op members elec heir board o direcors rom wihin he membership.

Cooperaives pay axes on income kep wihin he co-op or invesmen and

reserves bu no on any surplus revenues ha are reurned o individual mem-

bers who pay axes on ha income.


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Employee stock ownership plans:ax-qualied employee bene plans ha,

wih some excepions, oer workers an ownership sake in heir company wih-

ou having o spend heir own money o purchase sock. ESOP companies se

up a rus und ino which hey conribue new shares o is own sock or cash

o purchase exising shares.23 When workers reire or leave he company, hey

receive heir sock, which he company mus buy back a is air marke valueunless he worker is able o sell i in he public marke.24

Te ESOP rus may also borrow money o buy shares, wih he company mak-

ing paymens o he ESOP rus in order o repay he loan. Privae companies

ypically use leveraged employee sock ownership plans o buy ou company

ounders and oher shareholders.25 Tese bene plans can be adoped by boh

public and privae companies.

Individual employee stock ownership:Workers buy or are given shares rom heir

employer and are oen able o voe hose shares privaely.

Employee stock purchase plans:Employers subsidize he purchase o socks

ouside o he reiremen sysem, ypically oering workers sock a a 10 percen

o 15 percen price discoun, usually a he lower price over an oering period

o hree monhs o as many as 27 monhs.26 Enrolled employees buy company

shares wih aer-ax conribuions deduced rom heir paychecks over he

course o he oering period.

401(k) plans with ownership of company stock: Reiremen plans in which

workers and companies make preax conribuions rom heir pay o buy company

sock or he company gives employees company sock as a mach o employee

conribuions. Te governmen has increasingly scruinized 401(k)s wih inves-

mens in employer sock as hese plans have become he primary reiremen

vehicle or many workers. Te governmen has made a number o changes o

regulaions in order o encourage invesmen diversiy.27

Profit sharing:Paymens can be eiher in cash (such as annual cash bonuses) or

employer conribuions o sock, bu paymens are a specied share o he pros

when he rm makes money. Pro sharing becomes employee ownership whenpros are received in he orm o sock.

Cash plan:Conribuions, known as sock grans, are paid direcly o employees

a he ime pros are deermined in he orm o cash or sock. Te award is


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Inclusive capitalism 101 | www.americanprogress.

axed as ordinary income.28 In he case o sock grans, wha is received becomes

employee ownership.

Deferred plan:Pro-sharing conribuions are no paid ou immediaely bu are

insead placed in individual, ax-qualied reiremen accouns or each employee

where invesmen earnings accrue ax-ree unil wihdrawal. Paymens ino heseplans, however, need no be based on he employers curren or accumulaed

pros.29 Benes are disribued a reiremen, deah, disabiliy, or someimes a

separaion rom service.

Combination plan:Allows plan paricipans he opion o deerring all or a par

o he pro-sharing allocaion.

Gain sharing:Workers receive paymens based on he perormance o heir uni

raher han he enire company. Perormance is ypically measured as produciviy

or coss savings. Paymens are ypically made in cash.

Stock options, restricted stock, phantom stock, and stock appreciation rights:30

Benes are ied o eiher he value o shares (as in resriced sock and phanom

sock) or increases in sock prices (as wih opions and sock appreciaion righs)

in hese hybrid inclusive capialism programs. Workers may or may no ever acu-

ally own shares excep or a very shor period once he awards are exercised.

Stock options: Sock opions are conracs beween employers and employ-

ees ha give employees he righ o buy sock a a se price during a specied

period o ime. Companies began graning sock opions in he 1960s, bu

sock opions gained populariy in he 1990s when high-ech sarups began

using sock opions o recrui alened sa who would oherwise receive beter

pay rom esablished echnology rms such as IBM and Hewlet Packard. Te

number o employees receiving opions in broad-based sock opions declined

in populariy aer he do-com bubble burs in 2000 and subsequen changes in

accouning rules. Approximaely 9 million workers paricipaed in sock opion

programs in 2010, down rom abou 12 million in 2001.31

Restricted stock awards and restricted stock units: Resriced sock award plansallow employees o buy shares, someimes a a discoun, or, more oen, gran

employees awards. Bu hese plans do no allow employees o ake acual owner-

ship unil aer cerain requiremens have been me. Tese requiremens can

include working a cerain number o years or meeing corporae or individual

Approximately 9million workers

participated in

stock option

programs in 201

down rom abo

12 million in 200


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perormance goals. Resriced sock can carry dividend or voing righs i he

company chooses and reains some value or workers i share prices go down,

unlike sock opions. Resriced sock unislike resriced sock awardsare

grans valued in erms o company sock, bu he employee does no receive

condiional shares a he ime o he award. Raher, employees have he righ

o a cerain number o shares ha will be delivered only when vesing or oherrequiremens are me.

Phantom stock and stock appreciation rights: Phanom sock provides a bonus

(in cash or sock) based on he value o a specied number o shares, which is

awarded a he end o a specied ime period. Sock appreciaion righs parallel

sock opions, paying an award (cash or sock) based on he increase in value

o a companys common sock. Sock appreciaion righs have a base price. Te

award equals he dierence beween he base price o a sock appreciaion righ

and he price o company sock a he ime he righ is exercised.

All oaled, a signican porion o American workers paricipae in hese sors

o programs.Almos hal o workers paricipae in some sor o inclusive capial-

ism compensaion38 percen paricipae in pro sharing and 27 percen in

gain sharing; 18 percen own company sock; 9 percen hold sock opions; and

5 percen receive opions in any given year, according o he 2006 General Social

Survey and a 2010 updae o ha survey.32 Approximaely 53.4 million American

workers paricipae in inclusive capialism programs according o hese gures.

Sill, more han hal o he American workorce does no have access or chooses

no o paricipae in inclusive capialism programs and paricipaion varies grealy

by occupaion and indusry.33 Moreover, mos paricipaing workers receive only

very modes amouns o income rom hese programs.34


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| www.americanprogress.o | www.americanprogress.o

History of American policies

promoting inclusive capitalism

History o American policies promoting inclusive capitalism | www.americanprogress.o

Since he ounding o our naion, American policymakers o all poliical sripes

have suppored privae-secor inclusive capialism programs boh hrough heir

words and policies. Teir ideas abou how and why inclusive capialism helps

srenghen our naion have varied grealy, bu policymakers have agreed broadly

ha our democracy and markeplace are sronger when workers can share in he

capial heir labor helps creae.

Alber Gallain, reasury secreary under Presidens Tomas Jeerson and JamesMadison, was he rs proponen o inclusive capialism wihin our governmen.

He is someimes credied wih inroducing he concep in he Unied Saes

aer adoping a plan a his New Geneva, Pennsylvania, glassworks in 1794.35

Gallain explained ha he democraic principle on which his naion was

ounded should no be resriced o he poliical process, bu should be applied

o he indusrial operaion as well.36

Since hen suppor or inclusive capialism programs has crossed ideological and

poliical divides and has been suppored or a variey o reasons. Policymakers

have argued ha hese programs boos pros and produciviy, promoe work-

place paricipaion, improve labor relaions, bolser our capialis sysem, ensure

susainable economic growh, deliver equiable compensaion or workers, and

even provide a bulwark agains communism.

