It’s Time for Employees to Share in Corporate Profits

I am not a socialist. I do not believe that the wealth of the rich should automatically be shared with the less fortunate for the betterment of society. However, the gap between executive compensation and that of the average worker has been blossoming out of control much to the detriment of workers who do not share in the profits they help to create.

France has used the worker dividend over the years to promote profit-sharing. The benefits range from increased production to higher worker motivation.

Here is how a “workers dividend” would work. For every $1 million passed on to shareholders in the form of stock buybacks or dividends, corporations would have to pass on $1 to every worker. All public corporations would be required to pay it.

The Problem with Stock Buybacks

Stock buybacks benefit large shareholders and corporate executives, whose pay packages include significant stock compensation. In 2020, the ratio of CEO-to-typical-worker compensation was 351-to-1 under the realized measure of CEO pay; that is up from 307-to-1 in 2019 and a big increase from 21-to-1 in 1965 and 61-to-1 in 1989.

Over the past decade, corporate stock buybacks have soared. Corporations use stock buybacks to withhold profits from workers, and instead keep more and more profits for their CEOs and Wall Street investors. On July 3, 2019, Senator Sherrod Brown (D-OH) introduced legislation to require profit-sharing with workers in the form of a dividend for workers. Unfortunately, it hasn’t had any traction in Congress.  

According to Senator Brown, “Wall Street is obsessed with shareholder equity, but workers have equity in a company, too – it’s called sweat equity, and it’s time workers are rewarded for it. “Corporate greed is fundamental to the Wall Street business model – we know that. Workers aren’t going to get their fair share until we change it – we know that too.  My proposal is simple: if corporations want to transfer wealth to Wall Street, workers have to get a proportionate share of the pie.”

Profitable companies have long had the option of kicking cash to shareholders in the form of dividends. Buybacks were simply a new tool to accomplish that same goal, and in many ways, they were a better tool because for much of that period, the capital gains tax rate was lower than the dividend tax rate.

Why? There are two reasons. One is that it puts cash in the hands of those shareholders who choose to sell in the buyback. And two, it decreases the number of shares, potentially hiking up company’s share price.

Large corporations buy back stock using capital they should be investing in their workers to keep more and more of their profits for their CEOs and Wall Street investors. This practice has further exploded under President Trump’s tax law that overwhelmingly benefited major corporations and the top 1 percent. In 2018, the largest U.S. companies spent a record $806 billion on stock buybacks.

A Bloomberg analysis shows that of America’s $54 billion corporate tax windfall, so far $21.1 billion has been kicked to shareholders in the form of “buybacks,” almost twice as much as has gone to employees in higher compensation and far more than has been spent on capital investments or research and development.

Brown’s Stock Buyback Reform and Worker Dividend Act

The act would:

• Require public companies to issue a worker dividend to all non-executive workers based on the total amount spent on stock buybacks, dividend increases, and special dividends. The worker dividend will be equal to $1 for every $1 million spent on stock buybacks, dividend increases and special dividends.

• Lower the permissible amount of stock buybacks a company can make.

• Impose reporting requirements to ensure transparency into corporations’ stock buybacks.

• Convert the safe harbor rule to a mandatory prohibition on excessive stock buyback activities.

• Establish an enforcement mechanism – including a 5-year moratorium on stock buybacks and a private right of action for employees – if a corporation fails to meet the worker dividend requirements.

While other proposals focus solely on preventing stock buybacks, Brown’s proposal is unique in its focus on workers. It is the only proposal that puts workers on equal footing with shareholders and puts money in workers’ pockets.  

Worker Dividend Act

On September 19, 2019, U.S. Senators Cory Booker (D-NJ), Bob Casey (D-PA), and Rep. Joe Kennedy III (D-MA), reintroduced the Worker Dividend Act—legislation targeting the increasing trend of corporations using profits for stock buybacks, instead of using them to raise wages for workers. Under the bill, if a publicly-traded company buys back its stocks to enrich its shareholders and CEO, it must also pay out a commensurate sum to all its employees—the “worker dividend.”

“While corporate profits are at their highest level in 90 years, wages for working families have been stagnant for more than four decades and workers’ slice of the pie continues to shrink. A company that has the profits to reward its shareholders should also reward the employees who are helping create those profits,” Senator Booker said. “This legislation has a simple premise: when companies do well, workers should do well. There’s no reason that a country as rich and as powerful as ours should have to choose between great wealth for the few, like corporate executives and shareholders, and great opportunity for all its citizens, including its workers.”

Most significantly, though, Booker’s bill is a critique of the overall operation of an economic system that people on the left have long argued is systematically broken and stacked against everyone but the very wealthiest Americans.

It would be nice if top corporate executives shared more of the profit pie with their workers without being required to do so. Since that doesn’t seem to be in the cards, Congress should step in and finally pass the Stock Buyback Reform and Worker Dividend Act.

Blog posted by Dr. Steven Mintz, The Ethics Sage, on July 5, 2022. You can sign up for Steve’s newsletter and learn more about his activities on his website  (https://www.stevenmintzethics.com/) and by following him on Facebook at: https://www.facebook.com/StevenMintzEthics and on Twitter at: https://twitter.com/ethicssage.