How Southwest Airlines And Others Are Creating A New Breed Of Capitalism
In the last few weeks, seven major corporations — American Airlines, Delta Airlines, Fiat Chrysler Automobiles, Ford Motor Company, General Motors, Southwest Airlines, and United Airlines —with almost a half a million employees have paid out large cash profit sharing checks to employees at all levels of the companies as a share of 2016 profits. Last month, Southwest reported it shared $586 million with its 54,000 employees or an average of 13% on top of wages. Employees will receive their profit sharing soon on April 20th. The same month, General Motors made its employees partners, paying its 80,000 workers an average of $13,750 each. The $1.1 billion investments mirrored similar moves by Ford, which came in with a about a $9,000 average piece of the pie for 56,000 hourly employees.
It is now time for Congress to encourage companies to expand profit sharing for the middle class. You’ve heard the promises over and over again during the Presidential campaign about the need to increase wages and incomes for the working middle class. This is easier said than done because many pressures have tended to flatten real U.S. wages for average employees over the last few decades. Globalization has tightened the cost screws on U.S. employers, health care costs have taken a bite out of paychecks, a kind of new norm of the 1% to 3% wage increase has taken hold in the country, unions have been in decline. Most of the typical “fixes” proposed by both the Republicans and the Democrats might take years if not decades to address in any significant fashion. So where are the possibilities for some meaningful income increases in the economy for the working middle class? The one exception may be cash profit sharing.
To be sure, not every company has been as generous as Southwest or General Motors. American Airlines also reported in February that it divided $314 million among 100,000 employees this year, Fiat Chrysler said about 32,000 employees received about a $ 5,000 part of its profits, and United Airlines divied up $828 million among 85,000 of its workers. Don’t misunderstand these figures, most of the profits went to shareholders and managers also did well, but this is beginning to look like a new form of capitalism where employees may also have potential access to a piece of the pie. Nonetheless, the push towards profit sharing is unmistakable.
The idea of cash profit sharing is fairly straightforward. Before a year of work starts, a company promises to divide part of its profits among shareholders and employees, typically making a clear commitment or negotiating the amount in advance. Chrysler, for example, reported the formula of $ 800 for every 1% in profit margin based on North American sales. Southwest Airlines has paid out profit sharing for 43 consecutive years and has created a corporate culture around shares for employees that are integrated with its whole approach to involving and managing the people who keep the airline running.
The word “share” can be misleading. Profit sharing is not comparable to “sharing” the last pint of water on a fishing boat on a dry day. It is a prosperity share — not a scarcity share. The profit “share” is more comparable to a share of stock, namely, a way to participate in the upside performance of a company where you are invested. From the point of view of executives and shareholders, cash profit sharing can make sense because the profit share is only determined after the year of performance has passed. In other words, the profits come before the pay out to employees. In companies that emphasize profit sharing, the employee investment part is emphasized in the company culture: sharing information with employees, involving workers in solving company problems, and managing for a customer and service-centered view of the world.
Could this be encouraged on a national scale? You might be surprised to know that the business world was strongly in favor of profit sharing at many points in American history, typically when the concentration of wealth was a major public worry or the country was trying to come together after a crisis. There is also no question that profit sharing has a long and distinguished political pedigree in American history as the bipartisan idea to lift incomes of the working middle class. The politician who was Speaker of the House of Representatives under President Abraham Lincoln, Rep. Galusha Grow of Lancaster, Pennsylvania, often called the “father of the Republican Party,” managed the Homestead Act through the U.S. Congress for Lincoln. He believed that the conflict between labor and capital could only be resolved by inching American business towards profit sharing. President Teddy Roosevelt advocated for the idea. Republican Senator Arthur Vandenberg put together a famous bipartisan effort with President Franklin D. Roosevelt’s administration that successfully created tax breaks for companies that implemented profit sharing for many years. On the Democratic side, JFK and LBJ both spoke in favor of the idea as did many other Democratic leaders, including Hillary Clinton, who emphasized it in her campaign.
For a variety of reasons, Federal encouragement of profit sharing waned in the years of impressive wage growth after WWII, the Vandenberg-Roosevelt encouragements were never updated, many opportunities to encourage profit sharing in Federal tax law were wasted, and cash profit sharing currently has no stand-out tax incentive. This is not fair to the working middle class because the Federal Government uses the tax system to encourage a lot of corporate behavior. According to the Tax Foundation, the Federal government foregoes $131 billion per year in corporate taxes in order to encourage corporations to do lots of things. When the Federal government forgoes collecting taxes, it is called a tax expenditure. By my estimate these tax expenditures will amount to over one trillion dollars in foregone taxes over the next ten years while middle class wages and incomes will continue to stagnate by all accounts. Why not encourage corporate behavior that can benefit the working middle class? Why should corporate tax reform be for the big guy and not for the little guy? The tax reform that is currently under discussion is planned to reduce corporate taxes further. Whatever one’s opinion on which direction corporate taxes should go, it is time to put profit sharing front and center in the tax reform discussion. One issue that will be up for discussion will be how to define “profit sharing.” Throughout American history the idea has often been considered in its generic sense and has included different forms of employee share ownership as another way of making employees partners on the upside gain in businesses.
Profit sharing can be a market-driven way to increase middle class wages. It is finally making inroads in the U.S. economy. These and many other cases and over two hundred years of business experience with profit sharing in America and serious academic study on profit sharing have created a rare opportunity for political leadership. Profit sharing is not going to solve all the economic problems of the working middle class. Some touchy issues will need to be worked out. However, profit sharing, if sensibly encouraged, can be one bipartisan policy to help increase the working middle’s incomes at a time when both Republicans and Democrats are trying to figure out how to fulfill their promises to expand incomes in the future.
Joseph Blasi is the J. Robert Beyster Distinguished Professor at Rutgers University’s School of Management and Labor Relations and author of book, The Citizen’s Share and the Third Way think tank policy report, Having a Stake. The article represents Blasi’s personal opinions and not those of any institution.