In he years emerging rom he Grea Depression, Sen. Arhur Vandenberg

(R-MI), represening he indusrialized sae o Michigan, argued ha pro shar-

ing could preserve he pro sysem o capialism and mainain a parnership

beween capial and labor.37


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Compare his o ormer Vice Presiden Huber H. Humphrey Jr., who served

as chair o he Join Economic Commitee aer reurning o he Senae in he

1970s when i convened hearings on expanding employee ownership. Vice

Presiden Humphrey argued ha broad-based ownership was one o he pillars

o our economy:38

capital and the question o who owns it and thereore reaps the benet o its

productiveness, is an extremely important issue that is complementary to the

issue o ull employment. I see these as the twin pillars o our economy: Full

employment o our labor resources and widespread ownership o our capital

resources. Such twin pillars would go a long way in providing a rm underlying

support or uture economic growth that would be equitably shared.39

During he Cold War Presiden Ronald Reagan compared employee ownership

o he Homesead Acs abiliy o bring widespread arm ownership o Americans,

arguing ha employee ownership could help preven he spread o communism inCenral America:

Te energy and vitality unleashed by this kind o Peoples Capitalismfee and

open markets, robust competition, and broad-based ownership o the means o

productioncan serve this nation well. It can also be a boon, i given a chance,

to the people o the developing world. Nowhere is the potential or this greater

than in Central America.40

Federal policies to promote inclusive capitalism

Te curren policy ramework or inclusive capialism sared in he 1920s and has

advanced episodically in a ew inrequen waves o populariy. Policymakers have

generally ocused on supporing specic ypes o inclusive capialism programs

especially deerred pro sharing and employee sock ownership plansraher han

promoing inclusive capialism broadly. Moreover, boh Republicans and Democras

have aken lead roles in advocaing or policies o suppor inclusive capialism.

Tis ype o biparisan suppor coninues oday among conservaive leaders suchas Rep. Dana Rohrabacher (R-CA) and Sen. Kelly Ayote (R-NH) and progres-

sives such as Sen. Bernie Sanders (I-V) and Rep. Chaka Fatah (D-PA), who all

suppor legislaion o expand governmen suppor or inclusive capialism. 41

Both Republicansand Democrats

have taken lead

roles in advocating

or policies to

support inclusive

capitalism.


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Deferred profit sharing

Te concep o pro sharing sared in he privae secor. Large companies such

as Procor & Gamble, Sears Roebuck and Co., Easman Kodak Co., and S.C.

Johnson & Son, Inc., began adoping pro-sharing plans in he lae 19h and

early 20h cenuries in an atemp o comba labor unres and unionizaion ando improve worker perormance (or more on he relaionship beween inclusive

capialism and unions see ex box).42 Pro sharing was rs popularized in France

in he 19h cenury and adoped in companies hroughou Europe bu became

more pervasive in he Unied Saes han in oher counries.43

Iniially no governmen policies o encourage his ype o sharing exised. Bu

Congress passed he Revenue Ac o 1921, which provided ax incenives o sock

bonus and pro-sharing plans.44 Congress primarily inended he provisions as

a way o moivae workers o be more producive, bu had he secondary goal

o increasing savings among workers.45 Te new policy was inended o benecompanies and workers alike. Employer conribuions ino sock bonus and pro-

sharing plans, as well as he earnings wihin hose plans, were exemped rom

income ax. A he same ime, companies could claim a ax deducion or conri-

buions ino hese plans, jus as hey could or wages paid o workers and conri-

buions o employee pension unds ha were no ax exemp. Employees delayed

paying axes on his income unil hey wihdrew he money rom heir accouns

under he new law.46

Tese ax incenives, however, did litle o encourage he adopion o hese shar-

ing programs a he ime. Income ax raes on companies and individuals were so

low and so ew workers paid income ax ha companies and workers gained litle

bene rom he avorable ax rules or sharing plans. Moreover, once he Grea

Depression hi, many employers erminaed heir sharing plans or ailed o pay ou

he benes.47

As he economy slowly began o recover, companies reurned o pro sharing

and ederal policymakers and looked o incen hese pracices urher. In 1938 he

Democraic-conrolled U.S. Senae convened a pro-sharing commitee, bu i

was he Republican represening Michigan, Vandenberg, who became he de acoleader o he commitee. 48

During he hearings, Te Milwaukee Journal conjecured ha pro sharing would

be he Republicans New Deal, speculaing ha Republicans migh ry o use


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his privae-secor benes program in he same way Democras were seting up

public-secor social saey ne programs.49 Vandenberg even oyed wih he idea

o providing broad ax incenives or pro sharing bu he nal commitee repor

recommended only ha pro-sharing conribuions be exemped rom payroll

axes, which Congress approved in 1939.50

Pro sharings real comeback ook place during World War II, when companies

adoped generous deerred pro-sharing programs o atrac scarce labor since

ringe benes were exemped rom he wage and price conrols he U.S. govern-

men insiued o proec agains inaion. Furhermore, he War Labor Board

gave employers even more encouragemen by allowing hem o ranser excess

pros o deerred pro-sharing plans, hus avoiding governmen axes designed

o limi corporae pros o heir prewar levels.51 Hal o all he pro-sharing plans

in exisence in 1947 were creaed during he war, according o labor hisorian

Sanord Jacoby.52

During he 1950s and 1960s, he number o pro-sharing plans coninued o

grow wih ederal governmen suppor.53 Companies adoped hese programs o

serve as a supplemen o oher reiremen programs and were urher encouraged

because governmen allowed income rom deerred pro-sharing plans o be

axed a lower raes or capial income.54

Subsequenly, policymakers have aken less o an ineres in encouraging he use

o pro- sharing. Bu employers sill ake advanage o he ax incenives available

or deerred pro- sharing programs and oday pro sharing remains popular.

Abou 20 o 30 percen o workers paricipae in deerred pro sharing plans

according surveys rom he Bureau o Labor Saisics. 55

Employee stock ownership plans

Employee sock ownership plans are he oher ype o inclusive capialism ha

have a long and enduring hisory o governmen suppor. Tese plans are oday

one o he mos prevalen orms o employee ownership, and heir growh could

no have happened wihou governmen inervenions.


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San Francisco lawyer and invesmen banker Louis Kelso sared he rs lever-

aged employee sock ownership plan, which enabled he employees o Peninsula

Newspapers in Palo Alo, Caliornia, o buy he company rom is ounders in 1956.

