Inclusive Capitalism for the American Workforce

8/7/2019 Inclusive Capitalism for the American Workforce

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Inclusive Capitalism or theAmerican Work orceReaping the Rewards o Economic Growth throughBroad-based Employee Ownership and Pro t Sharing

Richard B. Freeman, Joseph R. Blasi, and Douglas L. Kruse March 2011

www.amer icanprogress .o rg


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Inclusive Capitalism or theAmerican Work orceReaping the Rewards o Economic Growth throughBroad-based Employee Ownership and Pro t Sharing

Richard B. Freeman, Joseph R. Blasi, and Douglas L. Kruse March 2011


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1 Introduction and summary

5 The problem and the re orm 5 The problem

7 The reform

11 The tax consequences

15 The consequences o our re orm 15 Broad-based incentive systems work

18 Narrow incentive pay systems dont work

22 The implications o re orm 22 Taxes

23 Company responses

26 Worker responses and risk

28 Conclusion

29 Endnotes

32 About the authors and a cknowledgements

Contents


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Introduction and summary

Te American model o capi alism needs major ins i u ional re orms o regaini s economic heal h and do wha i has ailed o do or he pas hree o ourdecades ensure ha he bene s o economic progress reach he bulk o ourci izens. Well be ore he recen housing and nancial crises, he Grea Recessiono 2007-2009, and he ensuing jobless recovery, he U.S. economy was no deliv-ering he bene s o sus ained economic grow h o he vas bulk o workers.

From he mid-1970s hrough he 2000s he earnings o mos American workersincreased more slowly han he ra e o produc ivi y grow h. Real median earningsbarely rose even as gross domes ic produc per employed worker grew subs an-

ially.1 Tis con ras s wi h he nearly equal ra es o real earnings grow h and pro-duc ivi y grow h rom he urn o he 20 h cen ury hrough he early 1970s, whichcrea ed a large prosperous middle class.

Te disconnec be ween economic grow h and earnings grow h over he pasour decades resul s oday in he Uni ed S a es having an ex remely high level

o economic dispari y. In 2008 he level o income inequali y was higher in ourna ion han in any o her advanced indus rial democracy in he Organisa ion orEconomic Coopera ion and Developmen . Among he 135 coun ries wi h mea-sured levels o inequali y, our na ion ranks 41s highes in inequali y, wi h grea erinequali y han in over hal o low-income developing coun ries, including China,where a large par o he popula ion remain poor peasan armers. 2

Te recen housing and nancial crises, he ensuing recession, and he currenjobless economic recovery exacerba e hese long- erm rends. Indeed, despairabou he direc ion o he economy is overwhelming earlier hopes ha he recen

economic urmoil was a emporary breakdown rom which our coun ry wouldrapidly recover. Te reason why mos Americans have a pessimis ic view abouour economic u ure is clear. High unemploymen will likely las hrough he endo he decade, which will depress wage grow h or mos workers and oge her wi hunemploymen add o economic dispari y. 3


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hen presen our proposed re orm. Tis is o allow rms o deduc incen ive-basedpay as a business cos only in incen ive programs ha are su cien ly broad-based

o cover mos workers. Curren ly, companies can deduc incen ive compensa ioncos s rom heir corpora e axes no mater how ew employees bene and no ma -

er how large he compensa ion.

Tis re orm builds on longs anding regula ions governing pension and heal h caresys ems, which allow ax deduc ions or hose orms o compensa ion beyondregular wages and salaries only i he plan covers mos workers. Speci cally, ourplan would give avorable ax rea men o compensa ion sys ems ha link incen-

ive pay o company per ormance i all o he companys ull- ime employeespar icipa ed in hem and i he value expended on he op 5 percen o employeesby salary was also expended on he botom 80 percen o employees by salary.

By o ering ax deduc ions o plans ha cover all workers, his re orm should

induce rms o adop such plans. By linking he earnings o all workers o com-pany per ormance, our re orm will help re-es ablish he his oric rela ion in which

he earnings o all workers increase wi h economic grow h.

We nex review he evidence on he economic per ormance o rms wi h broad-based incen ive sys ems and on he per ormance o rms wi h incen ive sys emslimi ed o ew op earners. Tere are over one hundred s udies ha compare rmswi h and wi hou broad-based incen ive sys ems and/or compare rms be oreand a er hey in roduce such sys ems. And here are a small number o eld orlabora ory experimen s on broad-based incen ive sys ems. Tese s udies nd habroad-based incen ive compensa ion sys ems are generally associa ed wi h highereconomic per ormance or rms and beter labor marke ou comes or workers.Tis evidence con ras s wi h growing evidence ha incen ive sys ems ha alloca eincen ive pay o only a ew workers do no work well or he rms or he economy.

Since our proposal calls or a change in ax policy, we examine he magni ude o ax deduc ions ha curren ly go o equi y compensa ion plans and pro -sharing

plans under curren U.S. ax law. Te law does no allow rms o deduc as a coso business salaries or execu ives beyond $1 million, bu allows ax deduc ibili y

o incen ive pay o any amoun regardless o how many persons are covered by he plan. Recen ly-released da a rom he U.S. In ernal Revenue Service show he deduc ion or s ock op ions alone amoun ed o $86 billion rom July 2007 o

June 2008. Te ax deduc ion e ec ively subsidizes he incen ive pay o a ew opexecu ives and o her high paid employees.


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Finally, we consider how rms and workers migh respond o our re orm. Weexamine he impac o our proposal on a ew For une 500 rms. Our analysisshows ha rms wi h curren broad-based sys ems will likely no be meaning ully a ec ed by he change since hey already prac ice he brand o inclusive capi alism

ha he policy seeks o encourage. Firms wi h narrowly-de ned compensa ion

sys ems will, however, have o re-evalua e heir plans and ei her expand hem ocover more workers or pay axes on heir narrowly based plans. Firms wi houany incen ive pay plans will hope ully be spurred by he re orm o examine hepo en ial ha such orms o broad-based compensa ion have or improving heireconomic per ormance and he well-being o heir workers.

On he workers side we examine ways in which rms can give workers incen-ive pay while keeping he risk manageable and consis en wi h diversi ca ion o

employee asse s. I is impor an ha our re orm does no place employee pay andweal h unduly a risk due o he vagaries o he per ormance o heir rm, as has

happened o many workers in heir 401k re iremen plans. Tis problem can beaddressed by limi ing he amoun o company s ock in a company or individualemployees 401k plan nanced by ha workers savings o 10 percen .

Te ne ou come o our proposed re orm should be ha more rms will adopbroad-based incen ive sys ems ha will spread and deepen incen ive pay sys ems

o heir workers, which should improve economic per ormance and help res orehe rela ion be ween worker incomes and economic grow h. Such inclusive capi-alism would do wonders o res ore ai h in he American Dream.


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The problem and the reform

The problem

Over he pas hree o our decades he U.S. economy grew while he real earningso mos workers did no . Where did he gains rom economic grow h go i no oregular workers? Analysis o he s a is ics on he dis ribu ion o labor earningsshow ha much o he gains in produc ivi y grow h wen o hose a he very opo he earnings pyramid.

Following he lead o Universi y o Cali ornia Berkeley economis Emanuel Saezand Tomas Pickety o he Paris School o Economics, many analys s highligh

he ac ha he grow h o earnings and income have a rac al quali y in whichhe bulk o economic grow h primarily bene s hose in he upper 10 percen o

earnings, ha he bulk o earnings grow h in he upper 10 percen goes primarily o hose in he upper one percen , and so on. 4

Much o he grow h o earnings a he op is no in he orm o normal wages andsalaries. I akes he orm o incen ive pay linked o capi al income, or incomederived rom company s ock op ions, and o her incen ive plans. Te amoun sand propor ion o execu ive compensa ion in s ock op ions and rela ed incen iveplans increased massively in he rs decade o he 21s cen ury. 5 Te reasurysO ce o ax Analysis es ima es ha pro rom op ions exercised hi $126 billionin 2000, rom less han $50 billion in 1997, and amoun ed o $78 billion evena er he 2000 s ock marke crash. From 2001 o 2007, he mos recen year ha

ull da a are available, es ima es based on S andard & Poors Execucomp show hapro rom all s ock op ions averaged abou $58 billion per year. 6

Is his orm o compensa ion labor income or capi al income? S andard s a is icalaccoun s rea i as labor income bu i is a peculiar kind o labor income since i isderived rom and varies wi h capi al income.


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Te In ernal Revenue Service rea s all earnings or paid employees as labor income,including earnings rom s ock op ions or o her capi al-rela ed pay. Te Na ionalIncome and Produc Accoun s, which he U.S. Bureau o Economic Analysis cre-a es as a comprehensive measure o economic ac ivi y, also rea he capi al-rela edpar o earnings as labor earnings. Bu bo h he IRS and na ional income accoun

s a is icians recognize he uzzy boundary be ween capi al and labor income.

Te IRS applies a reasonableness cri erion o he earnings paid op earners ina closely-held corpora ion, and has rules or de ermining whe her modes o pay

ha exceed $1 million in public corpora ions are deduc ible as a labor cos o business under ax law. Na ional income s a is icians appor ion he income o hesel -employed be ween labor and capi al compensa ion in es ima ing labors shareo na ional income. Economic analys s, o course, recognize pay ha depends oncapi al income di ers in impor an ways rom wages and salaries paid o regularemployees.7Te whole poin o linking pay o capi al income in he business

world is o di eren ia e ha orm o pay rom normal wages and salaries in ordero provide incen ives o improve he per ormance o companies.

Bu back o he da a. Wi h s ock op ions and capi al-rela ed orms o pay coun edas par o labor income, he share o na ional income going o labor has ei her allenmodes ly or dropped airly sharply depending on whe her one uses he Bureauo Labor S a is ics or Bureau o Economic Analysis es ima es o labors share.In erna ional agencies also show divergen es ima es o he change in labors shareo income in he Uni ed S a es. Te OECD es ima es a huge drop in U.S. laborsshare o na ional income, while he In erna ional Labor Organiza ion es ima es amodes decline comparable o he Bureau o Economic Analysiss es ima es.

