The traditional model of a capitalist economy, where capital pays workers fixed
wages/benefits for doing what management wants, has morphed in advanced
companies and economies into something quite different. In place of the historic
capital/labor dichotomy modern firms have developed a system where employees
share in the financial fortunes of the firm, make many of the decisions that determine
firm performance, and depend on pension fund ownership of equity for much
retirement income. These changes are likely to continue into the foreseeable future, creating what I call the shared capitalist model of work and compensation
How far down the path toward shared capitalism have major advanced
economies gone ? What are the advantages and disadvantages of shared
capitalism ? How will shared capitalism affect economic efficiency and distribution ?
This essay seeks to answer these questions. It describes the main features of
shared capitalism, documents the growth of shared capitalist institutions, and
assesses their impact on economic well-being. My main focus is on the United
States, which is arguably the lead economy in shared capitalism, but I also consider
developments in the United Kingdom and France.
My main findings are :
Financial sharing and shared decision-making have grown rapidly in the
United States and to a lesser extent in the United Kingdom and France.
Firms that use shared capitalist modes of pay also devolve decisions to
workers, indicating that these two practices are complementary.
Shared capitalism improves efficiency; but has ambiguous effects on distribution.
THE SHARED CAPITALIST PARADIGM
« The only problem with capitalism is that there are not enough capitalists» – Jeff
Gates, advocate for employee ownership and author of US law on employee stock
Shared capitalism is a variant of the traditional capitalist system of private
ownership of property, employment contracts in the job market, and market-based
determination of prices and wages. It diverges from traditional capitalism by dividing
the benefits and risks of capitalism among workers and retirees as well as among
capitalists, blurring the capital/labor dichotomy that has dominated traditional
economic relationships. As exhibit 1 indicates, the sharing occurs in three ways :
Through financial participation in one’s own firm. There are diverse
mechanisms for this : profit-sharing, where workers get immediate or deferred cash
rewards, bonuses, or other remuneration when the firm/branch/work site exceeds
some profit goals; gain-sharing systems that relate rewards to other measures of
local group performance, such as reducing costs; employee stock ownership plans
(ESOP), where workers own shares of the firm in a trust fund, over which they have
some voting rights; all employee stock option plans (AESOP), which grant options
to a broad base of employees; and programs that reward workers for buying and
holding shares in their own firm.
Through pension fund ownership of shares in one’s own firm or in equity
more broadly. In The Unseen Revolution, Peter Drucker argued that the increasing
proportion of equity in pension funds was transforming modern capitalism. But
when he wrote, virtually all pension funds were defined benefit plans, where the
firm promises workers a fixed retirement benefit but keeps control of investments
and bears the risk of the investment. By contrast, the defined contribution plans
that grew in the 1980s and 1990s give the responsibility for the risk and reward
from pension contributions to employees. Rather than a promisory note (in effect,
a bond), workers have equity in their pension fund, which makes retirement income
dependent on capital earnings. This turns workers into capitalists, and gives them
an incentive to monitor the governance of the firms where their pension moneys
Shared decision-making at the workplace. Here also there are diverse sharing
mechanisms. US firms set up employee involvement committees under various
guises. Some firms flatten the corporate hierarchy by reducing middle management layers. Japanese firms rely on consensus building among management and
have extensive formal consultative and information committees with employees. In
the EU, works councils can play a similar role. Germany mandates workers on
boards of companies.
Shared capitalism alters modern economies in several ways. Sharing financial
rewards strengthens the incentive system for production and aligns the interests of
capital and labor more than traditional employer/employee arrangements. At the
same time it places greater risk on employees. Sharing of decision-making reduces
the boss/worker divide inside firms and increases the power of workers to affect
outcomes. Shared capitalism also changes the social welfare state. Defined contribution pensions ease the burden on taxpayers to fund pay-as-you-go social
security systems while placing responsibility on individuals to invest their moneys
wisely. Shared decision-making at workplaces also changes traditional modes of
regulating workplaces and production sites. Devolution of decisions means that
labor and management can enforce laws at local sites rather than relying on state
command and control center. This will make some regulation more efficient but
risks aligning workers and firms against the broader public in other areas.