Kelsos ideao use nancial leverage o allow employees o purchase he com-

pany hey worked or wihou having o spend any o heir own moneyhadnever been done beore. Peninsula Newspapers needed a special exempion rom

he Inernal Revenue Service in order o do so since he 1954 ax code prohib-

ied borrowing by a ax-qualied plan rom he plan sponsor or relaed eniies.56

Peninsula Newspapers and all subsequen employee sock ownership plans cre-

aed over he nex 20 years had o prove o he IRS ha he ransacion was done

a arms lengh and in he bes ineress o he paricipans. 57

Te IRS exempion allowed a limied number o companies o insiue employee

sock ownership plans, bu Kelso was a rue evangelis or hese plans and sup-

pored more widespread employee ownership. He believed ha by allowing work-ers o sell heir labor in exchange or capial, policymakers could ensure sable

income or workerseven as echnological change exered downward pressure

on wages. Owning par o he rm, Kelso argued, would allow workers o receive

compensaion or heir labor as well as heir capial. Kelso said hese ypes o

arrangemens would help sabilize he economy and promoe democracy.58

Kelso won over a crucial supporer in Sen. Russell Long (D-LA). Long, like his

aher Huey Long, he populis Louisiana governor, was concerned abou inequal-

iy and economic jusice. Long had a ron sea in he craing o ax policy as chair

o he Senae Finance Commiteeoverseeing he design and reconciliaion o

he Employee Reiremen Income Securiy Ac o 1974, or ERISA. Alhough

boh he House- and Senae-approved versions o he ac prohibied ransacions

beween a qualied plan and a pary-in-ineres, Long was evenually able o inser

he ESOP deniion and an exempion o he rule in he nal version o he ac.59

Long was a proponen o employee sock ownership plans unil his reiremen in

1987. During his ime in he Senae, housands o hese plans were esablished and

Congress addressed he plans in 15 separae pieces o legislaion, including legisla-

ion o increase nancial incenives or companies o paricipae in employee sockownership plans, ease ransiion or small-business owners who wish o sell o heir

workers, and he use o employee ownership o bail ou boh he Consolidaed Rail

Corporaion, or Conrail, in 1974 and he auomaker Chrysler in 1979.60


22/58



o dae, ederal policymakers have coninued o suppor he expansion o employee

sock ownership plans and have remained ocused on using ax incenives o do so.

Indeed, American policymakers rom across he ideological specrum coninue o

suppor specic ypes o sharing or he same reasons supporers have championed

hroughou hisory: inclusive capialism can be good or businesses and workers, ican be a boon o capialism, and i can ensure susainable economic growh.

Unorunaely, even hough employers requenly adop muliple ypes o shar-

ing programs wihin he workplace policymakers and aciviss also coninue a

siloed approach o he promoion o sharing policies.61 Policy advocaes lobby

solely or heir specic brand o inclusive capialism raher han advocaing or a

broader suppor or all ypes o sharing programs. Likewise, only a small minor-

iy o academic research sudies he eecs o more han one y pe o sharing,62

and niche indusries have developed o suppor privae-secor developmen o

single ypes o sharing.

As a resul, sharing policies end o be viewed as serving niche communiies raher

han promoing broader economic goals. Whas more, governmen policies o

suppor sharing are very uneven across he various ypes o programs and policy-

makers have no ackled some ough quesions abou how o ensure governmen

policies o encourage inclusive capialism also proec workers ineress.


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Organized labors relationship to inclusive capitalism programs has

evolved over time. Some o the earliest American unions were ormed

by skilled workers responding to decreasing access to capital income.

But unions attitudes toward inclusive capitalism shited over time and

they opposed these programs or a number o reasons during the rst

hal o the 20th century. Today unions oer measured support or some

types o sharing programs, evaluating their willingness to participate

on a case-by-case basis.

In the decades ollowing the ounding o the United States, skilled

workers protesting diminished access to capital income led to some

o the earliest American strikes and the establishment o employee-

owned companies.63 These workers were responding to decreasing

wages and apprenticeship opportunities that could eventually lead to

capital ownership and income. These opportunities were drying up asmaster cratsmen ound that they could increase their prots by divid-

ing tasks previously perormed by skilled apprentices among low-paid,

low-skilled workers.

Employee-owned cooperativesthe rst o which were ormed in

Philadelphia by the Union Society o House Carpenters in 1791 and

the Philadelphia cordwainers (or shoemakers) in 1806allowed

skilled workers to escape the low wages paid by master cratsmen and

a chance to the ull prots associated with capital ownership.64 These

rst employee-owned enterprises were ormed in protest o unair

conditions oered by master cratsmen and the inability o workers to

bargain or higher wages. However, trade union cooperatives became

increasingly popular in the 1830s and many were successul65

This support or employee-ownership programs, however, shited

as the country industrialized and unions increasingly represented

workers employed by large, antiunion companies. For the rst hal

o the 20th century, unions opposed sharing programs. Unions took

that stance when companies began developing and implementing

welare capitalism programs that included prot-sharing and stock

rewards programs in part to limit the spread o unionism. Companies

with employee ownership and other employee benets programs

would still resort to spying and ring workers who wanted to orga-

nize a union.66 Additionally, unions were suspicious that what capital

rewards companies were oering was a substitute or good wa

rather than an added benet o employment.

Union rebrand Samuel Gompers, president o the American F

tion o Labor rom 1886 until 1924, argued:

some employers who have inaugurated systems o so-called pr

sharing have pared down the wages o their employees so that th

combined sharing o profts and their wages did not equal the wa

o employees o other companies in the same line o industry. Wha

are especially interested in more than proft sharing is a air living

reasonable hours and air conditions o employment.67

While union leaders hold many o these same concerns today,

the 1950s unions have taken a more nuanced approach to inclcapitalism and evaluate these programs based on the total ee

on the workorce. Indeed, unions have developed their own bra

o sharing programs and there is evidence that unionized comp

that adopt inclusive capitalism plans enjoy measurable benet

Inclusive capitalism to increase worker compensation

Given the labor movements historic opposition, it was big news

iconic labor leader Walter Reuther, president o the International

United Automobile, Aerospace and Agricultural Implement Work

o America, or UAW, included prot sharing as a major demand i

1958 contract negotiations with Detroit automakers. Reuther wa

cerned that there was an increasing imbalance between what Am

can workers could produce and their purchasing power. He saw p

sharing as an eective way to expand workers purchasing powe

Though ultimately unsuccessul, Reuther argued that 25 percent

automakers excess prots should be shared with workers to na

ringe benets and another 25 percent should go back to car buy

the end o each year in the orm o rebates.

Since then, labor unions have become increasingly willing to co

the adoption o inclusive capitalism programs. Still, labor union

vigilant o workers interests when it comes to bargaining or in

capitalism programs and try to ensure that:69

Unions and inclusive capitalism


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Financial incentives are a bonus on top orather than instead

oadequate pay and benets

Sharing agreements are transparent so that workers understand

the plans and companies cannot manipulate nancial reporting in

order to reduce worker compensation

Workers have a voice in designing, implementing, and reviewingthe plans

Workers eorts control the nal payout to the maximum extent

possible

Lets consider the example o United Steel Workers, who worked with

employers to develop their own brand o gain sharing that evalu-

ates improvements at the team level. This approach allows workers a

maximum amount o control over the nal payout. Scanlon plans

named ater a local union presidentwere designed to supplement

wages o workers in companies that could not pay union wages

without undermining rm competitiveness.70

Also, Reuthers UAW union (ormerly the United Auto Workers and now

the International Union, United Automobile, Aerospace and Agricultural

Implement Workers o America) was ultimately successul in obtaining

prot-sharing agreements or its members, which were rst included in

a contract with the now-deunct American Motors Corporation in 1961.71

More than 20 years later, in 1982, Ford was the rst o the Big Three

automakers to adopt a sharing agreement.72Since then, the union has

worked with automakers to adopt both prot-sharing and gain-sharing

programs and in 2011 it bargained the most generous prot-sharingagreement with the Big Three automakers in UAWs history.73

Inclusive capitalism to prevent company ailure

Labor unions have also participated in employee-ownership agree-

ments to prevent company ailure and the associated job losses.