We do no atemp here o reconcile hese divergen es ima es o how labors share,inclusive o earnings associa ed wi h capi al income, changed over he pas sev-eral decades. Ins ead, we es ima e he magni ude o labor earnings due o capi alincome using S andard and Poors Execucomp da a les or he op ve execu iveso public corpora ions wi h SEC lings and he value o one par o ha pay, s ock op ions, o he upper 5 percen o earners wi hin hose companies. Te da a show

ha pay based on capi al income is large and rising over ime. Te value o compen-

sa ion apar rom basic salary paid o only he op ve execu ives o public compa-nies rose o $29.3 billion in 2006, he las year or which comple e da a are available,

rom $4.9 billion in 1992, or a o al o $238.3 billion across he whole period.


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Tis compensa ion pay packe or senior corpora e execu ives includes bonuses,res ric ed s ock gran s, values realized on s ock op ions exercised, cash andlong- erm incen ives, and o her paymen s ha more closely correspond o capi alincome han o labor income. Coun ing only s ock op ions exercised, whichare concen ra ed among he op ve percen o employees by pay, he value hi

$65.1 billion in 2006, up rom $10.8 billion in 1992, or a o al o $806.7 billionacross he whole period or he op ve percen o employees. Tis gure wouldbe larger i i included he value o all orms o per ormance-based pay or he op

ve percen o employees by pay, such as various cash incen ive and equi y planslike res ric ed s ock plans which hemselves are growing in impor ance. 8

I we rea he capi al-rela ed income as capi al income, hen labors share wouldall in all o he di eren da a series. Whe her we assign his orm o pay o labors

share (since i is axed as such) or o capi als share (since i gives workers an own-ership claim on he per ormance o he rm), he key ac or our purposes is ha

i is a rising par o income rom which mos workers have been excluded.

The reform

As no ed in he in roduc ion, our proposal seeks o re urn he economy o onein which worker earnings rise wi h produc ivi y by encouraging he inclu-sion o more workers in hese orms o capi al-rela ed pay. o accomplish hiswe propose ha he coun ry give avorable ax rea men solely o incen ivecompensa ion sys ems ha provide incen ives broadly o all workers while wi h-holding avorable ax rea men rom sys ems ha provide incen ives o smallnumbers o execu ives and o her highly paid workers. Corpora ions ha sough

he avorable ax rea men would decide abou how o design he broad-basedequi y and pro sharing plans based on heir unique circums ances and busi-ness s ra egies.

Curren ly, he U.S. ax Code does no allow he deduc ion o salaries beyond$1 million as a business expense, bu i does allow rms o deduc as a cos o business any amoun o money paid as incen ive pay under Sec ion 162(m) o he

In ernal Revenue Code. We would limi he deduc ion as an expense o broad-based incen ive sys ems.


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Broad-based incen ive compensa ion sys ems are expanding in he Uni ed S a es asincreasing numbers o rms recognize ha broad-based pro sharing, employees ock ownership, and s ock op ions mo iva e workers o per orm beter. In 2006,48.6 percen o workers in he priva e sec or had one o more o he ollowing:

Cash profit sharing, in which worker pay is linked o overall company per or-mance;gain sharing, in which pay is linked o work group or depar men per-ormance;employee stock ownership, in which employees own company s ock

ei her direc ly or hrough a re iremen plan; or company stock options, in whichemployees are able o pro rom increased s ock prices by buying s ock a a seexercise price and selling i a he increased price.

Approxima ely 63 percen o workers in corpora ions organized as join -s ock companies have one or more o hese inclusive capi alis prac ices. aking allpriva e-sec or workers, 30 percen received pro sharing, 21 percen received

gain sharing, 18 percen owned s ock in he company where hey work, and 11percen had company s ock op ions, while 7 percen received a gran o s ock op ions in 2006.

Tese inclusive plans link he compensa ion o workers o company or work-group per ormance. Tey are usually associa ed wi h managemen prac ices hadevolve some decisions o workers so ha workers can respond o incen ives oimprove per ormance. Presiden s o di eren ideologies rom Ronald Reagan oBarack Obama have expressed broad suppor or a wider dissemina ion o hese

ypes o sys ems.9

In he box on page 9 we highligh wo rms ha use broad-based incen ivesys ems or heir workers, Wegmans Grocery chain and he high ech gian Cisco.Wegmans and Cisco di er in he composi ion o heir work orces as well as in heindus ries in which hey opera e. Wegmans boas s a less-educa ed and lower-paidwork orce. Cisco hires many compu er engineers and scien is s, giving i a highly educa ed and high-paid work orce. Bu bo h are among Americas mos success uland admired rms and bo h make use o broad-based incen ive sys ems or heirworkers. Ta Wegmans does his wi h a less-skilled and lower-paid work orce

gainsays he o en-heard belie ha incen ive pay is no or ordinary workers.

While pro -sharing, employee s ock ownership, and broad-based s ock op ionsbecame increasingly widespread over he pas hree decades, he vas majori y o workers receive only modes amoun s o income rom hem. 14 Over hal o


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Grocers at Wegmans and techies at Cisco pro t rom inclusive com-pensation systems and the higher pro ts these programs deliver.Wegmans Food Markets, Inc. is a amily-owned, U.S. regional super-market chain with about 37,000 employees in 75 stores in New York,Pennsylvania, New Jersey, Virginia, and Maryland. In 2009 ConsumerReports ranked it the nations best large grocery chain. It was ranked3rd on Fortunes 100 Best Companies to Work For in 2010. Wegmanshas pro t-sharing or ull-time employees and a host o bene ts orpart-timers as well as ull-timers.10 According to Fortune Magazine:

All that means Wegmans labor costs run between 15 percent and 17 percent o sales, [industry guru Bill] Bishop estimates, compared

with 12 percent or most supermarkets (the company declines tocomment). But its annual turnover rate or ull-time employees isjust 6 percent, a raction o the 19 percent gure or grocery chainswith a similar number o stores, according to the Food MarketingInstitute. Almost 6,000 Wegmans employees about 20 percenthave ten or more years o service, and 806 have a quarter-century under their belts. The supermarket industrys annual turnover costscan exceed its entire pro ts by more than 40 percent, according toa study conducted by the Coca-Cola Retailing Research Council.When you understand that, you begin to see the truth in Robert Wegmans words: I have never given away more than I got back. 11

Cisco Systems, Inc, is one o the worlds leading consumer elecnetworking, and communications technology and service rms,over 65,000 employees. It is an archetype Silicon Valley high-temultinational corporation, which at the height o the dot com bhad the highest market capitalization o any corporation in the wIt has been awarded or the exemplary quality o their relationwith employees and communities, and appears regularly on theFortune 100 Best Companies to Work For list, ranking 16th inIts CEO, John Chambers, has spoken publicly about the importaCiscos broad-based incentive systems:

On employee ownershiptheres not been a single success u

company in the history o high tech in the last two decades thahas done that without broad-based stock option plans. When I originally heard about that in school, I would have called it sociism, when in act it is the ultimate orm o capitalism. It is a vefective way to align interests. 12 I nd it ironic that the UnitedStates invented the sharing o the success o the company withemployees very broadly, and now we have other countries arounthe world that beat us not only in education and in rastructure, also in terms o employee ownership. 13

A tale o two companiesShared capitalism works at Wegmans and Cisco

workers receive no incen ive pay. By giving ax- avored rea men only o rmsha award a leas as much o he botom 80 percen o heir ull- ime work orce

as hey award o heir op 5 percen , our plan seeks o increase he amoun s o income made available o regular workers in incen ive pay.

Te widespread use o di eren orms o broad-based incen ive pay ells us ha

many managers are amiliar wi h such prac ices. Tey have in place he admin-is ra ive machinery o ex end hem o more workers. Our proposal can hus beimplemen ed by many businesses a minimum adminis ra ive cos . Moreover,mos American workers are avorable o having a s ake in he rm jus as heirbosses do. 15 So hey are likely o reac posi ively as well.


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We chose he cri erion o allowing ax deduc ions or plans in which all o hecompanys ull- ime employees par icipa ed and where he value expended on he

op 5 percen o employees by salary was also expended on he botom 80 perceno employees by salary in he plans or wo reasons. 16 Firs , U.S. corpora e andregula ory experience wi h similar ypes o rules governing pension and heal h

care sys ems means hese ypes o regula ions are amiliar o all. Second, becauseour analysis o compensa ion da a or For une 500 rms shows ha he bulk o he bene s o mos narrow-based programs are concen ra ed in his op layer o

earners ra her han going almos exclusively o he op execu ives, whose earningsare repor ed in SEC lings. We examined publicly available in orma ion on equi y and pro -sharing plans approved by corpora e compensa ion commitees andmade available o shareholders in Securi ies and Exchange Commission lings ora random sample o he For une 100. Based on hese da a, mos plans appear oapply o less han he op 5 percen o earners.

Our proposal would include he ollowing ypical orms o pay in he incen ivecompensa ion ca egory:

Cash incen ive plans or bonuses are ypically based on annual nancial andopera ing resul s and o en cons i u e a orm o pro sharing or gain sharingal hough hey may also be based par ly on individual per ormance.

Res ric ed s ock plans deno e s ock ha is gran ed o employees when cer aincondi ions are me such as ongoing employmen over a period o ime and (or)various per ormance condi ions. Tey ypically have he value o he s ock a

he ime o gran .

Long- erm incen ive plans are based on various me rics whereby he employeeis rewarded or improving per ormance over he long- erm and no based solely on he share price while hey are some imes paid wi h a combina ion o cashand (or) equi y ins rumen s.

Per ormance shares involve receiving a number o shares based on he achieve-men o per ormance arge s over a per ormance period.

S ock op ions give an employee he righ bu no he obliga ion o purchase ade ned number o shares o s ock a a given price ( ypically he exercise price)

or a given period o ime.


