Corporate Governance in the Employee and Union-Owned Workplaces of the Future (Geocities Rescue)

In an article published in January 2003 issue of PVS Labor and Corporate Governance, I challenged the conventional progressive view of Social Security Reform and how organized labor might take advantage of the debate to improve conditions for American workers. This second essay details how to use Taft-Hartley pension funds or Personal Retirement Account funds controlled by labor to expand ownership and create the workplace of the future. Since its first posting on this site, this essay has been expanded with additional material, so much material that the Pay Equity portion has been moved to its own page.

Many readers of the January article expressed consternation with why PVS published an article suggesting compromise at this stage of the debate (including those readers in the Investment Management office of the AFL-CIO, who were so confused they had this article killed). In this essay, I explore how changing the assumptions behind how business is managed makes such a discussion worth Labor’s while. I highlight the differences between traditional firms and employee-owned firms and the implication of these differences for management and financial systems. This examination and the essay that follows on pay equity set out ways that employee-owned firms might do things differently, taking their performance to the next level.

The Social Context of Ownership
Traditional capitalist firms are organized on a principal-agent model. The organizational culture is best described as hierarchical. The purpose of these organizations is to maximize value for the shareholders. Employees in this schema are dispensable factors of production. While more enlightened management treat the employees as stakeholders, the purpose of doing so is to improve the value of the company for its shareholders, as is expected given the assumptions of Capitalism. More often than not, however, the actions of management are designed to encourage conformity to the norms and goals of the organization, rather than to encourage original thinking. Given the hierarchical organizational culture of most firms, originality by the vast majority of the employees is neither encouraged nor rewarded. In the rare case where such systems do exist, the lion’s share of the reward for innovation goes to shareholders and to management. Inventors within the system receive a small bonus for a patent, but often such rewards are a pittance compared to the value added by the invention. In traditional firms, scientists and engineers are rewarded with higher salaries up front. These salaries are related to the credentials they hold. The expectation is that in reward for these salaries, any invention is the property of the shareholders or proprietors. In exchange for assuming all of the financial risk, the traditional owners claim all, or most, of the rewards.

In the capitalist firm all profits go to the fiduciary owners of the firm, while none go to the employees. The implication here is that the owners of the firm own the labor, as well as the value produced by the firm's assets. This loss of ownership leads to the alienation of the worker from his work, as others have described. Workers put themselves into their labor and their most valuable resource, their time. Claiming ownership of another’s time on the planet without just compensation is tantamount to slavery. The only way to overcome this condition is through the just distribution of profit and ownership.

A Different Mindset
The challenge for labor and for employee-owners is step out of the traditional environment and an adversarial relationship with management and step into the possibility of a whole new paradigm of ownership. This mindset emphasizes worker democracy and equality while at the same time encourages individual achievement. The survival of a union or employee owned firm (or any firm) depends on its ability to achieve and adapt. To overcome the authoritarianism of Capitalism institutional systems must change. Most firms controlled by Employee Stock Ownership Plans (ESOPs) still contain hierarchical vestiges in pay and share distribution. Lower level employees are still regarded as expendable in many such firms. Overcoming these tendencies is important in realizing the potential of employee ownership.

Profit Distribution
One area ripe for paradigm shift is the distribution of profit. All profit need not go to the shareholders, even the employee-shareholders. Instead, profit is distributed based on the ownership of the factor employed. I reject the traditional economic tenet that wages are an adequate compensation for the inherent right of employees to a share in the profit of what is produced. As I demonstrate below, wage levels are determined by a variety of factors (most of which do not involve a free market for labor) and in many cases do not even reimburse the employee for the supply cost of labor. For example, if labor costs are forty percent of the cost of a product, then forty percent of the profit is justly distributed to the workers (regardless of the ownership share by the employees). Profits from material, and plant and equipment costs are justly distributed to the shareholders (including employee shareholders). Potentially, in labor-owned firms, the workers get two profit distributions, which beats zero (the status quo) any day. To approach a redistribution of profit, however, workers are to be adequately represented on corporate and ESOP trust boards and receive an equitable share distribution.

Board Representation and Share Distribution
Union ESOP shareholders insist that firms and ESOP trusts update their board structures so that each major ownership faction is fairly represented, including management shareholders, labor employee shareholders and professional employee shareholders, as applicable to the structure of the firm. This restructuring includes a method to assure that factional votes on the ESOP board are reflected in votes of the board of directors in those firms that are not wholly owned by the ESOP.