This is not the most common reason or unions to negotiate sharing

arrangements, but it is the most visible. This model, in many ca

has provided companies with needed capital to return to prot

ability. Capital sharing, however, cannot make a sick company

industrywell again. Unortunately, unionized rms impleme

employee-ownership mechanisms to save their companies hav

always been successul. High-prole ailures have risked too mo workers savings and as a result turned some in labor against

ployee stock ownership plans.

Just two years ago when Ford, General Motors, and Chrysler a

bankruptcy, workers adopted an employee-ownership arrange

Prior to the economic downturn that would put automakers on

brink, the UAW and the Big Three automakers in 2007 negotiat

Voluntary Employee Benets Association to administer health

ance or retired autoworkers that would relieve the burden o r

health care obligations on the companies and reduce the risk t

workers o relying on a severely underunded system.

The companies originally agreed to a stream o payments to th

ets association to be paid primarily in cash. But when the dow

occurred, the UAW and the automakers agreed that a signican

tion o the companies remaining obligation would be paid in e

While this is an indirect orm o employee ownershipthe Vol

Employee Benets Association is an independent trustworke

shoulder signicant risk since their retirement health benets a

aected by the nancial perormance o the companies.74

This was not the rst time one o the Big Three automakers was

out by its workers. When Chrysler aced bankruptcy in 1979, un

ized workers agreed to a 30 percent wage reduction in exchang

a 20 percent to 25 percent ownership share o the company th

an employee stock ownership plan. Chrysler workers investme

o. When the company repaid the debt several years early, the

sold its Chrysler shares or a threeold gain.75


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Yet these types o worker-led bailouts can subject employees to too

much risk, and high-prole ailures have soured a number o labor

activists to employee ownership. A prime example is the 2002 bank-

ruptcy o United Airlines, which was a major blow to public con-

dence in employee stock ownership plans. Uniteds largely unionized

workorce became the companys benecial owners when it wasacing bankruptcy eight years earlier. In exchange or a 55 percent

ownership stake in the company, workers agreed to major wage

concessions.76 The companys ultimate ailure caused its employees

to lose virtually all their retirement savings invested through the

companys employee stock ownership plan.77

The United Airlines employee stock ownership plan was poorly

designed and implemented but the case is still viewed as ailure

or these types o plans.78 Many outside experts recommended that

United implement a ar-reaching employee involvement program

and that it address opposition among management to employee

ownership.79 Also, United could have ostered the development

o an ownership culture among employees by adopting cash

prot sharing to supplement the plan so that workers, like other

shareholders, would enjoy the rewards o company perormance

improvements immediately i the reorganization was successul.80

Yet none o these recommendations was ully adopted and the U.S.

Department o Labor commissioned a report ound that cultural

change eorts have been largely symbolic and incremental

rather than systemic.81

Moreover, the United Airlines planin which workers traded wage

and benets concessions or a majority stake in a large corporation

that remained publicexposed workers to ar more risk than the

typical ESOP sale. Under a traditional employee stock ownership plan,

sale workers take ownership o a private company using leverage,

rather than wage concessions, to nance the deal.

Research shows that these types o horror stories are exceptio

the rule.82 Union workers requently participate in inclusive ca

ism programs but approach themparticularly employee sto

ownership plans and other types o retirement plans that inc

employee ownershipwith caution.83 In 2002 Richard Trumk

president o the AFL-CIO, testied beore Congress and arguean ESOP or other employee stock plan makes sense as a sup

ment to a dened benet plan and a properly diversied de

contribution plan, or as a medium term investment.84 Employ

stock ownership plans sponsored by unions typically are stru

in this way and unions generally oppose any attempts to con

dened benet pension plans to an employee stock ownersh

or a dened contribution plan.

Still unions continue to pioneer new types o sharing. The Unite

Steelworkers announced a new union co-op model last year th

combines worker ownership with a progressive collective barg

process and are in the process o developing projects in Cincin

and Pittsburg.85 Leo Gerard, president o the steelworkers unio

gued that these arrangements oer a sustainable way to rebui

economies: To survive the boom and bust, bubble-driven econ

cycles ueled by Wall Street, we must look or new ways to crea

sustain good jobs on Main Street.86

Whats more, union workers usually prosper within these sharin

arrangements. In highly unionized establishments, less compe

tion is put at risk through prot sharing and employee ownershand outcomes are generally positive or employers and worker

even when organized workplaces do have riskier orms o inclu

capitalism.87 Perhaps most importantly, sharing programs are g

ally more successul in terms o improving worker satisaction a

company perormance when employee participation program

place,88 which oten means union involvement.


26/58




27/58


| www.americanprogress.o | www.americanprogress.o

Policy mechanisms

Policy mechanisms | www.americanprogress.o

Our ederal and sae governmens have insiued a variey o mechanisms ha

encourage inclusive capialism programs. Cerainly governmens adoped some o

hese policies wih he explici goal o boosing privae-secor adopion o inclu-

sive capialism programs, bu oher policies have enabled he growh o sharing

programs even hough his was no necessarily he inended goal o policymakers.

Policies ha encourage inclusive capialism programs in he workplace include:

ax advanages or companies and selling owners ax advanages o workers o encourage widespread paricipaion and savings

or reiremen Programs o increase awareness o employee ownership and provide assisance

o new and exising employee-owned companies Designaion o a privileged company srucure Direc governmen nancing or encouraging privae lending o companies wih

inclusive capialism policies Governmen purchasing o suppor inclusive capialism Regulaory oversigh o reduce coss or companies wih inclusive capialism

programs and inuence he ypes o sharing programs adoped

Tese policy levers could be used o encourage all ypes o inclusive capialism

programs bu are mos oen geared oward increasing employee ownership. Fewer

aciliae he use o sock rewards programssuch as broad-based sock opions,

resriced sock, or sock appreciaion righsand we were unable o uncover any

ederal or sae programs o increase he use o immediae cash pro sharing or

gain sharing among employers. Boh policy developmen and he endorsemen

o exising policies o suppor inclusive capialism are beyond he scope o hisrepor, bu his gap indicaes a clear need or addiional work o develop policy

around broad-based pro sharing and gain sharing.


28/58



Tax advantages for companies and sell ing owners

Federal ax advanages or companies and business owners are arguably he mos

generous policy levers being used o simulae he growh o inclusive capialism

pracices. ax advanages or companies range rom graning various deducions

o ax saus ha can eliminae all corporae-level axes. Te governmen awardshe mos generous o hese benes o companies wih employee ownership

srucures. Moreover, he ax advanages or employee sock ownership plans are

paricularly robus.

Tere are wo main ypes o hese plans: C-corporaion and S-corporaion

employee sock ownership plans. Boh ypes provide valuable bu diering ax

advanages o paricipaing companies. In addiion, many sae laws magniy hese

eecs by having saues ha mirror ederal provisions. Tese ax benes include:

Deductibility of ESOP contributions: Employer conribuions o an employeesock ownership plan are ax deducible up o a limi o 25 percen o covered

payroll, and or leveraged C-corporaion plans, conribuions used o pay loan

ineres are no subjec o his limi.89 Tis allows a company o use preax dol-

lars o buy ou is owners and does so wihou workers having o risk heir sav-

ings.90 In his siuaion an employee sock ownership plan would secure a loan

o purchase securiies rom he sponsoring employer. Te employer hereaer

would deduc conribuions o he plan, which are used o repay boh he iner-

es and principal on he loan.

