The Equitable Distribution of Profits
Mitt Romney recently implied that all those who don't pay federal income taxes--the 47%--are freeloaders.
This idea calls for an examination of the way a corporation or any business divides its profits.
Here profit is defined as the money remaining after all expenses are paid.
Three different groups of humans have an interest in this distribution: the owners, the management, and the workers.
In a small business, all three groups may be comprised of the same people or the owner and management may be one person.
For this article, I assume that these three groups are separate.
Current practice is to consider worker's wages as an expense; something to be minimized.
This certainly was the philosophy of Bain Capital when Romney was in charge.
Is it justified for a man who engages in the practice of eliminating workers or reducing their wages and benefits, to then imply that these same workers are freeloaders because they can't afford to give their families adequate food and health care? It is obscene for the Romneys of the world to under pay their workers and then curse them because they have to appeal to a compassionate government for aid.
To be sure, many large businesses know that treating their workers fairly makes good business sense.
Let's look at these three groups of humans; the owners, managers, and workers.
The problem to be analyzed is how to fairly distribute the profit pie between these groups.
First, we must rank each group according to their contribution.
The stockholders buy a piece of the business with the hope that the company will be profitable and grow.
Unless they also have a working position in the company, they provide little more than their funds.
If you go by the number of outstanding shares of stock a company has, this group represents the greatest number of people.
Depending on the type of business, the workers perform the service or make the product that the customer pays for.
They invest their time and effort in a company for both wages and hopes that their continued good service will give their life financial stability.
A worker's responsibilities can vary from very little, to significant.
While there are many companies that have good, hard working managers, their numbers are shrinking daily.
Data from 1973 to the present show that compensation to high level managers has been rising sharply while wages have stagnated or decreased.
Good managers, from the CEO down, focus on satisfying their customers and maintaining the business' reputation.
Upper lever managers also invest their time and effort, but, in addition, they bear the greatest responsibility.
As such, they, as individuals, deserve the greatest compensation, but they are not gods.
Their compensation should not rise, unbounded, at the expense of the stockholder and worker.
After careful study, my plan for an equitable distribution of profits is to keep workers total compensation--which is now at a decades old low point--where it is now.
Next, set the CEO's total compensation to 50 times the mean workers total compensation.
Then scale down the remaining top-level management types to match.
What remains after the workers and managers are paid goes to the stockholder as a dividend.
Since most people plan their lives based on their wages, this now becomes the baseline compensation.
In years when profit is greater than this baseline, it should be divided among the three groups in the following manner.
The stockholders should get 50% of the increase, because they will be the only losers if profits go below the baseline.
The remaining 50% goes to the workers and management in the form of bonuses, and in accord with the 50 to 1 ratio of the CEO's bonus and mean worker's bonus.
Linking the CEO's compensation to the worker's compensation will insure that a rising tide lifts all boats.
The big question is, who will make them do it.
This idea calls for an examination of the way a corporation or any business divides its profits.
Here profit is defined as the money remaining after all expenses are paid.
Three different groups of humans have an interest in this distribution: the owners, the management, and the workers.
In a small business, all three groups may be comprised of the same people or the owner and management may be one person.
For this article, I assume that these three groups are separate.
Current practice is to consider worker's wages as an expense; something to be minimized.
This certainly was the philosophy of Bain Capital when Romney was in charge.
Is it justified for a man who engages in the practice of eliminating workers or reducing their wages and benefits, to then imply that these same workers are freeloaders because they can't afford to give their families adequate food and health care? It is obscene for the Romneys of the world to under pay their workers and then curse them because they have to appeal to a compassionate government for aid.
To be sure, many large businesses know that treating their workers fairly makes good business sense.
Let's look at these three groups of humans; the owners, managers, and workers.
The problem to be analyzed is how to fairly distribute the profit pie between these groups.
First, we must rank each group according to their contribution.
The stockholders buy a piece of the business with the hope that the company will be profitable and grow.
Unless they also have a working position in the company, they provide little more than their funds.
If you go by the number of outstanding shares of stock a company has, this group represents the greatest number of people.
Depending on the type of business, the workers perform the service or make the product that the customer pays for.
They invest their time and effort in a company for both wages and hopes that their continued good service will give their life financial stability.
A worker's responsibilities can vary from very little, to significant.
While there are many companies that have good, hard working managers, their numbers are shrinking daily.
Data from 1973 to the present show that compensation to high level managers has been rising sharply while wages have stagnated or decreased.
Good managers, from the CEO down, focus on satisfying their customers and maintaining the business' reputation.
Upper lever managers also invest their time and effort, but, in addition, they bear the greatest responsibility.
As such, they, as individuals, deserve the greatest compensation, but they are not gods.
Their compensation should not rise, unbounded, at the expense of the stockholder and worker.
After careful study, my plan for an equitable distribution of profits is to keep workers total compensation--which is now at a decades old low point--where it is now.
Next, set the CEO's total compensation to 50 times the mean workers total compensation.
Then scale down the remaining top-level management types to match.
What remains after the workers and managers are paid goes to the stockholder as a dividend.
Since most people plan their lives based on their wages, this now becomes the baseline compensation.
In years when profit is greater than this baseline, it should be divided among the three groups in the following manner.
The stockholders should get 50% of the increase, because they will be the only losers if profits go below the baseline.
The remaining 50% goes to the workers and management in the form of bonuses, and in accord with the 50 to 1 ratio of the CEO's bonus and mean worker's bonus.
Linking the CEO's compensation to the worker's compensation will insure that a rising tide lifts all boats.
The big question is, who will make them do it.