Currently, the majority of ESOPs distribute shares based on salary. This has the potential to demotivate lower salaried and shorter-term employees. When lower salaried employees receive less of an ownership share than higher salaried employees, they perceive the difference and adjust their conduct accordingly. Vesting requirements also play a role in this, especially those that require a "probationary" year of service prior to participation in an ESOP program. This is why organized labor continues to see many ESOPs as a vehicle to fund management using ERISA. Only by equalizing the basic share grant for each employee (rather than linking it so salary) is this perception overcome.

Union ESOP shareholders develop more equal share distribution and dividend reinvestment structures. Ideally, shares are distributed without regard to salary level; with each full-time employee getting the same number of shares (and part-timers getting a percentage of that). Share accumulation starts at day one, rather than after a year of service, which is the current practice in many firms. In today’s economy, where employees work at a firm for a few years and then move on, waiting any time period for a piece of the action has serious retirement and wealth consequences. Some mechanism is necessary so that long-term temporary employees are compensated with shares from the client firm. Temporary employment has its place in a flexible economy, but not as an excuse to deny workers the ownership benefits that they deserve. All of this leads to the heart of the matter, how managers are selected and employees are paid.

Adopting an Ownership Culture in Organized Labor
Union-owned firms must develop a profitability culture of ownership, as must unions who move from more diversified investment to direct ownership. Such a culture highlights team building with management and professionals and de-emphasizes work rules that maximize employment rather than safety. Firms that practice these principles innovate more and are more productive, so their profits are higher. Even taking into account the increased share paid to workers, investors are attracted to these firms, as they produce a higher dividend. As importantly, these firms get the best workers, the ones who work well and innovate. These firms win market share, as their products are newer and better. Other firms adapt to these methods or disappear.

The creation of Personal Retirement Accounts as part of Social Security Reform is one way to increase employee ownership. Another way for unions to tackle this issue is to restructure their pension fund operations. A portion of these funds is used to exercise direct control over the firms at which members work. This occurs through the creation of ESOPs, the direct voting by employees or by union investment agents, such as PVS or the union local itself, voting in the interest of member workers. In some cases, the result of such a conversion is voting control or control of enough shares so that the union employees at the firm have a significant voice in the management of the firm. The majority of ESOP conversion clients are privately held firms that are held by their founders and transferred to employees. Unions use the same types of capital credit mechanisms used to create ESOPs to buy out non-employee shareholders.

Expanding ownership brings the union movement into the Twenty-first Century and ultimately fulfills the long-term goal of workers controlling the means of production. After workers are in control, they adopt a more equitable pay structure than exists in traditional firms. In the short term, adopting these proposals gives both non-union laborers and professionals an additional incentive to organize. More than anything else, these strategies reverse the decline in union membership as a share of the workforce.

Pay Equity for ESOPs and Union Owned Firms (Geocities Rescue)

For union and employee-ownership to realize their full potentials, pay is equalized to the greatest extent possible. To do this, firms account for the determinants of pay.

Management Pay and Selection
As long as there is a division of labor, some form of management hierarchy is required to operate the firm, even the union or employee-owned firm. The average worker, given no organization or command structure, does not work otherwise; or their work does not mean anything in relation to the work of others. However, there is no economic reason why those in positions of authority need to receive higher compensation (aside from an age premium). It is likely that the only real reason managers get paid more is that they control the money. If this is true it is an abuse of trust.

In a free market to give orders to someone else you pay them. The same should be true in an organization. Given a common pool of labor, for one worker to tell other workers what to do he should pay a price, possibly taking a salary reduction to be in charge of his fellows. His task is different than those of his fellows, but it is no more essential than the labor itself.

Retrain managers in the union or employee-owned workplace to cope with an ownership culture that emphasizes training and team building. Union shareholders insist upon management selection and salary determination structures based on competitive bidding for management positions within the firm by all qualified applicants and selection by those managed at the shop floor level and higher. Such structures go hand in hand with such technologies as Total Quality Management, whose flaw may be that they drive responsibility to the lowest possible level without at the same time adjusting salary structures to reflect this. Pay for supervisors is no longer set by higher-level employees, rather a free market for wages is created in the firm. The floor price in auctions for management positions is the average wage of the employees supervised. In the event more than one bidder proposes the average wage, an election is held among all of those supervised to pick the supervisor. First line supervisors have a relatively small electorate. The entire division or corporation elects corporate division heads or CEOs.

