Sharing Profits, Sharing Power

Nick Pearce writes:

The ‘right to buy’ for council house tenants has long been considered emblematic of the Thatcher revolution of the 1980s.

It gave direct expression to the rising aspirations for betterment amongst the skilled working classes, particularly in Southern England, and secured their allegiance to a conservative vision of a property owning democracy.

It remains one of the most popular and enduring policies of the last thirty years. It taps into a craving for security, the desire to get on and the need to have a stake in society.

Through homeownership, we are encouraged to put down roots, plan for the future and help shape our neighbourhoods. 

Thirty years later, voters’ desire for security and a stake in society are just as strong. Yet they are now undermined by the crisis of living standards and the alienation that many people feel at work. 

So where Mrs Thatcher sought to extend security and ownership through selling council houses, Ed Miliband should look to the workplace.

He should set an ambition to help more employees take a real stake in their companies, boosting their commitment, driving up productivity and helping to rebuild a more dynamic and resilient British capitalism.

The most straightforward way to do this is through profit-sharing, by distributing a small share of company profits to employees, once a company achieves a certain level of profitability.

The John Lewis Partnership provides the most famous example of profit-sharing, but in fact about one third of all British companies use it in some form to reward their employees.

Another high-profile case is Sports Direct, where staff who had been with the company since 2009 received shares worth 75 per cent of basic pay when the company achieved profit targets in April 2013.

Profit-sharing isn’t just good for staff. Firms that have adopted profit-sharing and other similar schemes are typically more profitable and see stronger improvements in productivity than other similar companies.

Evidence shows that the financial stake that profit-sharing gives to employees induces them to work harder and smarter, and get on better with their colleagues and managers.

These benefits are strongest where all staff share in the rewards – not just the top executives – and where rewards are linked to collective effort, not individual targets.

Profit-sharing, and other options like employee share ownership, incentivise staff to work towards raising company performance and, crucially, rewards them fairly when they are successful.

Rather than staff simply demanding higher wages, profit-sharing provides a means through which employees can earn better financial rewards, generating stronger returns for company owners and shareholders in the process.

The financial risk to companies and shareholders is limited because profit shares are only generated if a certain level of profitability is achieved.

The overarching goal of profit-sharing is to make British businesses more productive and more profitable. But the central insight is that this is most effective – and most resilient – when we draw on the talents of the whole workforce and reward them accordingly.

If every private sector company in the UK with 500 or more employees had a profit-sharing scheme, over 8 million people (43 per cent of all employees) in 3,000 firms could benefit from hundreds of pounds a year.

The number of firms using profit-sharing has been fairly static in the UK over the last decade. Companies stuck in low-value, low-skill business models might need a push to adopt these more dynamic practices. 

How do we get more firms to adopt profit-sharing and other models like employee share ownership? The first step is to ask employers, investors and employee representatives to come up with some proposals for expanding profit-sharing that suit all sides.

A future Labour government might also look at new tax reliefs to encourage worker share ownership, although it’s important to prevent further opportunities for tax avoidance. In France, profit-sharing is compulsory for all larger companies.

In an age of austerity, working people can no longer rely on the state to support rising living standards with more generous in-work benefits. Weak real wage growth that predates the recession highlights the need for bold economic reforms.

A commitment from Labour to dramatically expand the use of profit-sharing would signal a renewed commitment to ensuring that working people have a stake in the success of the British economy.