SHARED CAPITALIST COMPENSATION IN THE US
To see how extensive shared capitalist modes of compensation have become in
the US, I gathered statistics on particular forms of shared capitalism compensation from diverse sources and mined the compensation questions from the 1994-95 Workplace Representation and Participation Survey (WRPS; Freeman and
Rogers). My estimates, summarized in exhibit 1, suggest that approximately half of
the US private sector work force is paid through some form of financial sharing
(Dube and Freeman, 2000).
Roughly 8% of American workers participate in an ESOP or related employee
ownership scheme. ESOPs grew rapidly in the 1980s, due in part to favorable tax
treatment, but stabilized in the 1990s. ESOPs aside, many firms have introduced
401k or other defined contribution pension plans that invest heavily in company
shares. Some 35% of US private sector workers were covered by defined contribution plans in 1998, and about 11% have sufficiently large investments in their
own firm to make company performance an important determinant of their retirement
In the 1990s the fastest growing form of shared compensation was all employee
stock options. The National Center for Employee Ownership estimates that
approximately 8% of workers are covered by an all employee stock option plan,
but this may be a high number. By contrast, the US Bureau of Labor Statistics
shows that just 1.7% of workers were granted options in 1999. The BLS numbers
are lower in part because the BLS did not count workers given grants in other
years or workers eligible for grants that were not given. Adjusting for these differences
could produce estimates of workers in firms that have ever given all employee
stock options as high as 5-6%. However, the BLS figures may also be lower than
the NCEO estimates because the BLS survey is more accurate. Looking over time,
even the modest BLS estimate shows a large increase in the proportion of workers
granted options in the 1990s. Before the 1990s, options were limited to top
executives; but in that decade, many firms extended options to workers in lower
parts of the hierarchy, and some unions bargained for options for members. In
Summer 2000 the House enacted a « Super Stock Option Bill » that adds tax
breaks to options for all employees, which should increase the popularity of this
form of compensation.
Many firms also give employees the opportunity to purchase shares of their
firm at discounts through tax-qualified « 423 plans » or other schemes; and a
sizeable proportion of workers take advantage of this opportunity. Surveys of workers
suggest that 11% of American workers had such plans. Estimates from company
records suggest a higher proportion, with 15.7 million workers or about 14% of
private sector employees owning shares through discount plans (Conyon).
Turning to profit-sharing modes of compensation, on the order of one quarter
of US private sector workers are covered by profit or gain-sharing. Profit-sharing
systems range from plans that place the profits into trusts for worker retirements to
plans that pay workers with bonuses at years’end and plans give awards more
frequently in the form of cash. Gain-sharing systems are invariably cash systems.
Because there is considerable overlap among these modes of pay, one cannot
simply add the numbers covered to obtain the share of the US private sector work
force with shared capitalist forms of compensation. Adjusting for overlaps, I estimate
that 45% of US private sector workers are covered by some shared compensation
system. Consistent with this, 54% of workers in the WRPS reported that they were
so covered, though on this survey (as on others) the proportion of workers who
reported that they were in an employee owned firm exceeded estimates from other
sources. In short, about half of US workers are paid through some form of variable
compensation related to firm performance. Existant data do not, however, tell us
the proportion of employee pay or wealth that is variable compensation dependent
on firm performance as opposed to fixed compensation.
As noted earlier, the growth of defined contribution pension funds, invested in a
firm or in the equity or bond market more generally, is changing the ownership
structure of capitalism. In 1998 some 37 million US workers (35% of the non farm
private employment) had a defined contribution pension plan, with the typical
employee holding $40,000 in assets. For public sector and non-profit sector workers
pension fund are their major way of holding a stake in the capitalist system. TIAA-CREF, one of the 20 top firms in the Fortune 1000 listing, invests the pension
moneys of American academics. CALPERS, perhaps the most aggressive pension fund in the area of corporate governance, invests the pension moneys of
California public employees.