Innovation
Another determinant of pay is contribution. Union-owned firms inaugurate incentive systems to reward actual performance rather than conformity within a hierarchical structure. Currently, higher contributing employees tend to receive higher wages with the expectation that they will perform. Pay for contribution is a good thing, but can be awarded AFTER a demonstrable contribution to the firm is made, rather than before.

If salaries are equalized, patents and innovations are more handsomely rewarded, encouraging these activities. Incentive systems include the decision structures used to identify particular innovations or actions that resulted in short or long term profitability and to assign credit for these actions. Incentives are awarded on an individual or a group basis, depending upon the contribution. If an individual invents something, secures a long-term client, or in some way avoids a loss he or she is granted both a cash incentive and stock awards to reflect the makes to the long-term profitability of the firm. This reward is determined through democratic, rather than hierarchical means. Incentive systems are necessary to reward initiative and attract the best workers, which increases market share and lead other firms to adopt this type of structure.

Cooperativism is healthier psychologically, engendering self-actualizing behavior. In this system, all members of society, all things being equal, have the opportunity to rise to their full potential with limited sacrifice. When they achieve their potential (and no healthy person stops short, given the opportunity) they are giving their maximum effort to society. At their point of maximum fulfillment their contribution is equal to all others who are giving their maximum.

Education
Some employees are determined to be more valuable because of their level of education or training. Union-owned firms are able to develop an edge in recruitment and training systems by providing both tuition and pay during training and education. They recruit the best and brightest individuals prior to technical training or during their college careers. In exchange employees finance an equal share of their tuition through a student loan that the firm repays for the new employee over a period of years (two years of work for each year of education). The employer also provides off-campus living arrangements and paid work experience as a supplement to education. Such a system removes the financial risk from the employee and transfers it to the employer, which contributes to a culture of equality and flatter wage structures in the firm. The firm expects to pay a lower wage later on but gets the more talented workers sooner. Those who leave early reimburse the company for whatever portion of their educational debt remains unpaid at separation. As college costs go up and student debt mounts, such an arrangement seems inevitable, especially for those students who come from families who are less "credit worthy." Workers who have already self-financed their educations are awarded an up-front bonus in cash and stock to compensate them for their educations, rather than a higher salary. Pay differentials that reflect educational sacrifice no longer make sense when workers are educated to their full potential at company expense.

An economics that is overtly Christian makes other statements about pay differentials that secular economics cannot. Pay differentials due to ability are no longer justified, as abilities are gifts from God - not the property of the individual. Working in an area where one’s talents and interests do not lie not only does not make sense for the individual, but also is an abuse of what God has provided. Higher pay for doing something one does not love cannot compensate the psychic pain inherent in such a choice. It is better that all work using their God-given talents and be happy. In a system of equal base pay, working too hard is no longer necessary. Workers are able to earn a just wage, covering their supply cost of labor, while doing so.

The Supply Cost of Labor
Conventional economics holds that the supply curve for labor goes up with more wages offered,- the higher the wage the more willing the worker, all other things being equal. Of course, all other things are never equal. A more important determinant of supply cost is economic need. Labor and the wages gathered from it are the way the worker obtains all other economic goods. This means that the supply curve for labor has a negative curve - the lower the wage the more one works. The more the worker needs, the more he or she works at a given wage. If the wage is lowered, the worker works more. As wages rise, work goes down. Most do not work 60 to 80 hour weeks because they can afford not to. This is why poor people work such long hours while the rich take time off (though some dedicated professionals, especially doctors, do not. However, this has more to do with duty than economics).

The level of income a worker requires is relative to a "just wage." The just wage is the wage required to maintain the worker and the worker's dependents (who he cannot morally allow to go hungry). This wage covers, at minimum, shelter, food (energy for work), clothing, transportation to and from work, and a reasonable amount of leisure. Also within such a wage are all taxes and social insurance contributions, health care and insurance costs and religious tithes. If a worker's main job is not enough to cover these costs moonlighting occurs, workers organize and strike or welfare is sought - as it is more just to go on the dole than to work as a slave.

Family Support
In a more paternalistic era, employees received a higher salary when they had a child, meeting their supply cost of coming to work. Such a direct payment has been replaced by pay for seniority. Labor-owned firms include a compensation system that links pay to the number of dependents supported by the worker. This is an option that employee-owned firms find attractive that traditional firms do not attempt. Employee-ownership allows the payment of a lower base rate while meeting the supply costs of the employee.