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Whe her he incen ive compensa ion plan gives employees incen ives accordingo salary or o her cri eria would be up o managemen .

o preven corpora ions rom circumven ing he law by using al erna ive busi-ness orms, our proposed re orm would also apply o comparable plans o limi ed

liabili y companies and rela ed en i ies. o avoid problems ha have arisen underhe Employee Re iremen Income Securi ies Ac , where some rms have usedmul iple re iremen and heal h plans o hide he ac ual dis ribu ion o he bene s

ha received ax- avored s a us, he assessmen would apply o all o he incen iveplans aken as a group. 17

We would expec ha his policy proposal would apply o publicly- raded corpora-ions and priva ely-held corpora ions o a cer ain size bu would exclude small busi-

nesses and s ar -ups whose economic si ua ion di ers grea ly rom he larger rms.

Bu here is no hing holy abou he par icular cri erion we have picked. Tere areundoub edly al erna ive ways o de ne he division o incen ives among workers

ha would mee he spiri o our proposal.

The tax consequences

Te principle ha a rm can deduc he cos o employee bene s or ax purposesonly i i o ers he bene s in a nondiscrimina ory way o all workers has prec-eden in U.S. ax rea men o employee re iremen and heal h plans. Congress

rs legisla ed requiremen s or nondiscrimina ion pension coverage o a rmsemployees in 1942. 18Ensuing Congresses and adminis ra ions main ained he pol-icy ha a ax-quali ed pension plan mus appor ion he con ribu ions or bene sin a nondiscrimina ory manner be ween he op group o highly paid employeesand key owner-employees and workers who are ou side he op group.

A reasury s a emen on pensions in Augus 2000 ha remains germane oday s a es he goal behind giving ax-quali ed s a us o such plans:

Te aim o national policy in this area should be to insure an equitable distribu-tion o pension benefts to all Americans in order to enhance their retirement security... o the extent that employers adopt new plansit is important that moderate and lower wage workers participating in the plans receive and vest ina meaning ul proportion o the benefts. 19


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Replace he words o pension bene s wi h o incen ive-based pay and hes a emen would apply o our proposal.

reasury uses wo ypes o rules o ensure ha all employees receive an equi ableshare o he ax subsidized bene s. Te rs are nondiscrimina ion pro ec ions,

which ensure ha he plans are inclusive o he vas bulk o workers. Te secondare op-heavy rules, which ensure ha he bene s and expendi ures rom heplans do no go dispropor iona ely o a small minori y o employees, subver ing

he in en o giving he ax- avored s a us. According o reasury: Te op heavy and nondiscrimina ion pro ec ions bene he American axpayer and pro ec hein egri y o he pension ax pre erence by seeking o insure ha he ax pre erencebene s workers hroughou he income spec rum. 20

Our proposed policy ex ends he principles o nondiscrimina ion and op-heavy pro ec ion o incen ive compensa ion sys ems or corpora ions o ge associ-

a es ax deduc ions. Jus as Congress sough o encourage priva e pensions andemployer provision o heal h insurance by giving ax deduc ions o hose expendi-

ures ha ul ll principles o airness and equi able use o public ax resources, wewan o encourage compensa ion sys ems ha increase employees share o capi alincomes by giving ax deduc ions o hose plans ha bene all employees ra her

han o plans limi ed o he highly paid ew.

Like he rules in he Employee Re iremen Incomes Securi ies Ac ha governsre iremen plans and heal h insurance, our proposed re orm would no requireany rm o in roduce any par icular orm o broad-based incen ive pay or indeedany such pay a all. A rm could o er pro or equi y sharing solely o op manag-ers jus as i can crea e pension and heal h plans only or hem. Bu such narrow plans would no receive ax deduc ions.

A board o direc ors ha se up a broad-based compensa ion plan ha quali edor ax advan ages would be ree o de ermine he bene s under hose plans andhe cri eria or awarding hose bene s based on heir judgmen s o how o align

employee behavior wi h corpora e per ormance. Te sole requiremen or gainingax deduc ion s a us is ha he compensa ion sys em covers all workers ra her

han be limi ed o hose a he op o he rms earnings s ruc ure.

Finally, no hing in our plan would a ec he curren ax policy ha allows compa-nies o deduc no more han $1 million in execu ive salary as a business expense

rom corpora e income in non-per ormance based compensa ion under Sec ion162(m) o he In ernal Revenue Code.


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Te principle ha Congress or he IRS in i s adminis ra ion o he law can decidewha coun s as a business expense or he purposes o corpora e axa ion or cande ne pruden s andards or reasonable limi s on such expenses ha underpinsour proposal is long es ablished in ax law. Sec ion 162(a) o he In ernal RevenueCode declares ha Tere shall be allowed as a deduc ion all he ordinary

expenses paid or incurred including a reasonable[our i alics] allowance orsalaries and o her compensa ion or personal services.

Te IRS applies he reasonable s andard solely o priva e corpora ions on heno ion ha hey are he mos likely o exploi he ax sys em by awarding largesalaries o persons o avoid he corpora e pro s ax. Te person or personscon rolling he corpora ion would pay income ax ra her han he rm paying hepro s ax and he person paying he income ax when hey ob ained he pro s,say hrough dividends. Tis uses he legal vehicle o a limi ed liabili y corpora ionin a way ha con ravenes he U.S. ax Code.

Sec ion 162(m), which guides he ax deduc ible s a us o incen ive pay beyond $1million, con ains 23 pages o discussion o pay- or-per ormance sys ems ha quali y

or he avorable ax rea men . Employee bene s and axa ion exper Anne Morana he law rm S ep e & Johnson LLP reviewed how he IRS and he cour s de er-mine wha an employer may and may no deduc or compensa ion over ime. Sheda es he in roduc ion o he reasonableness s andard o he Revenue Ac o 1918. 21

A various imes, Congress has enac ed ax laws o limi excessive or unreasonableexecu ive compensa ion.22In 2008 and 2009, or example, Congress enac ed execu-

ive compensa ion res ric ions or senior execu ives a op he nancial ins i u ionswho apped he roubled Asse Relie Program se up by Congress as par o heEmergency Economic S abiliza ion Ac o 2008. 23 In 2010, he Pa ien Pro ec ionand A ordable Care Ac limi ed he deduc ibili y o he rs $500,000 paid in any

orm o compensa ion or employees in he heal h insurance indus ry. Congresspresumably eared ha he increased revenues o insurance rms due o he new heal h re orm law would raise pay a he op o he rms as incen ive pay even

hough he increased revenues were no due o any ac ion o op managemen .

For employee ownership, he Employee Re iremen Incomes Securi ies Ac , orERISA, se s limi s and airness guidelines or quali ed re iremen plans such asde ned-bene pension plans, and various de ned-con ribu ion plans such asemployee s ock ownership plans, de erred pro -sharing rus s, and s ock bonusplans. Whe her one agrees or disagrees wi h he par iculars, Congress regularly usesspecial provisions in he U.S ax Code o implemen economic and social policy.


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Tus, our proposed re orm builds on Congresss his oric use o he ax code oencourage axpayers o accomplish desired ac ivi ies. In our case, he economicand social policy is o reward rms ha use broad-based incen ive sys ems as as ep oward res oring he his oric rela ion be ween grow h o produc ivi y andgrow h o he real earnings o workers.

Assume ha our proposed re orm or some varian hereo accomplished hisgoal. Would i improve our economy? Would i improve our curren incen ivecompensa ion sys em? Or would ex ending such incen ive compensa ion o hebulk o American workers wreak economic havoc by reducing he income o he

ew curren bene ciaries o such orms o pay, leading hem o run a less e cieneconomy? o his we now urn.


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The consequences of our reform

In his sec ion o he paper we will consider rs he evidence on how broad-basedincen ive pay works in he rms ha have adop ed i . Ten we examine he evi-dence on how he concen ra ion o incen ive pay on small numbers o high earn-ers a ec s heir economic behavior and he con ours o he U.S. economy. Te way

o judge our proposal is o compare how rms ha opera e broad-based sys emsac ually per orm compared o o her rms, and how he sys em o ax-advan agedincen ive pay or he highly paid, which i would re orm, ac ually unc ions.

Broad-based incentive systems work

A large group o s udies have analyzed he economic e ec s o broad-based incen-ive compensa ion sys ems in he Uni ed S a es and in o her coun ries. Tere are

analyses o samples o U.S. employee s ock ownership plan companies, and o spe-ci c rms such as he Bri ish re ailer John Lewis, an employee-owned par nership

ha has prospered hrough he UKs recession, or he Mondragon Corpora ion,a very large group o worker coopera ives in Spain engaged in manu ac uring,

nance, and re ail indus ries ha has been expanding in ha coun ry and world-wide ever since i was ormed.

Some o hese s udies es ima e produc ion unc ions ha link he sales or valueadded o rms o he ex en o which rms o er incen ive-based pay, condi ional onlabor and capi al inpu s. O her s udies examine worker responses o such sys emsand worker pre erences or an ownership s ake in heir rms as opposed o beingpaid solely by wages and salaries. And s ill o her s udies examine whe her he ben-e s o broad-based compensa ion fow o workers as well as o he rm are a orm o

speed-up ha unduly burdens workers and makes heir pay excessively risky.24

In a backup documen or his paper, we lis over 100 s udies o he rela ionbe ween di eren orms o broad-based incen ive compensa ion sys ems and mea-sures o economic per ormance. Reviews o he academic li era ure on employee


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ownership conclude ha wo hirds o 129 s udies [including bo h per ormanceand ati ude s udies] on employee ownership and i s consequences ound avor-able e ec s rela ing o employee ownership, while one en h ound nega ivee ec s,25 and ha research on ESOPs and employee ownership is overwhelm-ingly posi ive and largely credible. 26

Me a-analyses ha combine es ima ed parame ers rom many s udies repor as rong posi ive associa ion be ween inclusive capi alis modes o compensa ionand per ormance.27Many o he s udies are based on cross-sec ional comparisonso rms wi h and wi hou broad-based incen ives sys ems. Te resul s o hese s ud-ies are consis en wi h he idea ha hese sys ems a ec per ormance bu cross sec-

ion analyses canno ruly de ermine he causal impac o he broad-based sys emson he ou comes. Bu o her s udies are based on be ore-and-a er comparisons

ha are more likely o iden i y causal paterns. Many are based on small samples.Some are based on huge samples. o our knowledge, here is only one labora ory

experimen examining he rela ion be ween he ownership s ake o workers andrm per ormance. I ound higher produc ivi y among subjec s organized in o

employee-owned rms.28 All old, his is a growing area o research, wi h analys sworking as we wri e o address weaknesses in da a and o improve me hodology.