Noe: S-corporaions wih leveraged employee sock ownership plans may no

exclude ineres rom he 25 percen limi.

Deductibility of dividends: Companies wih C-corporaion employee sock

ownership plans may deduc dividends paid on ESOP-held sock ha is paid ou

in he ollowing ways: cash dividends paid o paricipaing workers; dividends

used o pay a leveraged plans loan paymens; or dividends employees volun-

arily reinves in company sock. Tis encourages companies o provide shor-

erm sock ownership benes o workers in addiion o he long-erm benes

o capial ownership.91

Noe: S-corporaion disribuionshe equivalen o dividendsare no

deducible bu may be used o repay ESOP loans.


29/58



ESOP rollover: Owners o closely held C-corporaions can sell he company

o an employee sock ownership plan and deer ederal axes on he gain rom

he sale. Rollover benes allow reiring owners selling o a C-corporaion plan

o deer ederal axes on gains arising rom he sale by reinvesing in qualied

replacemen propery.92 Tis ax advanage is oen an imporan bene o reiring

owners o closely held privae businesses who would like o preserve jobs and heirlegacy by ensuring he company says in operaion; gradually wihdraw rom he

company by selling o he business slowly; or sell only a porion o he com-

panyallowing heirs, key managers, or ohers o have a parial ownership ineres.

Noe: In 2012 Iowa passed biparisan legislaion o provide sellers o employee

sock ownership plans wih addiional ax benes.93

The S-corporation advantage: Congress provided a signican bene o ESOP

owners when i enaced legislaion ha allowed S-corporaions o be owned

by employee sock ownership plans beginning in 1998. S-corporaions arepass-hrough eniies, and hereore he pros o S-corporaion plans are

no subjec o ederal income ax. 94 Te hinking being ha when pros ow

hrough he company o is ownersraher han being reained by he com-

panyhose pros should only be axed once. Tis ax advanage is paricularly

valuable or employee sock ownership plans because hey are also ax-qualied

plansmeaning ha worker-owners deer income ax paymen unil he unds

are disribued o hem usually a reiremen.95

Te S-corporaion planwih is pass-hrough ax reamenmoivaed

many employee sock ownership plans o conver rom C-corporaions o

S-corporaions. According o one indusry survey, 73 percen o hese plans

were S-corporaions in 2010hough oher indusry expers esimae he gure

o be around 40 percen o 50 percen o all employee sock ownership plans.96

Also, because he ax savings is so grea, oen S-corporaion plans are eiher 100

percen worker-owned or moving oward becoming ully worker-owned.

Several oher ypes o businesses ha may or may no be employee-owned

cooperaives, limied liabiliy companies, parnerships, and S-corporaions no

owned by an employee sock ownership plansreceive pass-hrough ax rea-men rom he ederal governmen. In he case o employee-owned rms, he

worker-owners pay income ax on he pros hey receive rom he company, bu

he company is no subjec o he ederal income ax.


30/58



Likewise, he same lawha allows business owners o sell o an employee

sock ownership plan and deer ederal axes on he gain rom he saleprovides

hese benes o owners selling o a cooperaive.97 Tis law could poenially be

exremely helpul o owners o very small businesses who would like o sell o

heir employees bu who could no aord he coss associaed wih adminisering

an employee sock ownership plan. o dae, however, very ew companies haveaken advanage o hese benes.98

Te ederal governmen also makes valuable ax advanages available o companies

ha have sharing policies bu are no employee-owned. Te ax code, or example,

grans employers oering cerain ypes o sock opionswheher or no hey are

broad-basedax benes or he gain recognized as compensaion by he employee

a he ime he opion is exercised.99 Employers can deduc hese paymens jus as

hey would wages, bu hey are able o compensae heir workers wihou having o

deplee he companys cash reserves and receive he bene o a cash inusion rom

employees when hey exercise heir opions o purchase sock.100 In 2001 CiscoSysems Inc., he mulinaional compuer neworking equipmen manuacurer,

received $1.2 billion rom is employeesexercising heir opion o buy company

sock a a discouned raeand $1.4 billion in accompanying ax benes. 101

Tax advantages to workers to encourage widespread participation and

savings for retirement

Te ederal governmen provides ax advanages o workers who paricipae in

sharing programs. Many o hese benes are specically geared oward encourag-

ing capial-sharing programs o und reiremen savings or workers. In some cases

he governmen also requires ha employers ulll basic guaranees ensuring ha

sharing ormulas do no unairly bene highly paid workers.

All inclusive capialism programs ha deer income unil reiremenincluding

deerred pro- sharing plans, 401(k) plans wih ownership o company sock, and

employee sock ownership plansallow workers o avoid immediae axaion.

Employers hold workers unds in individual accouns ha canno be wihdrawn

excep under cerain well-dened condiions. Te money and ineres in he undsis no axed as long as hose unds remain in he accounas is he case wih mos

reiremen plans. Workers incomesand consequenly heir axesend o be

lower when he unds are nally axed a reiremen.


31/58



Workers are encouraged o paricipae in sock incenives programs in wo ways.

Firs, as is he case wih oher shareholders, i workers hold ono heir shares or

a given period o ime, gains rom he sale o qualied sock purchase plans and

qualied sock opions can be axed a capial gains raeswhich are usually lower

han ordinary income ax raes ha workers mus pay on heir wages.102 Second,

qualied sock purchase plans allow workers o purchase sock a a discounrom air marke value wihou any axes owed on he discoun a he ime o

purchase.103 Bu he discoun workers receive is generally considered addiional

compensaion and hey have o pay axes on i when hey sell he sock.

Finally, he ederal governmen has insiued regulaions o encourage employ-

ers o adop incenive pay programs broadly among heir employees. All workers

wih a leas wo years o service, or example, mus be included in employee sock

purchase plans in order or he plan o be considered qualied and carry special

ax advanages.104

Furher, according o Inernal Revenue Code requiremens, or an employee

sock ownership plan or anoher ype o reiremen plan o qualiy or avorable

ax incenives, i may no discriminae in avor o highly compensaed employ-

ees by providing more avorable benes or conribuions o hem han o oher

employees.105 Addiionally hese sors o plans are subjec o op-heavy rules.

Generally a plan is considered o be op heavy when more han 60 percen o oal

accoun balances are owned by highly compensaed employees. op-heavy plans

mus saisy minimum vesing and allocaion requiremens in order o ensure ha

lower-level employees receive some benes.106

Programs to increase awareness of employee ownership and provide

assistance to new and existing employee-owned companies

Shared-ownership srucures are no always well undersood by he business

communiy. Te ederal and sae governmens have enaced programs aimed a

increasing awareness and providing educaion and echnical assisance o new and

exising employee-owned companies. Tese programs uncion o aciliae word-

o-mouh abou shared ownership; assis owners convering o an employee-own-ership srucure (hrough preliminary easibiliy sudies, echnical raining and

advice, and locaing nancial assisance); help workers and employers adop an

ownership culure; and bring ogeher exising employee-owned businesses.