Many workers are forced to accept the best job they can, or work more than one job, in order to meet their supply costs. If everyone knew their supply cost of labor they would not work for anything less, provided government assistance or funded education is available for not working. Put another way, it is not justified to force someone to work for under his or her supply cost of labor; it is in fact slavery.

If the entire union-owned sector adopts such a system, it can demand federal and state tax credits to fund this expenditure, which truly benefits society at large. Dependent allowances of this type are needed nationwide. Returning to the topic of the January 2003 PVS newsletter, the Social Security liquidity crisis is ultimately an aging crisis. The most reliable way to reverse this crisis is for society to explicitly reward childbirth. It is also a way to forever end the debate on abortion, as any pro-life politician who does not seize upon this solution as the way to end abortion has other agendas involving the domination of women, rather than the protection of children. Finally, many members of organized labor are uncomfortable with labor's association with the pro-choice movement. Labor's adoption of such a child-birth incentive only helps bring the traditional progressive coalition back together again.

Older Workers
Another component of the supply cost of labor is the perceived length of life. Older employees have a higher supply cost for their labor. Two factors account for this. The first is that they no longer feel immortal, so they consider their time to be more scarce and therefore more valuable. Younger workers work for less, because they perceive, quite intelligently, that they have time on their side. A way to compensate older workers for their higher supply cost is to transfer a portion of their compensation to stock dividends, which are reinvested for retirement or taken as a direct payment, or some combination of the two. Shifting compensation in this way removes the existing perverse incentive to fire older more productive employees and replace them with younger workers. If a worker arrives mid-career, the worker is given the option to invest a portion of any accumulated retirement funds in shares of the new firm or the Union ESOP Trust.

Expanded Benefits
Higher pay is also a retention tool to reward longevity. There are other ways to do this. In union-owned operations overseas, expanded benefit levels are a common feature, especially in the financial area. Possible options to be adopted include limited payroll line of credit accounts and low interest home mortgages in cooperation with employee credit unions. Such accounts are used as a retention incentive. The term of the home loan and the planned retirement date are matched so that at loan maturity the number of ESOP shares held provides for payment an amount equal to the base salary. Provisions are made to refinance loans of employees who terminate before maturity at a reasonable rate. Failure to provide such a refinancing option, especially in firms with mixed ownership, constitutes peonage.

Issuing credit to employees at no or very low interest makes good sense in firm entirely owned by its workers, as interest fees are simply rechanneled back to profit and then redistributed again to the employees as shareholders. Interest is only required to compensate non-employee shareholders. When outside investors are bought out, interest is eliminated. This takes credit unions to the next level by merging the employer and the credit union and accessing the capital accumulation of the firm to make home loans.

Efficiency and Social Justice
An equal pay/incentive based system is a better way to allocate positions. Perfectly competitive labor markets produce an average wage, once other factors have been compensated for (family size, education) or provided for through making education and training freely available. After such factors as age, education, position and family size are factored out or compensated for separately, a perfectly competitive base wage is achieved through supply and demand. In a perfectly competitive labor market, if one factor is less productive, less of that factor is purchased. If another factor is calling for a higher price, than means are undertaken to produce more of that factor (providing education to enough of the higher paid factor to decrease the price). Worker deployment follows productivity, as it does in any free market. If less janitors are needed, less are hired, so the demand for janitors and the wage they are paid reflects their utility to the company, not the prejudices of the ruling hierarchy. It is not economically efficient to have workers who, at a base level of effort and ability, are not as productive as other workers. All contribute equal effort to the final product, with only the innovators and superior performers receiving increased compensation.

In a free market, if janitors are paid less than line workers there are too many janitors. Efforts are made to overcome the effects of discrimination in the education and employment system, so that those janitors who are capable of other duties are trained and hired in order to maximize their natural abilities. Both basic justice and good sense demand that menial laborers be offered all the education they can use in a culturally sensitive manner. I have heard too many stories of foreign doctors driving cabs or engineers operating dry cleaning establishments. Under-utilizing these individuals is both inefficient and wrong.

The last determinant of pay is discrimination based on race, gender or immigration status. These are no longer dignified in an employee-owned firm. The system set out above eliminates these ugly features from employee compensation forever. Indeed, smarter firms out and train socially disadvantaged individuals, as the likelihood of finding untapped genius within them is greater than in the population of white males.