Proposals to scale employee ownership and profit-sharing aimed at state and municipal governments
In a new white paper, the Center for American Progress (CAP) identifies four strategies that state and city governments could use to encourage local businesses to more broadly share ownership and/or profits with their workers:
- Establish an office of employee ownership and broad-based profit-sharing;
- Use public financing to facilitate ownership conversions;
- Encourage government contractors to share ownership and profits with their workers; and
- Require government-supported tech startups to share equity, profits, or ownership broadly with their workers.
These recommendations follow a robust review of the research showing the benefits of broad-based ownership and profit-sharing and a look at some of the state and local governments that have already taken up these policies to address income inequality in their communities.
Disparities in Access to Ownership and Profit-Sharing Plans
After making the case that employee ownership and profit-sharing benefits not only workers, but also businesses and local economies, Karla Walter, director of employment policy at CAP, zeros in on “disparities in access to profit-sharing and employee-ownership plans.” Referring to research from Rutgers Institute for the Study of Employee Ownership and Profit Sharing, she notes that less than half of U.S. workers participated in some form of profit-sharing in 2018. Of U.S. employees,
- 38 percent participated in a profit-sharing plan and 30 percent in a gain-sharing plan;
- 20 percent owned company stock; and
- 9 percent held stock options.
The value of these plans varies widely, as does the distribution across the population. White workers have greater access to all forms of profit-sharing and hold greater wealth from these plans than do workers of color. Moreover, those with the highest wages have the greatest access to this wealth-building tool. “One-third of high-income workers participate in profit-sharing plans,” says Walker, while only 20 percent of middle-income workers (earning between nearly $35,000 and $9,000 annually) and 7 percent of low-wage workers participate.
State and local policymakers must do more to expand the use of profit-sharing.
In response to these disparities, Walker writes, “state and local policymakers must do more to expand the use of profit-sharing as well as think through how to target populations of workers that would benefit the most from sharing programs.”
States and Cities Supporting Broad-Based Ownership
While states such as Ohio and Vermont, among others, have sought to educate local business owners about employee ownership and support business transitions for decades, policymakers are now looking at a broader array of strategies to grow employee ownership. Walker identifies some highlights in current state and local efforts, including:
- Colorado, where Governor Jared Polis launched a Commission on Employee Ownership and an Employee Ownership Network to educate business owners, support transitions, and remove barriers to employee ownership.
- Missouri and Iowa, where state-level tax incentives encourage the sale of local firms to ESOPs.
- Newark, NJ, where a public-private investment fund is providing financing for employees to buy out their firms.
- Cleveland, where the purchasing power of the city and anchor institutions supports the Evergreen Cooperatives, worker cooperatives providing good jobs to marginalized communities who suffered the most from de-industrialization.
Recommendations
These efforts by cities and states provide models to build on, but they are not yet sufficient to scale employee ownership. Says Walker, “Programs are frequently too modest in scope, reaching a relatively small number of workers and companies or supporting only one type of sharing.”
“State and local governments can raise wages and wealth for workers, support high-road businesses and create a wider coalition of supporters,” she writes, “by more broadly incorporating policies to promote profit-sharing in their economic policy agendas.” The CAP report elaborates on the four key strategies:
- Establish an office of employee ownership and broad-based profit-sharing
Noting the success of statewide centers for employee ownership, CAP recommends that these centers expand their mission to promote not only ESOPs and worker cooperatives, but also the benefits of stock ownership and profit-sharing, particularly at large companies. The centers could also promote employee ownership trusts, which, the report argues, are less costly to implement than ESOPs and may be better suited to smaller companies.
The report also makes the case for expanding the mission of these centers to include advocacy for stronger government support for employee ownership and profit-sharing. Centers for employee ownership can assess the impact of government policies and programs on employee ownership, and promote legislative and regulatory changes that would encourage widespread adoption of broad-based ownership.
- Use public financing to facilitate ownership conversions.
Financing is a major obstacle for employee ownership transitions. Public-private investment funds such as the one launched in Newark provide a model for raising capital. CAP praises the Main Street Employee Ownership Act for providing a potential financing source—SBA loan guarantees—for ESOP and worker cooperative transitions. The report recommends that cities and states take the additional step of ensuring that all of their loan guarantee and loan programs for small businesses are available for firms transitioning to employee-ownership structures.
The report recommends that cities and states take the additional step of ensuring that all of their loan guarantee and loan programs for small businesses are available for firms transitioning to employee-ownership structures.
- Encourage government contractors to share ownership and profits with their workers.
State and local governments spend billions of dollars on contracting for services. Just as they evaluate bidders’ proposals based on past performance and technical ability to perform a service, governments can evaluate contractors’ workplace practices. “Government agencies should give significant weight to those employers that provide decent jobs, including those that pay market wages, provide benefits, and share profits with employees,” the report recommends.
- Require government-supported tech startups to provide equity to their employees.
State and local governments often use their resources to promote entrepreneurship and innovation. Pointing to companies such as Google, Apple, and Tesla, which received significant government support in their early years, the CAP report notes that these tech companies were known for widespread stock ownership programs to incentivize performance. But tech companies today have pulled back on these programs in favor of stock options for only a small sliver of executives.
To counter this trend, CAP proposes that “whenever a government provides at least $1 million in assistance to a company [grants, loans, loan guarantees, access to government technology], the recipient should be required to share profits or ownership with its workers when the company goes public or is sold to another firm.” This proposal breaks new ground and offers another potential tool to governments in search of new ways to ensure more equitable economic outcomes.