Ownership of pension fund shares gives workers pecuniary interests similar to
other shareholders, and thus often puts them on the side of management rather
than of other workers in labor/management disputes. When the United Airlines
pilots union threatened industrial action against the employee owned airline in the
late 1990s, share prices fell, leading some senior pilots to complain to union leaders that union activity was reducing their retirement income. When business
executive « chainsaw » Al Dunlop raised the share value of International Paper by
downsizing its work force, unions representing workers outside the firm who had
International Paper shares in their pension funds saw their members’ pensions
rise, but at the expense of laid-off workers.
Turning to shared decision-making, the WRPS shows that 55% of US workers in
firms with 50 or more employees report that their firms have employee involvement
committees of some form. A third say that they serve on such committees. The
extent to which committees are able to make decisions or influence them in a
major way varies widely among decisions and firms, but workers who serve on
employee involvement committees are more likely to be satisfied with their role in
decisions at their workplace than other workers (Freeman and Rogers).
In the EU, legally mandated works councils create a natural forum for workers
to participate in some decisions. In all countries, management must share information with the councils, but beyond that the laws governing works councils varies by country. France allots a proportion of the wage bill to councils to spend on
employee benefits, such as cafeterias. The Belgium works council law encourages
labor and management cooperation. German law requires that firms consult with
works councils on some decisions and requires co-determination on other decisions.
In addition to works council Germany requires that firms place workers on boards
of directors, creating dialogue about higher-level corporate decisions.
I know of no study that examines whether US employees, with company
instituted involvement committees, or EU employees, with legally mandated works
councils, have a greater say in actual work place decisions. In both areas, the
highly educated and skilled workers, who have the knowledge needed for firms to
improve their operations, have achieved a much greater say in decisions than the
traditional less skilled industrial employee in « Fordist » production.
SHARED COMPENSATION IN THE EU : UNITED
KINGDOM AND FRANCE
The EU endorsed shared capitalist modes of compensation in its 1989 PEPPER
(=Promotion of Employee Participation in Profits and Enterprise results) Report,
but this did not have any marked effect on member countries. Many European
trade unions were leery of profit-sharing and ownership, and most countries were
unwilling to encourage shared compensation through tax concessions when national budgets were in deficit. The review of profit sharing by the OECD in 1995
shows modest profit-sharing in most EU countries. Two EU countries, the United
Kingdom and France, have, however, sought to increase worker participation in
the financial performance of their firms. Both countries gave tax concessions to
firms that introduced profit-related pay in the late 1980s. Since then the UK has
favoured employee share ownership or share option schemes, while France has
strengthened its system of wage related savings from profits, while generally
eschewing ownership schemes.
The United Kingdom
Exhibit 2 provides a capsule summary of UK policies toward shared compensation
from the late 1970s to 2000, divided between schemes that give tax advantages if
they cover all employees and schemes designed for top management and other
Profit-related pay, under which the Treasury did not tax compensation paid to
workers based on an approved profit-related pay system, was widely adopted in
the 1980s and 1990s. In the 1990s some 50% of UK private sector workers were
receiving part of their pay for profit-related reasons. However, the Treasury came
to view the system as a « scam » with firms finding ways to classify any sort of pay
as « profit-related » to take advantage of the tax break, and began phasing the
program out in 1997. As of 2000, profit-related pay will be history in the UK.
The UK has instead gone for shared compensation programs that encourage
firms to pay workers in shares or stock options or that encourage employees to
invest in shares. The motivation is best expressed by the Chancellor of the
Exchequer, Gordon Brown in a 1999 consultation paper : « Share ownership offers
employees a real stake in their company… I want, through targeted reform, to
reward long term commitment by employees (and) to encourage the new enterprise
culture of team work in which everyone contributes and everyone benefits from
success » (UK Treasury, foreword). The 2000 All employee Share Plan allows firms
to give free shares to workers tax free and gives tax breaks to employees who buy
shares as long as they hold the shares for 5 years (with smaller tax breaks to
workers who hold them for 3 years). Another important UK plan is the Save as You
Earn (SAYE) share option scheme, which gives tax relief to workers who enter a
special savings contract to buy the shares when the period ends.
In addition to these schemes, the UK gives some tax breaks to Company
Share Option Plans that go largely to top management. In 2000 the government
introduced an Enterprise Market Incentive system to allow small companies to
give tax-advantaged options to 15 key employees.