Te box on page 17 ske ches hree s udies ha exempli y he bread h o analysis.Te rs is a eld s udy in which he rm randomly assigned pro sharing oes ablishmen s wi hin a rm and ound ha he per ormance o hose es ablish-men s improved rela ive o he con rol group. Te second was a produc ion unc-

ion s udy commissioned by Bri ains reasury depar men ha used con den ialreasury da a o es ima e he link be ween ax-advan aged programs o broad-

based incen ive pay and sales and value-added measures o produc ivi y, based onbo h cross-sec ional and be ore-and-a er varia ion in he use o he programs. Te

hird is he U.S. 2010 Na ional Bureau o Economic Research analysis o 14 U.S.rms, which compared 41,000 worker repor s on work ac ivi y and economic ou -

comes across workplaces wi h di ering incen ive programs and be ween workerswi h di eren ial par icipa ion in hem.

Tese s udies and he many o hers in our back-up review show ha analys s using

di eren da a and models nd similar paterns in heir s a is ical evalua ions o broad-based incen ive sys ems. Te research documen s ha on average rms hahave broad-based incen ive compensa ion sys ems have beter ou comes or bo h

he rm and workers. I also shows varia ion across rms and workers in hosebene s. Curren evidence sugges s ha broad-based incen ive sys ems work be -

er when he rm gives workers au onomy a heir job ra her han closely moni-


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ors hem, pays hem a or above marke , and o ers good job securi y, raining,and par icipa ion in decision-making. 32Wi h an increasingly educa ed work orceand a echnology which au oma es rou ine asks and deploys workers in eam-orien ed work, many managers pre er such workplace arrangemen s. 33 rying ounders and more abou how hese and o her ac ors in erac o produce grea er orless success wi h broad-based incen ive sys ems is an ac ive area o research.

In con ras o he large body o evidence on he rela ion be ween broad-basedincen ive sys ems and produc ivi y, only a ew s udies examine he rela ion

be ween broad-based incen ive compensa ion sys ems and job securi y andemploymen grow h. Tese s udies end o show beter employmen ou comesin rms ha have broad-based incen ive compensa ion sys ems bu here is greaneed or addi ional work on employmen e ec s in par icular, or how rms wi hbroad-based incen ive compensa ion sys ems ared in he Grea Recession and heensuing weak recovery compared o o herwise similar rms wi hou such sys ems.

A feld experiment. 29 This study is based on 21 ast- ood ranchisesowned by one rm, where researchers were allowed to randomlyassign pro t sharing to three ranchises and non nancial incentives(social recognition and per ormance eedback) to six ranchises,with the remaining 12 as controls. A pre/post comparison usingmonthly data ound increased pro tability and productivity, anddecreased employee turnover, in the pro t-sharing ranchisesrelative to the control group. In addition, pro t sharing had a moreimmediate positive efect on pro tability and productivity as wellas a greater long-lasting efect on employee turnover relative to thenon nancial incentives.

A production unction study. 30 This study is based on sales andvalue-added data obtained by matching con dential UK data, withenough variation to allow or pre/post comparisons using rm- xedefects in some o the regressions relating company plans to per or-mance outcomes. The study ound that on average, across the wholesample, the efect o tax-advantaged share schemes is signi cant and

increases productivity by 2.5 percent in the long run. The studydiferent efects across sectors and among the plans studied depening on the measure o output, pointing to variation in the efectsthese plans depending on their structure and the context in whicthey are implemented.

A study o workers.31 This study is based on over 41,000 workereports in 14 rms with some orm o employee ownership, prand gain sharing, and broad-based stock options. The study ndthat worker co-monitoring helps overcome the incentives to reride because workers with a greater stake in per ormance moni

each other more closely and are more willing to intervene to reshirking behavior than workers with less stake. In addition, woin these rms per orm better the greater the depth o the incentive compensation system. The analysis shows that these systemincreased employee attachment, lowered turnover, prompted employee suggestions or improvements, and worked best with othigh per ormance labor practices and policies.

A sampling o studiesThe three studies used di erent methods and data o broad-based incentive systems to come to the sameconclusion inclusive capitalism works


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Workers wi h pro sharing, employee ownership, and/or s ock op ions reporgrea er job securi y in na ional and company-based surveys han do o her work-ers. Consis en wi h hese survey repor s, wo s udies ha racked employmenin rms wi h broad-based employee ownership plans rela ive o o herwise-similar

rms in heir indus ries ound ha he rms prac icing inclusive capi alism

had grea er employmen s abili y and rm survival. An addi ional s udy o U.S.coopera ives ound ha coopera ives adjus ed pay ra her han employmen whendemand changed, which should s abilize employmen . Bu s udies o he rela iono pro sharing o employmen s abili y yielded no clear generaliza ion. In addi-

ion, hree o our s udies ha compared he employmen grow h o employee-owned rms wi h ha o o her rms ound as er grow h in he employee-owned

rms while he our h ound no rela ion.

In sum, he limi ed s udies o employmen e ec s indica e ha employee owner-ship and pro sharing are linked o grea er employmen securi y and grow h or in

he wors case have litle rela ion o hose ou comes. 34

Narrow incentive pay systems dont work

Te curren sys em o incen ive pay in many rms alloca es mos incen ive pay o a rela ively small number o key persons in he rm or a small percen age o

all employees. As long as he pay or per ormance plan mee s he IRSs cri erion,amoun s paid in excess o $1 million as incen ive pay are deduc ible as a cos o busi-ness. Tis narrow orm o incen ive compensa ion dis ribu es a subs an ial por ion o

he gains o economic grow h o he ew persons a he op o he earnings pyramid.

wen y- ve years ago many exper s on execu ive compensa ion believed ha hecompensa ion commitees made up o members o he boards o publicly owned

rms could se s ock op ions and rela ed incen ives ha would resolve he so-called principal-agen problem be ween shareholders and op managemen . Teno ion or hope was ha he commitees would engage in arms-leng h nego ia-

ions abou pay ha would align he in eres s o managemen wi h shareholdersand lead o decisions ha would grow he economy. .35

Te execu ive compensa ion scandals o he early 2000s, exempli ed by he col-lapse o Enron Corp., raised doub s abou his in erpre a ion o seting incen ivepay or op managemen . Even be ore he Enron scandal, however, some hingseemed amiss in he way boards se incen ive con rac s. Boards seldom indexedincen ive con rac s o he overall per ormance o he s ock marke or o ha o


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compe ing rms. S ock op ions, or example, almos always reward execu ivesor an increase in he value o he s ock even i mos or all o he increase could

be atribu able o an indus ry or marke -wide e ec . As a resul , he s ock markeboom o he la e 1990s ha raised share prices o all rms, including hose haper ormed less well han o hers, or general infa ion, show up as increases in he

ax deduc ible per ormance-based compensa ion.

Tis prac ice o no indexing corpora e pay or per ormance con ras s wi h e or so develop pay- or-per ormance s andards or school eachers, where he per or-

mance arge s invariably ake accoun o he likely grow h o per ormance as as uden ages. Te corpora e governance re orms ha ook place a er Enron didno signi can ly change he execu ive compensa ion sys em. Te SarbanesOxley Ac ha Congress enac ed in 2002 developed speci c manda es and requiremen s

or nancial repor ing and made senior execu ives ake individual responsibili y or he accuracy and comple eness o corpora e nancial repor s. I also changed

a minor par o he ax code governing ax deduc ibili y o nonquali ed de erredcompensa ion or execu ives.36

oday, compensa ion exper s are more skep ical ha boards o direc ors appoin edby execu ives and compensa ion consul an s hired by rms can solve he principal-agen problem. Harvard Law School pro essors Lucian Bebchuk and Jesse Friedargue ha mos public corpora ions are governed in ways ha do no producearms-leng h nego ia ions over pay. Te resul , hey nd, is ha some compensa ionpolicies are more indica ive o ren -seeking han pay or per ormance. 37

o our knowledge, here is no evidence ha per ormance con rac s or he ew improve he u ure per ormance o rms, which is heir presump ive ra ionale.In ac , a growing number o s udies o execu ive compensa ion nd ha heincen ives lead insiders o game he incen ive sys em. One o he ways in whichmanagemen game he sys em is hrough backda ing s ock op ions ha is by issuing op ions on a la er da e han he da e o which he op ions are lis ed. Tis isadvan ageous o managemen when he share price has risen be ween he da e heop ion was ac ually given and he da e on which i was purpor edly given.