32/58



Several saes unded employee-ownership programs aimed primarily a encourag-

ing ESOP developmen in he mid-1980s.107 Subsequenly, many o hese pro-

grams were vicims o budge cus or he programs were allowed o sunse. Te

programs ha coninue o exis have become less relian on governmen unding

or are housed wihin sae agencies.

Te success o hese programs has varied. Te Ohio Employee Ownership Cener

and he Vermon Employee Ownership Cener have been successul in increas-

ing awareness o employee sock ownership plans hroughou he counry and

in aciliaing company conversionsparicularly in small, privaely held rms

where owners are acing reiremen.108 Oher programs, however, have been less

successul oen due o insufcien unding.

In he 1980s a number o saes passed policy declaraions generally supporing

employee ownership. Mos o hese declaraions had he goal o broadening own-

ership, sabilizing local economies, and prevening plan closures.109

A he ederal level, he Workorce Invesmen Acs regulaionspreviously he

Job raining Parnership Acallow saes o use ederal unding or preliminary

sudies o deermine wheher an employee buyou is easible in shudown and

job-loss siuaions. Bu a survey by he Ohio Employee Ownership Cener showed

ha 33 saes and he Disric o Columbia are no using and poenially did no

know abou ederal unding availabiliy or hese sudies.110

Finally, he Deparmen o Agriculure awards Rural Cooperaive Developmen

grans or he esablishmen and ongoing operaion o ceners or cooperaive

developmen. Tese ceners aid in he developmen o new cooperaives and

improve he operaions o exising ones.

Designation of a privileged company structure

radiional business srucures can inhibi companies rom adoping inclusive

capialism policies. Sockholders, or example, could in heory sue chie execu-

ive ofcers i pro making is no heir sole objecive,111

and worker cooperaivesoen lack sufcien capial o leverage privae nancing. Sae governmens have

enaced laws o boh allow businesses o more easily adop sharing policies wih-

ou ear o shareholder reprisal and o leverage capial or sarups.


33/58



Since 2010 welve saes have passed laws creaing a new class o corporaion known as

a bene corporaionwhich oers legal proecion o owners o look beyond shor-

erm nancial gains.112 By law, hese companies mus creae a maerial posiive impac

on sociey; consider how decisions aec employees, communiy, and he environ-

men; and publicly repor heir social and environmenal perormance.113 Companies

applying or his saus mus complee a hird-pary assessmen ha may evaluaeamong oher hingswheher rms have an employee-ownership srucure or oer

broad-based sock, sock equivalens, or sock opions o employees.114 Tis does no

guaranee ha every bene corporaion will oer inclusive capialism programs, bu i

can provide a signican legal proecion o companies wih sharing programs.

Iowa, Minnesoa, and Wisconsin have all passed laws o help cooperaives leverage

capial o nance heir businesses.115 Mos saes allow cooperaives o have only one

class o voing member-ownersoen making i difcul or hem o raise sufcien

capial o obain loans. By allowing cooperaives o have a leas wo classes o mem-

bersparon and invesor membershese saes help cooperaives more easilyraise he capial necessary o secure loans.116 Tis is paricularly valuable during he

incubaion period when co-ops ypically have difculy accessing credi.

Providing direct government financing and encouraging private lending to

companies with inclusive capitalism policies

Privae lenders and even governmen agencies may be hesian o provide nanc-

ing o curren and sarup worker co-ops because hey are unamiliar wih he

company srucure; ear ha workers will have oo much inuence over gover-

nance; and are conused abou who he responsible paries are in he even o a

deaul. Alhough employee sock ownership plans do no share he same chal-

lenges, heir unique ownership srucure can preclude hem rom paricipaing in

governmen programs. Te ederal and sae governmens have creaed programs

o provide direc unding and encourage privae lending o cooperaives and

employee sock ownership plans.

Te ederal governmen has craed regulaions o ensure ha co-ops and

employee sock ownership plans are able o compee or ederal grans ha areavailable o all businesses. Te U.S. Deparmen o Agriculures Business and

Indusry Guaraneed Loan Program provides assisance o companies o improve

he economic and environmenal climae in rural communiies. Program guide-

lines specically encourage worker cooperaives o paricipae.


34/58



Likewise, he U.S. Small Business Associaions Small Business Innovaion Research

program oers grans o small businesses o engage in research and developmen

ha has he poenial or commercializaion. In order o paricipae in he program,

a company mus be majoriy- owned by American ciizens or legal permanen

residens. Federal regulaions clariy ha or ESOP-owned companies, each sock

rusee and plan member is considered o be an ownerwihou his claricaioncompanies ha are majoriy ESOP-owned could be excluded rom paricipaion.117

A he sae level Indianas ESOP linked-deposi program allows he sae rea-

surers ofce o link is rouine purchase o cericaes o deposi, or CDs, rom sae

nancial insiuions o companies in need o capial o complee an ESOP ransac-

ion. Te Indiana reasurers ofce regularly invess sae unds by purchasing ceri-

caes o deposi. In order o assis companies orming an employee sock ownership

plan o borrow unds a a low ineres rae, he reasurer purchases cericaes o

deposi ha provide a slighly lower ineres rae bu in exchange requires he nan-

cial insiuion o reduce he ineres rae on he loan made o he company.

Previously, ederal law also encouraged privae-secor lending o employee sock

ownership plans by allowing lenders o deduc 50 percen o he ineres received

on ESOP loans rom heir axable income as long as he loan was used o purchase

a majoriy sake in he company.118 Consequenly, loans o employee sock owner-

ship plans carried a lower ineres rae han a convenional loan. Tis incenive,

however, was eliminaed in 1996.

Government purchasing to support inclusive capitalism

Sae and ederal governmens spend hundreds o billions o dollars each year o

purchase goods and services. Governmens leverage his spending o suppor vari-

ous ypes o businessessuch as small, minoriy- and women-owned businesses,

and businesses in disadvanaged areasoen by creaing conracing se-aside

programs. Frequenly he unique ownership srucure o employee-owned compa-

nies precludes hem rom quali ying or hese programs. Because o governmen

guidelines a company ha is majoriy-owned by an employee sock ownership

planeven i mos o is employee-owners are people o colorhe companywouldn qualiy or ederal conracing se-asides or minoriy-owned businesses.

Te ederal governmen, however, has enaced regulaions o ensure ha compa-

nies wih shared ownership srucures are eligible o paricipae in compeiions


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or cerain ypes o conrac se-asides. Te Hisorically Underuilized Business

Zone, or HUB Zone, programa ederal conracing se-aside program ha

benes economically disadvanaged areasincludes regulaions o allow ESOP

paricipaion. In order o be eligible or he HUB Zone program, a small business

mus be locaed in a hisorically underuilized business zone, owned and con-

rolled by one or more U.S. ciizens, and a leas 35 percen o is employees musreside in a HUB Zone. Like he Small Business Innovaion Research program,

regulaions clariy ha or ESOP-owned companies each sock rusee and plan

member is considered o be an owner.119

On he sae level Virginia passed a law o encourage he ormaion o employee

sock ownership plans o perorm services previously provided by he govern-

men. In 1995 Virginia creaed he Commonwealh Compeiion Council o

invesigae ways o privaizing services previously run by he sae.120 Te council

issued a plan advocaing or spinning o uncions perormed by he governmen

ino worker-owned employee sock ownership plans. Te plan was modeled aera process he U.S. Ofce o Personnel Managemen wen hrough o spin o back-

ground invesigaions previously perormed by he governmen o an employee

sock ownership plan.121 I is unclear wheher any sae services were acually

convered o employee sock ownership plans as recommended by he repor, and

he sae is no currenly working on any projecs o do so.

