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A better way to raise the minimum wage

Earlier this month, California raised the minimum wage by a dollar to $9 an hour. That might not seem like a lot, especially given that the minimum wage has generally failed to keep pace with inflation and lost 5.8% of its purchasing power in the last five years alone.

What’s significant, however, is that California and other cities and states are pushing for even higher increases, and are determined to win even if the federal government fails to act. Last month, a business group in Seattle filed a federal lawsuit challenging the city’s adoption of a $15 an hour wage, a case that could set the stage for a wider conflict between businesses and low wage workers.

This conflict, however, could be mitigated by a simple tweak of the minimum wage concept – namely, by tying part of any wage increase to ownership in a company instead of immediate cash. This model gives workers a chance to potentially earn more than the minimum wage, while saving companies cash in the short-term that could be invested elsewhere. More broadly, it would provide an alternative solution to economist Thomas Piketty’s taxation-based prescription for the widening gap between the world’s rich and poor.

For public companies, this would involve paying a portion of their workers’ pay in stock and guaranteeing to buy the stock back under certain conditions. For example, assume that the minimum wage is raised from the current $7.25 an hour to $13.25 an hour. Under this method, a business would be required to pay $7.25 in cash but allowed to pay the rest in stock—say, for instance, each share is worth $6 at the time of awarding. Employees would be required to hold the stock for a year, but after that period they would be entitled to sell their shares back to the company at the highest price the stock achieved in the last three months of that year. If the stock’s price falls, companies would have to guarantee at least the original value of the stock so that workers have a safety net.

This benefits both the worker and the employer. From a worker’s perspective, if the company performs well, its stock is likely to rise through the year and reach a considerably higher level during the last three months, netting the worker more than the $6 the stock was worth at the time of awarding. While the numbers may be small relative to the stock holdings of senior executives, this can still translate into a meaningful gain for employees and, in effect, raise their income beyond the minimum wage.

As the graph and table below illustrate, if an employee had been paid in stock in the summer of 2013 by a company whose shares had followed the S&P 500, that stock would have appreciated by 18.2% by this time, netting the employee an actual hourly wage of $14.34 – $1.09 higher than the hypothetical minimum wage of $13.25. For a full-time employee working 40 hours per week, this could mean almost $2,200 more per year.

 

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Minimum-Wage-Calculation-Sanghoee

For companies, being able to pay part of employees’ salaries in shares saves them cash up front, which can then be invested elsewhere or placed in interest-bearing accounts. These savings could make up for the higher price the business has to pay its workers to buy back its shares in the future. It also aligns the interests of workers and employers since compensation is now at least partially tied for even lower paid employees to how the company performs in the long term (in this case a year). Paying in stock will create a sense of ownership and motivate workers to do their best not just for short-term pay, but longer-term gains.

This could also work at private companies by linking employee pay with profits; the higher the profits, the higher the total wages a worker would receive annually. The potential rewards would essentially be the same as a public company, with the only difference being the short-term currency of stock in which it is conveyed.

As Piketty’s Capital in the Twenty-first Century notes, one big reason the gap between the rich and poor has widened so much is because the few who own capital have seen a much bigger return on their investments than the rest who rely mainly on wages for income and have seen little increase in their salaries. Piketty suggests creating a global tax on the rich, but punishing the wealthy isn’t necessarily the answer. Linking workers’ wages to stock and a company’s overall performance could be a better way to ease income inequality without penalizing business owners.

Just take a look at Microsoft (MSFT), which recently announced that it would slash 18,000 jobs to integrate the Nokia businesses it acquired. The market reaction was telling – the company’s stock jumped nearly 8%, suggesting that the broader market sees value in terms of financial capital (the product of investment) and not necessarily human capital (the product of wages).

The ultimate dream of a capitalist society is for its workers to also become investors (an ownership society) and realize a common prosperity. In reality, however, low-wage workers are seldom able to make enough spare income to invest it, thereby living under a perpetual financial ceiling. Barring a prohibitively punitive tax regime, which could wind up eliminating the incentive for business owners to invest and create, we need a hybrid wage model to address this. Adding ownership to the minimum wage concept could be a step in the right direction.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.