Finance pro essors Randall Heron a Indiana Universi y and Erick Lie a heUniversi y o Iowa es ima e ha be ween 1996 and 2005 18.9 percen o op ions

ha were unscheduled and a - he-money meaning hey were priced a as rike price which equaled he marke price o he underlying securi y weremanipula ed in some such ashion, and ha 29.2 percen o rms manipula edop ions o op execu ives a some poin in he same period. 38Backda ing op ions


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has aroused considerable ire, including in Congress, where Sen. Charles Grassley (R-IA) pressed o cials o ake ac ion on he grounds ha i is behavior ha is disgus ing and repulsive. 39

Backda ing is no , however, per se illegal. Te law allows a rms compensa-

ion commitee o run a s ock op ion gran ing program as i sees as long as idiscloses wha i is doing o inves ors, does no seek ax-advan aged rea men orpaymen s ha would no mee he IRSs in erpre a ion o incen ive pay in sec ion162(m), and properly repor s he backda ed op ion in i s nancial s a emen s. 40

Failure o disclose he ac s abou backda ing op ions ra her han he backda ingprocess i sel was he crux o he mid o la e 2000s backda ing scandal ha led

ederal prosecu ors and inves ors o go o cour agains companies and execu ivesha seemed o exploi backda ing or personal gain and possible misuse o he ax rea men o incen ive pay.41

O her modes o gaming incen ive compensa ion sys ems, such as spring-loading op ions he prac ice o awarding s ock op ions righ be ore a posi iveannouncemen expec ed o boos share prices also may or may no be legal,depending on he circums ance. o an ou side observer, hey seem similar o heillegal insider rading ha he Securi y and Exchange Commission is supposed

o moni or, bu in 2006 hen SEC commissioner Paul A kins raised he hackleso many analys s by declaring ha such manipula ion o he incen ive sys em wasno only legal bu also good or he rm. His argumen was ha since he execu-

ives made more money rom he inside in orma ion he rm would be needewer op ions o re ain heir services. 42

Erroneous nancial s a emen s and o her improper repor ing are o course nolegal. Ye evidence produced by he Governmen Accoun ing O ce and heSecuri ies and Exchange Commission shows ha such behavior is surprisingly

requen .43 Researchers who have examined nancial res a emen s in heGAO da a generally nd ha erroneous s a emen s are rela ed o he incen ivecompensa ion con rac s paid company execu ives, who presumably bene

rom he miss a emen s.44

Eigh o en s udies o he SEC da a nd ha improper repor ing is more re-quen when CEOS and presumably o her op execu ives have incen ive com-pensa ion con rac s ha would allow hem o bene . Bu accoun ing pro essorChris Arms rong a he Universi y o Pennsylvania and business pro essors AlanD. Jagolinzer and David F. Larcker o S an ord Universi y, have challenged his


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nding wi h a propensi y score analysis ha ma ches CEOs in a beter way hanhe earlier work. Tey nd rms where CEOs have rela ively higher levels o

equi y incen ives have, i any hing, ewer accoun ing irregulari ies han o hers. 45 Teir nding does no deny ha improper repor ing is common nor ha i may be economically mo iva ed bu ra her ques ions he abili y o economis s o

explain i wi h measured incen ives o he CEO.

Finally, business managemen pro essors Gerard Sanders o Brigham YoungUniversi y and Donald Hambrick o Penn S a e Universi y nd ha rms whoseCEO compensa ion packages were loaded wi h op ions had grea er varia ion inper ormance han o her rms. 46 I he gains o he winners exceed he losses o helosers, his would raise o al ou pu and would likely be in he in eres o he broadereconomy, hough no o risk-averse shareholders. Bu Sanders and Hambrick ound

ha riskier behavior produced more big losses han big gains. Te upsho : Teexecu ive op ions led hem o ake risky ac ions ha could resul in big payo s or

he execu ives, bu he risky ac ions more o en hur he rms and economy.

Te view ha he narrow incen ive compensa ion sys em based on rewarding only a ew execu ives does no work is now more widespread. In December 2009, Je Immel , he chairman and chie execu ive o General Elec ric Co. s a ed i beswhen he said: We are a he end o a di cul genera ion o business leadership

ough-mindedness, a good rai , was replaced by meanness and greed, bo herrible rai s. Rewards became perver ed. Te riches people made he mos

mis akes wi h he leas accoun abili y.47

Harvard Business School pro essors Rakesh Kurana and Andy Zelleke refec henew skep ical hinking abou he abili y o se up incen ive compensa ion sys ems

ha resolve he principal-agen problem ha is heir presumed in en . Tey argueha mos managemen -opera ed corpora ions in he 1990s and 2000s se up

execu ive compensa ion plans or he purpose o crea ing vas weal h or seniorexecu ives, ra her han or developing heir rms and he economy. 48 Indeed, inJune and July 2009 he Harvard Business Review ran a blog in which compensa-

ion exper s deba ed how o x execu ive pay, which presumed ha he sys emo pay seting was no working righ . 49

Wha impresses us is he di erence be ween he evidence ha broad-based incen-ive sys ems work o s reng hen he link be ween pay and per ormance in waysha improve he opera ion o he economy and he evidence ha he curren

narrow-based incen ive sys em ei her does no work or works perversely.


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ers. Ye he senior managemen a hese companies presumably ins i u ed broad-based plans or workers as par o a pro -maximizing compe i ive s ra egy, soclosing down such a plan would seem o be unlikely. I is hard o imagine, orexample, ha companies in he For une 100 Bes Companies o Work For inAmerica ha have broad-based pro /gain sharing, employee s ock ownership

or s ock op ion plan would close heir plans.53

S ill i is a possible response andmeri s aten ion.

Consider nex a hird ca egory o rms hose ha curren ly have incen ivesys ems or a small number o execu ives and highly paid workers bu do noex end hese plans o o her workers according o public da a. Our analysis o hebes available in orma ion on a sample o For une 100 rms rom he SEC publicda a says ha his is probably rue or Bank o America, Hewlet Packard, IBM,Cos co, arge , Medco Heal h Solu ions, Bes Buy and Fed Ex as a ew illus ra-

ive examples, al hough our analysis o SEC lings rom 1997-2010 sugges ha

Bank o America has a leas one equi y plan ha appears o ex end o more han5 percen o i s employees. Te in orma ion in SEC lings regarding per ormance-rela ed incen ive plans varies by company so ha some o hese rms may in achave broader-based sys ems han we could discern rom he public record. 54 Techoice o rms wi h narrowly-based plans would be be ween in roducing a broad-based or broader-based plan o ob ain ax bene s or o main ain he curren plan,

hough possibly a lower levels, and o pay corpora e axes on his expendi ure.Since he ax cos o he nonquali ed incen ive sys em o he corpora ion wouldrise unless he rm expanded coverage o many more employees, some o hese

rms would expand coverage and mee he goal o increasing access o capi alincomes o more workers.

Bu o her rms in his group migh decide ha he cos s rom expanding cover-age would all shor o he bene s and would be willing o pay heir op layer o employees incen ive pay even a he addi ional cos . Tis would direc addi ionalshareholder aten ion a he e cacy o he per ormance sys ems. A he minimum,

he governmen would no longer be subsidizing he bene s o a small number o highly paid workers.

Finally here are he rms ha have no incen ive sys ems a all. o he ex enha some o hese rms eschew pay or per ormance and nancial par icipa ionhrough lack o knowledge, we would expec he new law o direc heir aten ion

a he po en ial bene s rom such compensa ion sys ems. Tey can only add ohe number o workers covered by such sys ems.


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I is di cul , o course, o predic how many rms in o he di eren ca egoriesdescribed above and he propor ion wi hin each ca egory ha would respondin he an icipa ed ways. o ge some no ion o he incen ives acing he rms owhich hey would presumably respond, we assessed he impac o our proposedpolicy on several large For une 500 companies ha curren ly have broad-based

equi y or pro sharing programs and are viewed as models ha o her rms imi-a e. As no ed, many o hese rms would likely mee he cri erion or ax-quali eds a us and hus have no reason o change heir plans.

By con ras , da a rom he SEC lings o one o he larges For une 100 rms hahas a narrowly de ned incen ive compensa ion plan places i in o he ca egory o

rms ha would have o make a big change in policy o quali y or ax avored rea -men . Including all employees in his plan would orce his rm o re-evalua e i sincen ive pay sys em. I he company were o spend he same amoun as i curren ly does, hen i would have o gure ou a way o include a broader group o employees

in i s plans or make he s ock awards or managers considerably smaller and includemany o her employees. Or i could pay axes on i s narrowly based incen ive plan.

Given ha rms wi h broad-based incen ive compensa ion plans a presen arelikely o under he nondiscrimina ion/ op heavy rules ha we propose, weexpec ha our policy will increase he ex en o inclusive capi alis compensa ionjus as Congresss limi a ion o ax deduc ions or pension and heal h insuranceplans spurred rms o develop hose plans or all workers. Because many corpora-

ions in a varie y o indus ries unc ion success ully wi h broad-based plans halink labor earnings o capi al income, we would expec o see hose rms becom-ing he models or corpora ions ha have no used hose plans. Compensa ionconsul an s would presumably benchmark clien s per ormance agains corpora-

ions ha have success ully used broad-based plans.

Tere is one nal problem wi h how our plan is likely o work. Some rms mighry o game our proposed re orm much as hey have gamed he curren sys em.

Tey would ins i u e broad-based pro -sharing plans o quali y or he ax s a usbu in ac jus rede ne he curren xed wages o heir employees as pro shar-ing so ha hey would comply wi hou ac ually running a pay- or-per ormance

scheme or all workers. Whenever a ax sys em o ers lower ra es on one orm o paymen han ano her, people will seek o rearrange heir nances o gain he ax incen ives. As no ed, some rms have sough o mee ERISA requiremen s orquali ed pension and heal h plans by using mul iple plans o hide he ac ual dis ri-bu ion o he bene s. Bu his has no been a common response.


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Te IRS has experience in assessing he reasonableness o managemen salariesin priva ely owned rms and could presumably readily build up similar experi-ence in de ermining bogus pay or per ormance schemes. I his urned ou o be amajor problem, we would recommend a s rong penal y or such raud.

Worker responses and risk

Our analysis o worker behavior in Shared Capitalism at Workand he analyses o o her s udies show ha workers respond posi ively o incen ives associa ed wi haccess o capi al income. 55As no ed, mos American workers say ha hey wouldpre er being worker-owners or par icipan s in pro sharing o working simply

or wage and salary pay. Bu i could be ha workers are incorrec ly assessingheir own bes in eres s.

Te heory o diversi ca ion sugges s ha workers should diversi y heir capi alasse s ra her han rely on ownership s akes or pro sharing rom he per or-mance o heir employer. Analys s o re iremen income nd ha many workersinves large propor ions o heir 401k de ned-con ribu ion pension savings in acompany s ock accoun . Te s ock marke crashes o 2000 and 2008 devas a ed

he savings o workers who inves ed oo much in heir own company s ock in401k plans.

