Many employees who must innovate in America’s leading industries are finding that they can no longer share in the fruits of such innovation. Is this the new American reality?
For more than a decade, equity compensation where average employees get to own shares of the companies they work for through restricted stock or stock options has declined dramatically in many large publicly-traded corporations. What’s more, the percentage of employees with equity stakes in innovative industries, such as computer services, declined from over half of all employees in that industry in the early 2000s to about a fifth of all employees by 2014. The percent of employees nationally receiving stock options has fallen by almost half over this period.
Given these trends, what’s at stake is the chance for workers to earn a lot more. The fall in equity compensation is threatening American innovation because the decline is not only in large corporations, it is concentrated in industries that are supposed to be in the forefront of developing new innovative products and services. In my 2003 book, In the Company of Owners, written with co-authors Douglas Kruse and Aaron Bernstein, I reported that each and every one of the 100 largest companies such as Amazon, Cisco Systems, and Microsoft, that developed the world-wide web had some form of employee share ownership for most employees. These hundred companies sold products and wrote software and made equipment for the Internet.
Back in the early 2000s when I visited many of these companies in Silicon Valley and in the “innovation cluster” around Seattle, Washington, I learned that their leaders considered equity compensation central to recruiting the best talent and maintaining a competitive edge. In 2002, 58% of the employees of the U.S. computer services industry were employee owners of their company, while 57% held company stock options. By 2010, only 20% of employees were employee owners in the computer services industry and only 17% held employee stock options, which represents a 60% to 70% drop in equity compensation among creative workers in one of America’s most leading innovation industries. By 2014, these numbers continued the decline.
Why did this happen? Under the George H.W. Bush administration during the 1990s, tax incentives developed to encourage Employee Stock Ownership Plans (ESOPs) in large publicly-traded companies were eliminated due to budget cuts. This led to a slow elimination of ESOPs from stock market companies. In the years that followed under the George W. Bush administration after the abuses of stock options by top executives in the Enron and Worldcom scandals of the early 2000s and the explosion of equity compensation for top executives, government regulators pushed for companies to expense stock compensation with the hope this would tame executive pay.
This change in accounting, ironically, led companies to downsize their stock compensation programs in order to keep the expense low. But the mechanism they used was to push regular employees - such as lower level managers and professionals out of the employee share plans so that the benefits could be reserved mainly for executives and those at the top.
Yet another form of employee share ownership has suffered reverses. Employee Stock Purchase Plans (ESPPs) were one of the earliest forms of broad-based employee share ownership favored by business and encouraged by the U.S. Government. Typically, companies would allow employees to buy company shares at a significant discount while absorbing brokerage fees and letting the employees have a “lookback” option where they could opt to purchase the shares at any price over the last year. Employee Stock Purchase Plans have become less generous in many companies with lower or no discounts and the elimination of “lookback” options.
With no special tax incentives to encourage companies with equity compensation for all or most employees to keep those plans broad-based and open to most employees, these three events merged to mark the decline of equity compensation in many parts of American industry. It is true that some companies, such as Microsoft and Intel, continued to offer equity compensation to most employees, but the change in government rules and a lack of commitment by management has led to the general decline.
Unfortunately, in my conversations with human resource managers in recent years, I have discovered a kind of “revisionist history” where human resource management professionals who were asked to eliminate the middle class from employee ownership programs by their bosses are now creating a new “theory” to justify this. Many argue that only executives and a few percent of top employees can really impact the bottom line and only they should have shares. This view is held in spite of the fact that decades of scholarly research on broad-based employee share ownership concludes the opposite and in spite of the fact that about half of the Fortune Best Places to Work every year have some form of broad-based profit sharing or equity sharing program.
If policymakers believe that broad-based equity compensation plays an important role in innovation industries, what can be done? Business leaders need to look at the entire economy and look outside of their individual company and understand how significant a change has taken place in the work system of some of our major industries. Congress and the Administration should conduct hearings on the role of broad-based equity compensation in innovation industries. It is time to remove some of the regulatory barriers preventing a resurgence of different types of employee share ownership in larger corporations with several legislative proposals.
One proposal under discussion is the bipartisan Expanding Employee Ownership Act of 2017 recently introduced by Republican Rep. Dana Rohrabacher of California and Democratic Rep. Collin Peterson of Minnesota. It would provide tax incentives for corporations that grant equity to all employees and match them with tax benefits for the employees receiving the grants so that they can keep more of their share wealth. For the future of American innovation, it is time to take stock of equity compensation in America’s largest corporations.
Joseph Blasi is the J. Robert Beyster Distinguished Professor at Rutgers University’s School of Management and Labor Relations and author of the book, The Citizen’s Share and the Third Way think tank policy report, Having a Stake. The article represents Blasi’s personal opinions and not those of any institution.
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