Regulatory oversight to reduce costs for companies with inclusive capitalism

programs and influence the types of sharing programs adopted

Several governmen and quasi-governmenal agenciesincluding he Securiies and

Exchange Commission, privae sel-regulaory organizaions such as he Financial

Accouning Sandards Board, and he New York Sock Exchangehave regulaory

powers ha can inuence he prevalence o inclusive capialism. Tese bodies have

passed rules o inuence he ypes o broad-based sharing policies companies adop

and ha reduce he cos o sharing ownership wih employees by exemping compa-

nies ha issue sock o heir employees rom reporing requiremens.

Te Securiies and Exchange Commission, or example, exemps small, privaelyheld companies ha issue sock o employees hrough vehicles such as sock

opions and employee sock purchase plans, or ESPPs, rom ederal reporing

requiremens, arguing ha i would be an unreasonable burden o require hese

companies o incur he same expenses and disclosure obligaions as public com-


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panies when heir only sales were o employees.122 Several saes have also passed

laws exemping hese sors o companies rom securiies regulaions.123

Regulaions by he Financial Accouning Sandards Board and he New York

Sock Exchange also inuence wha ypes o inclusive capialism programs com-

panies adop.

In he wake o he Enron scandal, he Financial Accouning Sandards Boardhe

accouning indusrys sel-regulaory organizaionchanged is rules o require

companies o expense he cos o sock opions on heir income saemens.124

Previously companies did no have o charge sock opion coss agains heir

earnings. Many progressives lauded hese changes as an imporan disclosure ha

would give invesors a more accurae picure o he cos o execuive compensa-

ion, bu ohers prediced ha he new rule would promp companies o resric

sock opions o only heir op execuives.125

Te New York Sock Exchange also changed regulaions ha aec he prevalence

o sock opions. Public companies mus receive shareholder approval in order o

adop sock opion plans or heir employees. Te New York Sock Exchange rules

were amended in 2003 o prohibi brokers rom voing on sock opion plans unless

he benecial-owner o he shares has given hem voing insrucions.126 Previously

brokerage rms were allowed o voe cliens sock as a block wihou owner

approval, which made i easier or companies o receive approval o sock opion

plans. Companies, however, may adop oher ypes o sock-sharing mechanisms

employee sock ownership plans and employee sock purchase planswihou

shareholder approval.

Te Financial Accouning Sandards Board and New York Sock Exchange rule

changesalong wih changing marke dynamicsled o a reducion in sock

opions. A sudy looking a he prevalence o workers holding sock opions

beore and aer he Financial Accouning Sandards Board rule change ell by 26

percenor 3.7 million workersaer he expensing rule was enaced.127

Sock opions coninue o be a very common orm o equiy compensaion, bu by

increasing he public and sockholder oversigh o sock opion plans, hese rulechanges may have encouraged companies o adop oher ypes o sock-sharing

programssuch as resriced sock and sock appreciaion righs.128


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Federal and state governments have instituted a variety o

mechanisms to encourage inclusive capitalism policies. These

policy levers include:

Tax advantages or companies and selling owners: Tax

advantages or companies and business owners agreeing to

the sale o their stock are the most generous policy levers being

used to stimulate the growth o inclusive capitalism practices.

Employee stock ownership plans enjoy the most extensive tax

advantages while the government provides other types o shar-

ing programs much less support.

Tax advantages to workers to encourage widespread par-

ticipation and savings or retirement: The ederal government

provides tax advantages to workers who participate in sharingprograms. Many o these benets are specically geared toward

encouraging capital-sharing programs to und retirement sav-

ings or workers. In some cases the government also requires

that employers ulll basic guarantees ensuring that sharing

ormulas do not unairly benet highly paid workers.

Programs to increase awareness about employee owner-

ship and provide assistance to new and existing employee-

owned companies: Shared-ownership structures are not

widely understood in the business community. The ederal and

state governments have enacted programs aimed at increasing

awareness and providing education and technical assistance to

new and existing employee-owned companies. These programs

acilitate word-o-mouth about shared ownership; assist owners

converting to an employee-ownership structure; help workers

and employers adopt an ownership culture; and bring together

existing employee-owned businesses.

Designation o a privileged company structure: Traditional

business structures can inhibit companies rom adopting

inclusive capitalism policies. In theory, stockholders could suechie executive ocers i prot making is not their sole objective,

and worker cooperatives oten lack sucient capital to

private nancing. State governments have enacted law

businesses to more easily adopt sharing policies withou

shareholder reprisal and leverage capital or startups.

Providing direct government nancing and encour

private lending to companies with inclusive capital

policies: Private lenders may be hesitant to provide na

current and startup worker co-ops because they are un

with the company structure and ear that workers will h

much infuence over governance. Although employee s

ownership plans do not share the same challenges, the

ownership structure can preclude them rom participat

government programs. Federal and state governments

ated programs to provide direct unding and encourage

lending to cooperatives and employee stock ownership

Government purchasing to support inclusive capita

State and ederal governments spend hundreds o billion

dollars each year to purchase goods and services and they

this spending to support various types o businessesot

creating contracting set-aside programs. But the unique s

o employee-owned companies can preclude them rom

or some o these programs. The ederal government has e

regulations to ensure that companies with shared owners

obtain contracts under these programs. In addition, Virgina law to encourage the ormation o employee stock own

plans to perorm services previously provided by the gove

Regulatory oversight to reduce costs or companies

inclusive capitalism programs and infuence the typ

sharing programs adopted: Regulatory oversight bo

passed rules that reduce the costs o sharing ownersh

employees by exempting companies that issue stock

employees rom reporting requirements and rules tha

ence the types o broad-based sharing policies that co

nies will adopt.

Summary of existing policy mechanisms to support inclusive capitalism


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Fundamental questions about inclusive capitalism policies

Governmens have implemened a variey o policy mechanisms o suppor inclu-

sive capialism and hese pracices hold he poenial o boh improve business

perormance and provide workers wih higher levels o compensaion. Surveys

have shown ha he American public generally suppors he concep o inclusivecapialism, bu he base o suppor among policymakers and advocaes or inclu-

sive capialism policies is relaively narrow.129

Policymakers who suppor expanded use o inclusive capialism policies oen do

so because hey have personal experience wih ias is he case wih Indianas

sae reasurer program o increase lending o employee sock ownership plans

or are ocused on serving a specic consiuency ha lobby on one paricular orm

o inclusive capialism.