Tere are more and less risky orms o employee s ock ownership. Buying company s ock wi h worker savings in a 401k plan rom wages is more risky han geting agran o company s ock hrough an employee s ock ownership plan, which is ypi-cally based on company con ribu ions or loans o buy s ock ha is dis ribu ed oworkers wi h ax incen ives and no nanced by worker savings. In ESOPs, workersdo no ypically pay or heir shares wi h heir savings or wage concessions.

Similarly, i workers receive a ma ching con ribu ion in company s ock in a 401k plan o encourage hem o make con ribu ions o heir 401k plan as long as

he con ribu ion i sel is diversi ed, hen he company s ock ma ch is less risky.Res ric ed s ock and s ock op ions no unded wi h worker savings also have lower

risk. When incen ive pay comes on op o regular pay and bene s, ra her hansubs i u ing or i , and is paid as par o he improved produc ivi y ha i crea es,

here is no problem o risk aversion.


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In ac , his appears o be he case among workers a companies wi h inclusivecapi alis incen ive per ormance plans. Workers generally receive such pay on opo heir regular pay and bene s, along he lines o e ciency wage or gi exchange

heories o wages. 56 Te magni udes o ypical per ormance gains are consis enwi h he ypical pro and gain sharing bonuses.

Por olio heory recommends diversi ca ion o asse s o decrease risk, bu hisdoes no rule ou company per ormance-based income or workers. We askedHarry Markowi z, who inven ed por olio heory, o consider i s ock in onescompany could be par o an e cien diversi ed por olio. Te Markowi zchap er in our NBER volume makes i clear ha i can. 57Por olio heory does nopropose ha everyone own a comple ely diversi ed baske o securi ized asse sworldwide, in which case here would be no home ownership, sole proprie or-ships, principals in corpora ions, or workers wi h shares in heir company. Teanalysis by Markowi z indica es ha wi h s andard risk aversion parame ers, work-

ers can pruden ly hold on o abou 10 percen o heir own asse s in employees ock ownership o heir rm wi h only a modes loss in u ili y due o risk.

Tis sugges s a po en ial corollary o our proposal would be o prohibi 401k plansrom holding more han 10 percen o heir asse s in company s ock unded by

worker savings and o prohibi individual worker accoun s rom having more han10 percen o heir asse s in company s ock unded by worker savings. Company ma ches in s ock no atribu able o purchases rom worker savings would beexcluded rom he 10 percen rule.

Finally, harking back o he discussion o job securi y and employmen e ec so incen ive pay, o he ex en ha he variabili y in incen ive pay subs i u es orvariabili y in employmen associa ed wi h xed wages and salaries, some work-ers will nd ha linking heir pay o company per ormance will provide grea erjob securi y in recessions, which reduces he risk o job loss albei a he cos o riskier earnings. 58


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Conclusion

Our na ion needs o repair our economic sys em in ways ha make he bene s o economic progress accessible o many more Americans. In an era when earningsbased on access o capi al income is a major source o pay or a ew highly paidemployees and no o hers, he use o ederal ax deduc ions should no avornarrow incen ive compensa ion capi al income plans. Increasing he link be ween

he pay o more regular employees and he per ormance o heir rm hroughbroad-based incen ive compensa ion sys ems would expand he access o work-

ers o capi al income and help res ore he rela ion be ween he grow h o workerincomes and economic grow h o he rm.

Our proposal would also reduce wi hin- rm inequali y in compensa ion di er-ences be ween execu ives and he res o he work orce. Our analysis o how exis ing broad-based incen ive compensa ion sys ems work demons ra es ha heexpansion o hese sys ems would likely have posi ive e ec s on produc ivi y haanalys s have no ound or exis ing narrow-based orms o incen ive pay.

Ex ending ownership, pro , and gain-sharing incen ives o more workers will noimprove he earnings o all workers. Workers in rms ha are doing badly will nosee heir earnings rise because o he per ormance o he rm. Tey will have odo wha American workers in declining indus ries and rms have always done oimprove heir economic lo : move o new sec ors or employers. Bu our proposalwill lead o grea er access o capi al income or he middle class.

Tis proposed re orm will spur grea er e or s by rms o bring he bene s o ownership and decision-making responsibili y o a larger propor ion o he soci-e y. I will go a long way oward repairing he curren sys em o ax deduc ions or

incen ive pay ha suppor s rms ha concen ra e capi al income programs a heop o he company. Bringing he bene s o incen ive pay and capi al ownership

in he orm o labor earnings rela ed o capi al incomes will s reng hen Americancapi alism a a ime when i despera ely needs s reng hening.


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endn s | www.am icanp g ss

Endnotes

1 t is p s n s in a i n-adjus d a nings w k in midd a nings dis i u i n.

2 t CIA Fac k, w ic gi s Gini c ci n s in qua i y 135 c un i s a und w d in 2008, c ds Uni d S a sas a ing 41s ig s in qua i y. S c umn is das CIA Gini in, lis c un i s y inc m in qua i y, a ai a a

p:// n.wikip dia. g/wiki/lis _ _c un i s_ y_inc m _ qua -i y. Acc ding oeCD, Uni d S a s as 27 ig sGini c ci n 30 oeCD c un i s, su pass d n y yP uga , M xic , and tu k y. S oeCD, G wing In qua i y:Inc m Dis i u i n and P y in oeCD C un i s (2008), Figu1.1, a ai a a p://www. cd. g/d cum n /53/0,3343,

n_2649_33933_41460917_1_1_1_37419,00. m .

3 Indica i pa n in c ssi n, bu au laS a is ics, W k y and u y a nings da a m Cu n P pu a-

i n Su y s ws an inc as in a i a nings u imw k s a nin d ci a nings a s d ci m 4.87in 3 dqua 2007 5.03 in 3dqua 2010.

4 emanu Sa z and t mas Pick y, Inc m In qua i y in Uni dS a s, 1913-1998,Quarterly Journal o Economics 118 (1) (2003): 1-39.

5 Sc Jaqu , Ma w Kni , and Ka russ , r c n t nds inS ck op i ns. W king Pap 89 (U.S. D pa m n t asu y,o c tax Ana ysis, 2003), p. 14 and ta 1, p, 28, m

a n i d P -ra d P pu a i n S a is ics, t a Sp adInc m , 1997-2001.

6 t ca cu a i ns p s n s ck p i n x cis s (w ic ad as t a Sp ad Inc m in o c tax Ana ysis

w king pap in n ) a as d n S anda d and P sex cuc mp, using m d Mi i D sai, t C p a P

bas , tax S ing Ac i i y, and C anging Na u emp yC mp nsa i n. W king pap 8866 (Nber, 2002). t is m dus s ex cuc mps da a n s ck p i n p s p in

d s a is an s ima a s ck p i n p s in ex cu-c mp c p a i ns. t appa n d c as in s ck p i ns is pa y

xp ain d y a c nc mi an a g inc as in an c mp n n x cu i c mp nsa i n, nam y, s ic d s ck g an s, w ic

s num s d n inc ud .

7 A an K u g , M asu ing la s S a . W king pap 7006 (Nber,1999), a ai a a p://www.n . g/ mp/34282-w7006.pd .C mpa ing inc m an wn a p ssi na sp s am

a is p ay , K u g n s a i wn pays p aym and duc s is wn sa a y y sam am un , a s s aw u d unc ang d. A m a is ic xamp w u d w n

x cu i s duc pay an n i w k c and inc as iwn pay y sam am un , a s s a w u d unc ang d.

8 t ca cu a i ns s ck p i n x cis s a as d n S anda d

and P s ex cuc mp, using m d Mi i D sai, t C -p a P bas , tax S ing Ac i i y, and C anging Na u emp y C mp nsa i n.

9 P sid n r na d r agan, Sp c P s n d a W i h us ,Augus 3, 1987. t mas J f s n d am d a and sma a m-

s, s p wn s and m c an s. A a am linc n sign d inaw h m s ad Ac a nsu d a g a w s n p ai i s

Am ica w u d a m ind p nd n , p p y- wning

ci iz ns a mig i gua an d m is di cu imagin . I can p u i a in u u w wi s in Uni dS a s and ug u w s n w d an inc asing nd wa d

n x gica s p, mp y wn s ip. I is a pa a sa p p . P sid n ba ack o ama, c mm n n emp yown s ip n S p m 28, 2010, w s a d w u d

a s u y in s d in aking a k a i ( gis a i n n eSoPs) as a igning in s s w k s wi in s s c mpanyas a w ica y a as i s s m ing a can p g wc mpani s, caus w k s ik y w king m-s s, and y pu ing m ms s in i j acand y day. I ink a i s s m ing a can nc u ag d,

p d inEmployee Ownership Report , xxx, (6) (N -D c 2010)..

10 S W gmans F d Ma k s Inc., a ai a a p://www.answ s.

c m/ pic/w gmans- d-ma k s-inc; W gmans and I s emp y-s (2008), a ai a a p://www.s id s a .n /gan s am /

w gmans-and-i s- mp y s.

11 Ma w b y , t W gmans Way,Fortune Magazine , Janua y24, 2005, a ai a a p://m n y.cnn.c m/magazin s/ un /

un _a c i /2005/01/24/8234048/ind x. m.

12 Cisc Sys ms/on c d: J n C am s, SFGa .c m, F u-a y 29, 2004, a ai a a p://a ic s.s ga .c m/2004-02-29/ usi-n ss/17412116_1_si ic n- a y-cisc -sys ms- -m d s.

13 Ma ham n, Cisc s Ceo r c s n C mpany a 20, C mpu -w d, D c m 20, 2004, a ai a ap://www.c mpu -

w d.c m.au/a ic /5525/cisc _c _ c s_c mpany_20/.

14 D ug as K us , ric a d F man, and J s p b asi, ds., Shared Capitalism at Work: Employee Ownership, Pro t and Gain Sharing, and Broad-based Stock Options (C icag : Uni si y C icag P ss,

2010), p. 41-76.

15 D ug as K us , ric a d F man, and J s p b asi, ds., Shared Capitalism at Work: Employee Ownership, Pro t and Gain Sharing, and Broad-based Stock Options (C icag : Uni si y C icag P ss,2010), p. 65.

