How States and Localities Could Spur More Companies to Share Profits With Their Workers

State and local officials concerned about issues like income inequality and keeping good jobs in their communities could consider implementing policies to promote business models that provide workers with a stake in ownership or profits, a new report suggests.

The report from the Center for American Progress, a liberal think tank, points to benefits that employee ownership and profit sharing can have for both employers and workers. It also highlights steps states and localities might take to help bolster these sorts of businesses.

“We think the evidence on employee ownership and broad-based profit-sharing programs is they really help to build workers’ wealth,” said CAP's Karla Walter, who authored the report.  

There are a number of arrangements that businesses can use to provide employees with a share of profits or ownership.

For instance, there are employee stock ownership plans, or ESOPs. In general, these are employee benefit plans that involve setting up a trust fund where shares of stock are allocated to individual employees. The ownership plans are eligible for certain tax breaks. 

The National Center for Employee Ownership said in 2018 that about 6,600 of the plans existed in the U.S., covering about 14 million people.

Profit sharing is more or less what it sounds like and can be carried out in a variety of ways, like giving workers cash bonuses or by providing them with shares of stock.

Worker cooperatives are another model that Walter references in her report. As she explains, they’re owned and democratically controlled by their members, who receive surplus revenues. 

There are other options as well, like employee stock purchase plans where companies can offer discounted stock to their workers, often during some set period of time.

Research that Walter cites shows that programs like these are linked to a variety of positive outcomes for workers, like higher wages, healthier retirement accounts, and access to other workplace benefits like paid parental leave, tuition reimbursement and subsidized child care.

One 2017 study suggests that these benefits extend across race and gender lines. It noted, for example, that workers of color who participated in an ESOP earned 30% more in wages compared to those who did not. The study found similar results for single women.

There can also be benefits to companies—like greater loyalty, lower employee turnover, less absenteeism and higher productivity.

Despite all this, less than half of U.S. workers participated in a profit-sharing plan in 2018, and white workers hold more wealth than minorities through the programs, the report says. It adds that participation also tends to be lower among people with lower incomes.

Walter says state and local governments have a role to play here and recommends some policies and programs they might pursue.

One is establishing offices to provide outreach and technical assistance focused on employee ownership and profit sharing.

Another is to make sure that loan programs and other government financing initiatives that are geared toward supporting small businesses and economic development are available to companies that are interested in converting to an employee-owned model.

Baby Boomers nearing retirement own upwards of two million businesses, according to an estimate in the report. 

The report goes on to add that, “Selling to employees—rather than to a competitor, larger company, or private equity fund” is one way that these retiring business owners might “ensure that local jobs and the legacy of their company are preserved.” 

Newark, New Jersey has a plan underway—described in the report—that is meant to grease the rails for these sorts of conversion deals by providing special financing assistance.

Governments might also factor in employee ownership and profit-sharing practices when deciding between contract bids for goods and services, the report says.

Or they could require government-supported tech startups—which receive public assistance via grants, loan guarantees or tax incentives—to share in profits or ownership with workers.

Opportunities exist not only with small businesses, but large ones, too, said Walter. 

“These policies can make a difference,” she said. 

“They’re policies that are about not just job creation, but job quality, which is oftentimes not a part of the conversation with those big economic development subsidy deals,” she added. “It’s about creating good jobs and it’s about maintaining the strength of your community.”

Walter did caution that policymakers may want to be on the lookout for situations that could expose the earnings of lower-wage workers to excessive risks. But she also said there's not much evidence at this point that these kinds of risks are common or widespread with profit sharing or employee-owned business models.

A full copy of the report can be found here.