« La Participation, voilà la grande réforme de ce siècle ! » Charles de Gaulle, quoted
in PEPPER Report, p. 67.
French governments of differing political persuasion have mandated some forms
of profit-sharing and encouraged others. Exhibit 3 provides a capsule summary of
the two major French programmes from the late 1970s to 2000.
The most inclusive French program is a wage-related savings program – participation aux fruits de l’expansion – that is obligatory for firms with 50 or more
employees. The program was first enacted in 1967 and modified thereafter. This is
a deferred profit-sharing system that is in effect a forced saving plan : the profitsharing bonus is invested for 3-5 years before the worker receives any reward,
with the investment vehicles ranging from the firm’s own investment program to
outside securities. Because the program is obligatory, 4.9 million French non-governmental workers were covered in 1999 – about 30% of the non-governmental
work force. But almost no workers in smaller firms are covered. A May 2000 survey
for the Ministry of Economy, Finance, and Industry found that most French
employees viewed the plan favourably but regarded it as overly complex, and too
favourable to large firms and higher income employees. In summer 2000, the French
government considered ways to modify the system to bring more small firms into
the program and to give workers greater choice in their investment vehicles. The
main feature – required savings for workers in profitable firms – will remain. (République Française, Actualités, Mardi 1er août 2000).
France’s second major program – Intéressement des Salariés – is a voluntary
cash profit-sharing system, in which small as well as large firms participate. It encourages cash bonuses and is thus quite similar to the UK profit-related pay programme introduced at roughly the same time in the late 1980s. The tax incentive is
substantial as long as firms agree that the profit-sharing bonuses cannot substitute
for wages. Given industrial or regional level French collective bargaining agreements, this could be an effective way to assure that the plan avoid the substitution
of tax privileged profit shares for wage increases, but as firm level agreements
have grown in France, the possibility for bargaining for lower pay increases and
greater profit bonuses paid in part by the Treasury has increased. Coverage under
this plan has expaned greatly since 1986, so that some 2 million workers were
involved in profit-sharing in the early 1990s.
By encouraging profit-sharing rather than ownership of shares or options,
France has chosen a different road to shared capitalism than the US and UK.
Profit-sharing systems reduce the risk that fluctuations in the stock market unrelated
to employee activity will affect rewards, but they are less likely to induce employees
to participate in company governance.
ECONOMICS OF SHARED CAPITALISM : GROWTH
Economic analysis makes one key prediction about the development of shared
capitalism : that firms which voluntarily choose this mode of operation should
introduce financial sharing and shared decision-making in tandem. The reason is
simple : it pays the firm to give incentives to workers only when workers have
discretion to vary what they do at workplaces, and it pays management to devolve
decisions to employees only when employees have incentives to make decisions
that raise the value of the firm. Exhibit 4 shows that the incidence of shared compensation systems and employee involvement in the US supports this prediction.
Workers in firms with employee involvement programs are nearly twice as likely to
have shared compensation systems. Conversely firms that have shared compensation systems are much more likely to have employee involvement schemes. It is
the covariation between the mode of compensation and the mode of decisionmaking that makes shared capitalism a broad « system » for operating a capitalist
Economic analysis suggests that firms which operate under most shared
capitalist modes of operation will perform better than firms which operate under
traditional hierarchical labor/management modes of operation. Many researchers
have examined the effect of profit-sharing, employee ownership, and employee
participation in the firm on productivity. The general finding is that profit-sharing
raises productivity by around 5% (Kruse and Weitzman, using a meta-statistical
assessment of many studies; Doucouliagos, 1995) while employee ownership
has weaker and more mixed effects, depending on whether or not ownership carries
with it worker participation or not. Dube and I have found that workers in firms that
combine profit-sharing, ownership and employee involvement report much greater
productivity increasing behaviour on a variety of indicators (such as making suggestions for improving efficiency) than do workers in other firms. Conyon and I
have found that British firms tend to have higher productivity when they have some
form of shared compensation system. Cahuc and Dormont have found that the
French voluntary cash-based profit-sharing improves productivity as well.