Mos elling, even during he curren economic downurna ime when eleced of-cials are especially hungry or economic policy ideasinclusive capialism policies

are no a par o he larger naional conversaion. Federal lawmakers inroduced nine

bills and resoluions ha would have expanded governmen suppor or inclusive

capialism during he 112h session o Congress. Four bills suppored employee sock

ownership plans by increasing company ax advanages, expanding access o govern-

men conracs, and reducing regulaory requiremens or ESOP companies; wo bills

ocused on cooperaives aiming o increase awareness o cooperaives and provide

loans and grans o suppor heir developmen; wo bills were aimed a boosing

employee ownership hrough boh ESOPs and cooperaives by providing educaion,

oureach, and echnical assisance and increasing lending o employee owned rms;

and one bill provided valuable ax incenives or workers and employers paricipaing

in sock gran programs. 130

Disappoiningly, only he mos modes piece o inclusive capialism legislaion

received a voe; Senae Resoluion 87 designaing 2012 as he Inernaional Year

o Cooperaives was passed by unanimous consen. None o he oher bills have

even had a commitee hearing or received broad public recogniion as a way o

promoe and proec good American jobs.

Tis lack o legislaive acion is due in par o he ac ha here are several chal-

lenging quesions ha supporers o inclusive capialism will need o address in

order o build a broader base o suppor or inclusive capialism policies. Tese

quesions include:


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How much of worker pay should be variable?

Workers accep an addiional measure o riskwih he promise o a poenially

larger rewardby paricipaing in inclusive capialism policies and acceping ha a

porion o heir pay will be variable. Bu jus how much risk workers should ake on

hrough variable pay is open o debae and curren policy provides ew guidelines.

Academic research has ound ha he nancial incenive programs ha provide an

increase over adequae levels o pay and pensions are more successul han hose ha

pu a large porion o pay or reiremen income a risk.131 Workers who eel nan-

cially insecure experience less o he posiive oucomes associaed wih inclusive

capialism and are less ineresed in increasing heir paricipaion in such policies.

Indeed, excessive economic insecuriy, research nds, has he capabiliy o reversing

every posiive individual and workplace oucome o inclusive capialism.132

Evidence shows ha mos companies currenly providing inclusive capialism

programs are doing so in addiion o providing compeiive wages. Several sudieshave ound ha average pay o workers in employee-owned rms is jus as high as or

higher han worker pay in non-employee-owned rms.133 A General Social Survey

analysis suggess ha a majoriy o workers paricipaing in inclusive capialism pro-

grams have xed pay ha is eiher he same as or higher han marke raes. 134

We urge policymakers o consider how o ensure ha variable pay supplemens

good wages as hey encourage more companies o adop sharing programs.

Variable pay mus be o a signican amoun o encourage greaer invesmen by

workers in he success o heir company, bu a he same ime variable pay should

be looked a as an addiion oand never a subsiuion ora living wage.

Workers, especially hose a he botom or middle o he wage scale, mus be able

o coun on a reasonable level o consisen pay.

How should variable compensation be structured so that workers realize upside

potential without feel ing th ey are pla yi ng the lotter y?

Under he umbrella o inclusive capialism, workers abiliy o aec heir variable

pay ranges a grea deal rom gain sharingwhere workers have a grea deal o con-

rol, receiving paymens based on he perormance o heir unio pro sharing a

large corporaionswhere workers have less conrol and paymens may poeniallyhave more o do wih he price o commodiies han changes in worker behavior.

Boh ypes o sharing have a valid role. I is reasonable or workers o bene when

he company does well regardless o he causeas do company owners, invesors,


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and oen execuives. And when a porion o workers pay is ied o oucomes hey

can conrol, i is a srong moivaor or workers o improve heir perormance.

I variable pay is awarded based only on company-wide perormance, here may be

less o an incenive or workers o improve individual perormance. Bu workers also

shouldn be excluded rom receiving a share o heir companys upside pros.

We urge policymakers o consider how governmen can promoe a balance

beween he porion o workers variable pay ha is ied o oucomes hey direcly

conrol versus company-wide perormance merics.

How do you limit the unintended consequences of inclusive capitalism policies?

Governmen has adoped a wide variey o policies o suppor inclusive capial-

ism. As a consequence, more companies share capial wih heir workers and

companies bene rom a more invesed and producive workorce.

No surprisingly, some companies have aken advanage o governmen incen-

ives while underaking acions ha may hur workers and make he business

environmen less sable. Companies have used employee sock ownership plans,

or example, o leverage capial or hosile akeovers ha have placed signican

addiional risks ono o workers.135

We urge policymakers o consider how o ensure ha governmen programs

reward only companies ha achieve he inended goals o inclusive capialism and

no companies ha ake unair advanage o legal loopholes.

Should government only support inclusive capitalism in the form

of employee ownership?

Exising governmen policies ha suppor inclusive capialism are primarily

ocused on providing benes o companies wih employee-ownership srucures

such as employee sock ownership plans. Far ewer policies promoe inclusive

capialism programs wihou an ownership componensuch as gain and cash

pro sharing.

Proponens o employee ownership argue ha i is he workers role as ownersha provide he unique benes o inclusive capialism. While his role mus be

osered hrough educaion and managemen srucures, workers who see hem-

selves as ownersand no jus wage earnerseel ully invesed in he uure o


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he company and consequenly have an especially srong ineres in improving

company perormance.136

In addiion, i is argued ha worker-owned companies are anchored o he

communiies where hey are based and as a consequence provide larger socieal

benes o ha communiy.137

As he benecial owners o heir companies, work-ers can emphasize boh reurn o pros and susainable growh ha considers he

needs o oher communiy sakeholders as well as he environmen.138 Also, a a

ime when so many jobs are going overseas, employee ownership can ensure ha

local jobs are mainained and ha wealh is rooed in he communiy where i was

creaed. Finally, worker ownership is oen hough o be benecial or democ-

racygiving workers a real, paricipaory role in heir work lie ha can ranslae

ino heir civic lie.139

In shor, here is somehing special abou broad-based worker ownership. Ye

many o he benes o inclusive capialismsuch as increased rm perormanceand employee compensaionalso occur wihou ownership.140 Employers

recognizing he benes o shor-erm and long-erm sharing rewards oen adop

employee-ownership models along wih oher ypes o sharing programs.

We urge policymakers o consider how bes o suppor all ypes o inclusive capi-

alism, including gain sharing and pro sharing and no jus ownership.

How do you encourage all types of companies to adopt sharing policies?

Tere are muliple reasons why companies may no adop broad-based sharing pro-

grams, including: CEOs and op execuives lack inormaion abou inclusive capial-

ism programs or experise on how o adop hem; hey are skepical ha inclusive

capialism programs will improve business perormance and invesor resuls; or hey

are unwilling o share power and capial income wih heir workers.

Mos o he recen policy aciviy around inclusive capialism has been ocused

around policies ha mos aec small and medium-size companies and sar-

ups. One area o ocus or examplebene corporaion sausis paricularly

atracive o ideologically moivaed sarup companies ha wan o ensure ha

he wellbeing o workers and oher sakeholders does no become subservien oshareholder reurns as he company grows. Similarly, ESOP policy has generally

moivaed owners o small and medium-size businesses o conver heir owner-

ship srucure upon heir reiremen.


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Less atenion has been paid o encouraging he adopion o inclusive capialism

programs a large, esablished public corporaions even hough hese companies

have he power o esablish compensaion norms hroughou heir indusries and

employ more han hal o al

growing the wealth

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