16 emp y s n p a i n, pa - im mp y s, and mp y sw a n ac d c ain as na minimum nu

qui m n s, as w u d p s n d mp y s w c s n pa icipa , c u d xc ud d. t p icy w u d n app y pu yindi idua inc n i p ans, suc as sa s c mmissi ns.

17 Many ms wi s a d capi a is ms c mp nsa i n a mu -ip inc n i p ans nc u ag w k s a ng dif n ma gins.

t us, n ndisc imina i n and p- a y p c i ns w u d a c n n y ac p an s pa a y u n i g up as a

w . Id a y, c mpani s w u d a a sing p an s ck p -i ns, a sing p an p s a ing, and s and w u d sp ci y

w ac p an w ks s pa a y and w y w k as a g up inways a s a d s, mp y s, and g nm n c u d as-i y and anspa n y und s and u s uc u c mp nsa i nand w n s.

18 G nm n Acc un a i i y o c , P i a P nsi ns: t p-h a yru s own -D mina d P ans (2000), ci s r nu Ac 1942, p. 77-753, 162.
http://www.slideshare.net/ganeshramb/wegmans-and-its-employeeshttp://www.slideshare.net/ganeshramb/wegmans-and-its-employeeshttp://money.cnn.com/magazines/fortune/fortune_archive/2005/01/24/8234048/index.htmhttp://money.cnn.com/magazines/fortune/fortune_archive/2005/01/24/8234048/index.htmhttp://www.computerworld.com.au/article/5525/cisco_ceo_reflects_company_20/http://www.computerworld.com.au/article/5525/cisco_ceo_reflects_company_20/http://www.computerworld.com.au/article/5525/cisco_ceo_reflects_company_20/http://www.computerworld.com.au/article/5525/cisco_ceo_reflects_company_20/http://money.cnn.com/magazines/fortune/fortune_archive/2005/01/24/8234048/index.htmhttp://money.cnn.com/magazines/fortune/fortune_archive/2005/01/24/8234048/index.htmhttp://www.slideshare.net/ganeshramb/wegmans-and-its-employeeshttp://www.slideshare.net/ganeshramb/wegmans-and-its-employees


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19 G nm n Acc un a i i y o c , P i a P nsi ns, p 6.

20 U.S. t asu y as qu d in G nm n Acc un a i i y o c ,P i a P nsi ns, p. 43.

21 S Ann e. M an, r as na C mp nsa i n, 390-4 tax Mgm .P i (Was ing n: bu au Na i na Afai s, 2009).

22 t s inc ud 1984 G d n Pa ac u p isi ns a d ny axd duc i ns mp y s and imp s an addi i na ax n mp y-

s c i ing xc ss g d n pa ac u paym n f s, 1993d nia ax d duc i ns x cu i pay y nd $1 mi i n, and

2004 ax c ang ga ding n nqua i d d d c mp nsa-i n a ang m n s.

23 J f Ma in, h n y A kins, and J. h n y o mann III, t ad a ad:x cu i c mp nsa i n p isi ns tArP cipi n s und

Am ican r c y and r in s m n Ac 2009 (Was ing n:G an t n n, 2009).

24 Indica i a i n w n ad- as d inc n i paysys ms and w k w - ing, a s is F un s 100 s

mp y s s ws a 4 p 10 w ms wi x nsiad- as d inc n i p g ams. (S , 100 b s C mpani s

W k F , CNN M n y, a ai a a p://m n y.cnn.c m/maga-zin s/ un / s c mpani s/2010/.) t Na i na C n em-p y own s ip ana ysis ms n 100 s mp y s

is im s ws a is is a g n a pa n.

25 e ic C.A.Kaa s mak , emp y wn s ip and i s c ns qu nc s:Syn sis-g n a d id nc f c s mp y wn s ip

and gaps in s a c i a u (Y k: Uni si y Y k, 2006).

26 S n F. F man, ef c s eSoP Ad p i n and emp y own -s ip: t i y y a s r s a c and exp i nc . W king Pap 07-01(o ganiza i na Dynamics P g ams, Uni si y P nnsy ania, 2007).

27 C. D uc u iag s, W k pa icipa i n and p duc i i y ina -manag d and pa icipa y capi a is ms: a m a-ana ysis

Industrial and Labor Relations Review 49(1) (1995): 58-77; D ug asK us and J s p b asi, emp y own s ip, emp y A i ud s,and Fi m P manc : A r i w e id nc , in Da id l win,Dani J.b. Mi c , and Ma m d A. Zaidi, ds.,Human ResourcesManagement Handbook, Part 1 (G nwic : JAI P ss, 1997); Ma inl. W i zman, Ma in l and D ug as K us , P S a ing andP duc i i y, in A an b ind , d.,Paying For Productivity: A Look at the Evidence (Was ing n: b kings Ins i u i n, 1990).

28 N. F ic , J. G da d, J. A. opp n im , and F. A. S a k , emp ysus c n n i na y- wn d and c n d ms: An xp im n a

ana ysis,Managerial and Decision Economics 19 (4/ 5) (1998): 311-26.

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30 ox a, tax-ad an ag d mp y s a sc m s: Ana ysis p -duc i i y f c s, r p s 1 and 2 (2007).

31 K us , F man, and b asi, ds., Shared Capitalism at Work ,

32 K us , F man, and b asi, ds., Shared Capitalism at Work , p. 276

33 F xamp s, s Indus y W ks b s P an s P a P A p n,ba s i Cask C .: IW b s P an s P 2009 Indus y W k,D c m 16, 2009, a ai a a p://www.indus yw k.c m/a ic s/ a s i _cask _c -_iw_ s _p an s_p _2009_20624.aspx?Pag =1.

34 Ma ga b ai , D ug as K us , and J s p b asi, Is emp y own -s ip an Uns a F m? o a S a i izing F c ? in t mas K c anand Ma ga b ai , ds.,Corporations and Human Capital (Was -ing n: t b kings Ins i u i n); C aig b n, and J n P nca ,

t b a i W k C p a i s: t P yw d C mpani s Paci c N w s ,American Economic Review , 82 (1992 and

1993): 1083-1105; t o j c i s W k C p a i s,Journal o Comparative Economics 17 (2) (Jun ), p. 288-308; D ug as K us ,

P S a ing and D mand l w-Ski W k s, in ric a dF man and P G sc a k, ds.,Generating Jobs: Increasing theDemand or Low-Skill Workers.(N w Y k: russ Sag F unda i n,1998), p. 105-153; D ug as K us , ric a d F man, and J s p b asi,

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35 J ns n and Mu p y am us y c aim d a x cu i s w n inpaid i c n i u i n c p a w a . Mic a C. J nsand K in J. Mu p y, P manc Pay and t p Manag m n Inc n-

i s,Journal o Political Economy (1990): 225-265. Inc n i - as dpay w u d cu is p m and gi m inc n i s mak

ig d cisi ns.

36 t is is S c i n 409A ga ding n nqua i d d d pay, w ic

imp s d an addi i na ax n mp y s. S J y Sa in Mu anIncid nc and Accid n s: r gu a i ns ex cu i C mp nsa i nt ug tax C d ,Lewis & Clark Law Review (2009); and Wi iamD nnan, t Pi a s Wi Pa y on!Vermont Law Review (2008).

37 luci n b c uk and J ss F i d,Pay without Per ormance: TheUn ul lled Promise o Executive Compensation (Cam idg : ha a dUni si y P ss, 2004).

38 randa h n and e ick li , W a F ac i n S ck op i n G an s t p ex cu i s ha b n backda d Manipu a d?Manage-ment Science 55 (4) (2009): 513-525. t y a s p a w -day ing qui m n a k f c n Augus 29, 2002 cu

ac i n g an s a w manipu a d in a , w ic imp i s gu a y c ang s a p n ia a ing a as manipu a i n.

39 U.S. S na C mmi n Financ , G ass y ak s aim a s ck p i ns ackda ing, x cu i c mp nsa i n ax p , P ss

as , S p m 6, 2006, a ai a ap:// nanc .s na .g /n ws m/c ai man/ as /?id= a3 aac7-174 -4 3 - 16d-2 d-a0 6c c87.

40 A w si a mak s is p in s ng y p://www. ackda ingisn ac im .c m/. S m ana ys s a gu a ackda ing ac ua y is in

in s s a d s sinc i a ws m pay x cuss an y w u d wi g nuin p i ns y m ing isk

p mium ass cia d wi g nuin p i ns.

41 In N m 11, 2010 N w Y k tim s an an a ic y Pla man, w s i s s y. P la man, backda ingScanda ends Wi a W imp ,The New York Times,N m11, 2010, a ai a a p://d a k.ny im s.c m/2010/11/11/

ackda ing-scanda - nds-wi -a-w imp /?s c= us n.

