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Joel Kurtzman
Managing Senior Fellow
Business and Capital Markets and Energy and Environment & Natural Resources and Global Economy
Joel Kurtzman is a managing senior fellow at The Milken Institute. He is also a senior advisor to Knowledge Universe. Previously, he was global lead partner for Thought Leadership and Innovation at PricewaterhouseCoopers, where he was responsible for developing new, marketable ideas in strategy, technology, the capital markets and business policy.
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Shares and share alike: Aligning everyone's interests

By: Joel Kurtzman
August 28, 2014
   
   

Warren Buffett famously argued that corporate senior management and directors ought to be rewarded like shareholders—with stock. His theory was that since incentives drive behavior, everyone wins. But do they? Missing from this equation is a major component of value creation—workers. Average American workers, the world’s most productive by any measure, I might add, are paid with money, not stock. And they are losing out on the fruits of their labors. 

Don’t get me wrong. I’m not some socialist who thinks markets are at best a nuisance and at worst an impediment to progress. I also don’t believe pay equity should be the goal. The more of a meritocracy we live in, the better. I simply think America’s rising tide should lift all boats. Something’s wrong when the benefits from an entire group’s activity exclude an important part of the group. Why incentivize some people who are crucial to the outcome, and not others? Why not include workers?

If American workers are shortchanged in the value creation process, it harms the overall economy. We live in a consumer economy after all, and for that you need consumers. Since the financial calamity of 2008, consumers have been reluctant to buy, especially retail goods.

I’m not trying to be provocative, but even if the 1 percent spent every dime they received from capital gains, a lot of the economy would still be left out. There may be trickle-down, but it trickles down only so far. And the 1 percent may be very well-heeled, but numerically it is a small group. No matter how well they do, they can only eat in restaurants three times a day. They can’t wear more than one suit of clothes at a time, and they need only so many haircuts and so many manicures.

Consumers account for about 70 percent of our economy. GM, Ford, Chrysler, and the transplants hope to sell 15 million vehicles aimed at that group this year and will collectively employ hundreds of thousands of people to do so. Brands catering to the upper crust account for a tiny fraction of those sales. The point is, a consumer economy needs middle-class consumers a lot more than it needs those in the top income brackets. It’s the middle class we need to focus on.

Consider the numbers. Between 2000 and 2014, output per hour increased 34.5 percent, according to the Bureau of Labor Statistics. Output per hour is a broad measure of productivity. Wages rose only 9.5 percent during that time. A 9.5 percent increase over 14 years is essentially flat. The reason output soared but workers’ wages stayed where they were has to do with the evolution of how people are compensated.

Between 1945 and 1980—a time that evokes nostalgia for the health of the middle class—output and wages increased in tandem. Chart the lines for output and wages for that period, and you won’t be able to tell which is which. Every time output grew, wages grew with it.

But in 1980, the rules started to change. Tax rates shifted and companies started compensating their seniormost leaders with stock and stock options. Managers, especially those at the top, began to focus on that. Knowing that profits are a sure driver of stock performance, managers focused on cutting costs, the largest of which was labor. They did it either by outsourcing or clamping a lock on wage gains.

We all know the outcome. Protesters, notably Occupy Wall Street, have made that all too clear. Executive compensation soared, especially CEO compensation, while everyone else’s barely budged. To maintain the consumer economy, consumers went into debt.

We all understand that the middle class feels threatened. So why shouldn’t we do for workers what we did for executives and compensate everyone with a certain length of tenure in a company with a portion of their income in stock? Let’s not give people an option to buy shares at a discount, as some companies do, let’s pay them with shares. Let’s pay everyone the same way the CEO is paid, based on their level within the company. Employees ought to participate in the ownership of private companies too, so they can profit from their efforts when there is a public offering.

Instead of longing for the days when unions were strong and commonly used bareknuckle tactics in their negotiations, why not align everyone’s interests? Why can’t Buffett’s insight apply to all? Why not make everyone shareholders?