An alternative way to assess the efficiency effects of shared capitalism is to
contrast the stock market performance of firms that use shared capitalist modes
of compensation or decision-making with that of other firms. Consistent with
econometric results on productivity, indices of the stock market valuation of firms
that are employee-owned or that have shared capitalist compensation systems
outperform the overall stock market in the US and UK.
As of this writing, there have been no major studies of the economic impact of
all employee stock option schemes or of other programmes that encourage
individual ownership of shares (as opposed to collective ownership in ESOP trusts).
Given that almost no worker can affect share prices by their own activity, it is hard
to explain the growth of all employee stock option plans and tax-privileged stock
purchase plans by incentive theories. Why give a Starbucks (the US coffee chain) or ASDA (the UK supermarket) clerk stock options, when there is no « line of sight »
between what the worker does and the share price ? One possibility is that firms
use these modes of pay to signal workers that they have a participatory corporate
culture, which may affect behaviour. Another possibility is that firms facing financial
constraints have passed the risk onto workers in a booming economy when the
workers are not fully aware of those risks.
Options aside, shared capitalism seems to produce modestly or moderately
better outcomes than traditional modes of operation, at the minimum. Whether or
not shared capitalism reduces income disparities is less clear. On the one side, by
linking employee earnings more closely to firm performance, shared capitalism
modes of compensation are likely to increase inequality. The variation in profitability
among firms is, after all, huge. On the other side, by making the pay of employees
depend on comparable factors as the pay of management and shareholders, shared
capitalism has the potential for turning workers into capitalists and thus narrowing
income gaps. Defined contribution pension fund ownership extends both the
benefits and risks of capitalism to many workers.
Does the rise of shared capitalist modes of pay and decision-making in the 1990s
mark a watershed in the development of market economies, or is it simply the
latest « flavour of the month » in a dynamic economic system ?
To some extent, the rise of shared modes of pay (notably stock options) has
been fueled by the 1990s boom and the idiosyncracies of the information technology
industries that have led this boom. A sizeable recession could readily change
employee attitudes toward these forms of pay, and induce many firms to return to
more traditional contracts. But even so I do not expect to see anything like a return
to the labor/capital dichotomous capitalism of the 19th and most of the 20th century.
As long as the educated and specialized workers who dominate modern production are more knowledgeable than top management in many key areas, efficiency
dictates that those workers participate in decisions, and by the complementary
argument given earlier, to receive shared capitalist modes of pay. As long as workers
rely on defined contribution pension plans for their retirement incomes, they will
truly be substantial owners of the capitalist system.
Economists do not have a good track record in predicting the future
development of capitalism (Marx being the best case in point) because they tend
to extrapolate then-current trends into the future, but I am willing to bet that the
21st century will see further growth of shared capitalism, and that this will benefit
the economy and blur the capital/labor division that has been one of the blemishes
of this form of organizing work. Welcome, new and improved capitalism of the new
EXHIBIT 1 : SHARED CAPITALISM IN THE US
I. Financial Participation in Performance of firm Coverage of private
1. Stock Ownership Programs 25%
• employee stock ownership (ESOP,
tax advantaged trusts that hold shares) 8%
• all employee stock ownership 8%
• opportunity to buy company stock at discount 10-15%
2. Profit sharing or Gain Sharing 25%
3. Defined Contribution Pension Plans with
sizable investment in company stock 11%
Any form of shared compensation 50%
• From diverse sources 45%
• From WRPS survey 54%
II. Ownership Through Pension Funds
4. Employee defined contribution pensions 35%
III. Shared Decision-Making Through Employee Involvement Committees
(firms > 50 workers only)
5. Employees in firms with committees 54%
6. Employees serving on committees 33%
Sources: Dube and Freeman (2000), table1 ; Freeman and Rogers (1999)
Dube and Freeman (2000), table1 ; Freeman and Rogers (1999)
EXHIBIT 2 – UK PROGRAMS TO ENCOURAGE
All employee schemes
Profit-Related Pay. Tax relief for wages paid through a profit-sharing scheme :
workers pay no tax on receipt of profit-related pay up to specified. It was set up in
1987, tax benefits were extended in 1991. The scheme was phased out between
1997 and 2000.