42 S Can G an ing S ck op i ns b C nsid d Insid t ading,W i C a C im P b g, Ju y 10, 2006, a ai a a p://

awp ss s. yp pad.c m/w i c a c im _ g/2006/07/can_

g an ing_s . m . t c mm n Dam n S i s, g n a c uns AFl-CIo, cap u d sp ns many usin ss andnancia ma k xp s: I s a s u a i y u y u mp

s a m cas gis , y u d n a pay m a muMaking Insid t ading l ga , t big Pic u , Ju y 12, 2006, a ai -a a p:// igpic u . yp pad.c m/c mm n s/2006/07/mak-ing_insid _. m .
http://www.industryweek.com/articles/batesville_casket_co-_iw_best_plants_profile_2009_20624.aspx?Page=1http://www.industryweek.com/articles/batesville_casket_co-_iw_best_plants_profile_2009_20624.aspx?Page=1http://www.industryweek.com/articles/batesville_casket_co-_iw_best_plants_profile_2009_20624.aspx?Page=1http://finance.senate.gov/newsroom/chairman/release/?id=fa3baac7-174f-4e3e-b16d-2eda0b6cec87http://finance.senate.gov/newsroom/chairman/release/?id=fa3baac7-174f-4e3e-b16d-2eda0b6cec87http://finance.senate.gov/newsroom/chairman/release/?id=fa3baac7-174f-4e3e-b16d-2eda0b6cec87http://dealbook.nytimes.com/2010/11/11/backdating-scandal-ends-with-a-whimper/?src=buslnhttp://dealbook.nytimes.com/2010/11/11/backdating-scandal-ends-with-a-whimper/?src=buslnhttp://dealbook.nytimes.com/2010/11/11/backdating-scandal-ends-with-a-whimper/?src=buslnhttp://dealbook.nytimes.com/2010/11/11/backdating-scandal-ends-with-a-whimper/?src=buslnhttp://finance.senate.gov/newsroom/chairman/release/?id=fa3baac7-174f-4e3e-b16d-2eda0b6cec87http://finance.senate.gov/newsroom/chairman/release/?id=fa3baac7-174f-4e3e-b16d-2eda0b6cec87http://finance.senate.gov/newsroom/chairman/release/?id=fa3baac7-174f-4e3e-b16d-2eda0b6cec87http://www.industryweek.com/articles/batesville_casket_co-_iw_best_plants_profile_2009_20624.aspx?Page=1http://www.industryweek.com/articles/batesville_casket_co-_iw_best_plants_profile_2009_20624.aspx?Page=1http://www.industryweek.com/articles/batesville_casket_co-_iw_best_plants_profile_2009_20624.aspx?Page=1


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endn s | www.am icanp g ss

43 tw da a s s p id an in ma i n. t G nm nAcc un a i i y o c as p d n nancia s a m n s a -m n s ginning wi Financia S a m n r s a m n s: t nds,Ma k Impac s, r gu a y r sp ns s, and r maining C a ng s(2002), w ic m s acad mic ana ys s a us d. In 2007 GAoissu d FINANCIAl reStAteMeNtS: Upda Pu ic C mpanyt nds, Ma k Impac s, and r gu a y en c m n Ac i i i s,(2007), a ai a a p://www.ga .g /n w.i ms/d06678.pd ,wi da a as d wn ada m p://www.ga .g /sp cia .pu s/ga -06-1079sp/ sm. m . t S cu i i s and exc angC mmissi n issu s qua y p s Acc un ing and Audi ingen c m n r as s, w ic can d wn ad d m: p://www.s c.g /di isi ns/ n c / iac i ns.s m .

44 t is is a a g i a u . S D. b gs ss and t. P i ipp n, Ceoinc n i s and a nings manag m n : e id nc m 1990s,Journal o Financial Economics 80 (2006): 511-529. S a s , N. bu nsand S. K dia, t impac p manc - as d c mp nsa i n nmis p ing,Journal o Financial Economics 79 (2006): 35-67, and

nc s y gi .

45 C is p A ms ng, A an D. Jag inz , and Da id la ck , C i ex cu i o c equi y Inc n i s and Acc un ing I gu a i i sJournal o Accounting Research (2010).

46 Wm. G a d Sand s & D na d C. ham ick, Swinging F nc s: t ef c s Ceo S ck op i ns n C mpany risk takingand P manc (Acad my Manag m n , 2007).

47 S F anc sc Gu a, Ge C i A acks ex cu i G d,The Finan-cial Times, D c m 9, 2009, a ai a a :p://www. .c m/cms/s/0/

1 3 7c- 507-11d -9a25-00144 a 49a. m ?nc ick_c ck=1.

48 rak s K u ana and Andy Z k , Y u Can Cap t Pay, but G d Wi G on, t Was ing n P s , F ua y 8, 2009,a ai a a p://www.was ing np s .c m/wp-dyn/c n n /a ic /2009/02/06/Ar2009020602794. m.

49 h w Fix ex cu i Pay, ha a d busin ss r i w b g, a ai aa p:// gs. . g/ / w- - x- x cu i -pay/.

50 t s ck p i n- a d ax d duc i n is su s an i a i ac p a ax d duc i ns and us d a c p a ax c ip s.t IrSs 2007 S a is ics Inc m : C p a Inc m tax r u ns,s w d a c p a inc m su j c ax in ax y a 2007was $1.25 i i n n w ic was paid $331.4 bi i n in c p a ax s.

51 t S na da a was as d n Jun 16, 2010 and is a ai aa : S na In s iga i ns Su c mmi r as s N w Da a nexc ssi C p a S ck op i n D duc i ns t a ing $52 bi i n,

P ss as , Jun 16, 2010, a ai a ap:// in.s na .g /n ws m/ as .c m?id=325708. S ns. l in and McCain ain duc d S. 1491, ending exc ssi C p a D duc i ns S ck op i ns Ac .

52 N i In na r nu S ic s S a is ics Inc m Di isi nn C ng sss J in C mmi n taxa i n ak u c p a ax d duc i ns s n nqua i d p ans in i

a i us p s. t In na r nu S ic s 2007 S a is ics Inc m : C p a Inc m tax r u ns (2007), a ai a ap://www.i s.g /pu /i s-s i/07c cc .pd , s ws a w i 5.868 mi i nc p a i ns u ns (p. 39 und num u ns in in 1), a

u 3.87 mi i n, p suma y sma usin ss s, a ass s und aa a mi i n d a s. W ini ia y xamin da a n a u 1.9 mi i n

c p a i ns a ax u ns an is su j c n p. 39-40w c p a i ns a k n d wn y siz a ass s.I is c a a a g s c p a i ns c a y acc un muc

ass cia d ax d duc i n. Und a d duc i ns, is ain i m C mp nsa i n o c s $479.2 i i n a ing

c p a i ns in 2007 in ta 2, r u ns Ac i C p a i ns (p.39). W n a a ax d duc i ns C mp nsa i n o -

c s am un s $101.42 i i n 29,355 c p a i ns wiass s a $50 mi i n. t a d duc i ns C mp nsa i n

o c s am un s $77.99 i i n 12,192 c p a i nswi ass s a $250 mi i n. t is a u n - i d 1 p c n

a c p a i ns wi ass s a a a mi i n d a s ac ua yacc un s a a g s a is ass cia d ax d duc i n.

53 t Na i na C n emp y own s ip c nduc s s a cannua y n p c n ag F un Magazin s 100 b s C mpa-ni s W k F in Am ica and gu a y nds a 30-60 p c n

s c mpani s a a i us ad- as d qui y and ps a ing p ans. In 2007, 56 p c n c mpani s a ad s ck

n is ad ad- as d qui y p ans. S Na i na C n emp y own s ip, emp y own s ip Upda (2007). Sa s , F ua y 1, 2006 w again m an a c mpani s

ad ad- as d mp y wn s ip.

54 t a ia i i y in in ma i n a c p a i ns gi in iSeC ings in p xi s and in p p s d s a d s u i nsw a d qu s s app a p manc - a d inc n-

i p ans, mak s i a d id n i y xac num mp y spa icipa ing in p an and c i ing n s in any y a .

55 K us , F man, and b asi, ds., Shared Capitalism at Work .

56 K us , F man, and b asi, ds., Shared Capitalism at Work .

57 S ha y M. Ma k wi z, J s p r. b asi, and D ug as l. K us , em-p y S ck own s ip and Di si ca i n, Anna s op a i nsr s a c , 176 (1) (2010): 95-107. S a s , J s p b asi, ha y Ma -k wi z, and D ug as K us , risk and lack Di si ca i n undemp y own s ip and S a d Capi a ism, inShared Capitalismat Work D ug as K us , ric a d F man, and J s p b asi ds., (C i-cag : Uni si y C icag P ss, 2010). t pap a s app a d as

a Nber W king Pap .

58 t is was pa m Ma in W i zman,The Share Economy (Cam idg : ha a d Uni si y P ss, 1984.
http://www.ft.com/cms/s/0/fe1e3f7c-e507-11de-9a25-00144feab49a.html?nclick_check=1http://www.ft.com/cms/s/0/fe1e3f7c-e507-11de-9a25-00144feab49a.html?nclick_check=1http://www.washingtonpost.com/wp-dyn/content/article/2009/02/06/AR2009020602794.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2009/02/06/AR2009020602794.htmlhttp://levin.senate.gov/newsroom/release.cfm?id=325708http://levin.senate.gov/newsroom/release.cfm?id=325708http://www.irs.gov/pub/irs-soi/07coccr.pdfhttp://www.irs.gov/pub/irs-soi/07coccr.pdfhttp://www.irs.gov/pub/irs-soi/07coccr.pdfhttp://www.irs.gov/pub/irs-soi/07coccr.pdfhttp://levin.senate.gov/newsroom/release.cfm?id=325708http://levin.senate.gov/newsroom/release.cfm?id=325708http://www.washingtonpost.com/wp-dyn/content/article/2009/02/06/AR2009020602794.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2009/02/06/AR2009020602794.htmlhttp://www.ft.com/cms/s/0/fe1e3f7c-e507-11de-9a25-00144feab49a.html?nclick_check=1http://www.ft.com/cms/s/0/fe1e3f7c-e507-11de-9a25-00144feab49a.html?nclick_check=1


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About the authors

Richard Freeman holds he Herber Ascherman Chair in Economics a HarvardUniversi y and is a research associa e a he Na ional Bureau o EconomicResearch in Cambridge, Massachusets .

Joseph Blasi is he J. Rober Beys er Pro essor in he School o Managemen andLabor Rela ions a Ru gers Universi y, and a research associa e a he Na ionalBureau o Economic Research in Cambridge, Massachusets.

Douglas Kruse is a pro essor in he School o Managemen and Labor Rela ions aRu gers Universi y, and a research associa e a he Na ional Bureau o EconomicResearch in Cambridge, Massachusets.

Acknowledgements

We would like o hank exper s rom he Cen er or American Progress and apanel o reviewers or heir help ul commen s on earlier dra s o his proposal.We are apprecia ive o Ed Paisley o Cen er or American Progress or his edi orialwork on his publica ion.


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dedicated to promoting a strong, just and ree America that ensures opportunity

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these values and we aspire to ensure that our national policies re lect these values.

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Inclusive Capitalism for the American Workforce

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