Approved Profit-Sharing Share Schemes. Introduced in 1978 Finance Act. Tax
relief for shares placed in a trust and given free to employees. The tax relief : value
of shares given is deductible from corporate tax; income tax exemption for workers
if held for 5 years. Coverage in 2000 : 1.25 million workers. Will be phased out and
replaced with New All Employee Share Plans.
Qualifying Employee Share Trusts (QUEST). A trust that acquires shares of firm
that are held on behalf of employees. Shares must be distributed to employees
within 20 years. Payments are corporate tax deductible. Funds often put in as part
of profit-sharing to gain tax relief
New All employee Share Plan (2000). Firms can give free shares tax free; employees
buy shares out of pre-tax income; firms can match employee purchases. Employees
who leave firm must withdraw shares. Firm has flexible performance criterion for.
Tax relief : employees who keep shares for 5 years in « ESOP » trust pay no income
tax; pay capital gains only on increase in value. Companies get relief for costs of
providing shares for employees..
Save as You Earn (SAYE) share option scheme. Tax relief given for options granted
to all employees for 3,5,7 years; workers must enter a special savings contract to
buy the shares when the period ends. No tax when option is granted, nor on the
savings to buy the shares. Coverage in 2000 : 1.75 million
Management/special employee schemes
Company Share Option Plans. Company can decide to give options to selected
employees (directors), with value up to $30,000, based on corporate performance
targets. No tax when option is granted, nor on increase in value of shares if held for
3 years; capital gains tax on price paid. Coverage in 2000 : 0.45 million
Enterprise Market Incentives. Small companies can give tax-advantaged options
to 15 key employees, with value up to $100,000, based on individual or corporate
performance. No tax when options are exercised and capital gains tax relief starts
from day of grant. Designed to help smaller firms attract or retain key personnel.
Source : wwww. inlandrevenue. gov. uk/ shareschemes
Capital Strategies, www. esop. co. uk
EXHIBIT 3 – FRENCH PROGRAMS TO ENCOURAGE
Participation in Company Growth – Participation aux Fruits de l’expansion
Since 1967 this law has required firms of specified sizes to give profit-sharing
bonuses in proportion to wages, with the size of the firm reduced from 100
employees to 50 employees in 1970.
The firm sets aside a proportion of profits in a Réserve Spéciale de Participation
(RSP) fund for five years, according to specified formula. All workers receive shares
in the fund proportionate to their salary, up to some limit. The funds can be spent
in various ways, in the firm or in other securities, including in the enterprise’s Savings
Plan (see below). Tax concessions include : RSP funds are deducted as a cost of
business, and are exempt from income and social security charges. In 1986 collective bargaining agreements could modify these agreements. Covers 1/3 of non-governmental employees, with 4% of gross wages for those paying bonuses.
Cash based profit-sharing – Intéressement des Salariés.
This regulation encourages firms to pay part of wages through profit-sharing, up to
a maximum of 10% of wages. The 1959 law introduced a voluntary system of
cash-based profit-sharing, with the bonuses exempt from company tax and social
security. The 1986 law eased administrative burdens and offered workers tax
benefits by exempting the bonus from income tax if the employee put the money
into the firm’s Plan d’épargne d’entreprise – saving plan. Covers about one-fifth of
non-governmental employees, with 2% of gross wages in firms and 3% for those
Source France, wwww. finances. gouv. fr/ press/ dossiers_de_presse/ fichte. htm(8 /09 /00 )
Hanatouz, (2000), Commission of the European Communities, (1991).
EXHIBIT 4 : THE INCIDENCE OF SHARED
COMPENSATION AND EMPLOYEE INVOLVEMENT IN
Full Sample Firms, by employee involvement committees
With EI committees Without EI committees
Any Shared Compensation Structure 53.8% 66.1% 33.9%
Performance-Related Pay 41.9 53.0 37.0
Profit-Sharing 28.9 39.9 24.1
Gain sharing 26.2 32.8 23.3
Ownership 29.6 40.2 25.0
ESOP 23.0 34.5 18.0
Employee-owned 11.2 13.1 10.4
Employee Involvement 29.9 100 0
Source: Dube and Freeman (2000).
Dube and Freeman (2000).