Recently, B.C., Alberta and Ontario have committed to raising the minimum wage and predictably in all cases, these wage hikes are met with scorn and praise from both sides. While a minimum wage is an essential factor to protect workers and create a minimum standard of living, there is a better solution that Canada should be exploring to help more people build wealth and ensure a competitive economy.
Both the United States and the United Kingdom have extensive legislation to promote the growth of Employee Share Ownership Plans (ESOPs). An ESOP allows employees to participate in the value growth of the business through an ownership interest.
ESOPs in the U.S. and U.K. are used in all industries and professions; however some of the largest and most successful ESOP companies are in retail where workers typically are paid lower wages.
As an example of how ESOPs can transform the minimum wage debate, let’s take a look at the John Lewis Partnership, one of the U.K.’s largest retailers, which implemented an ESOP more than 80 years ago.
Every year, partners, as the employees at the John Lewis Partnership are referred to, participate in an annual bonus based on the company’s profitability. This year some 93,800 partners shared a total payout of $315.9 million (£156.2M), the equivalent of 11 per cent of each person’s annual salary, or an additional six weeks’ pay.
This year’s bonus is lower than recent years, where the payout has been 14-17% of a person’s salary.
What an ESOP does is ties a portion of employee compensation to the success of the business. As employees have a direct impact on a company’s profitability, an ESOP incentivizes and rewards employees only when the business grows through increased sales or decreased costs.
The success of the John Lewis Partnership and other ESOP companies compelled the U.K government to conduct a review of ESOPs. The review found that not only are ESOP companies outperforming traditional business models (even faring better during the 2008 recession), these companies are more innovative and have happier employees.
All three political parties in the U.K. are in favour of creating a “John Lewis economy,” and new legislation has resulted in a one-year increase of 9% in the number of employee-owned businesses in the U.K.
This leadership at the national level is resulting in transformational change to the U.K. economy and the wealth of its citizens.
The U.S. realized more than 40 years ago that ESOPs would help more people build wealth while ensuring everyone is vested in the success of business. The favourable tax incentives implemented in the 1970s have helped create more than 11,000 employee-owned firms including some of the country’s largest and most competitive private retailers like Publix, WinCo and By-Mart.
ESOPs have also proven to dramatically increase the retirement savings of U.S. citizens. For example, take a recent article in Forbes that chronicled two sisters who both applied to WinCo, a U.S. employee-owned grocery chain, in their early 20s. At that time, WinCo had an anti-nepotism policy and only hired one sister. This women has worked at WinCo for more than 20 years and at 42 has nearly $1 million in her account of company stock. She could retire now if she desired.
Her sister on the other hand, bounced around from job to job and in her early 40s managed to save $30,000 for her retirement mostly in stocks. The 2008 financial crises cut that number in half. As a result, this sister conceded that she would need to start over. She’s found a government job and figures if she works to 67 she will have a “decent pension.”
In the U.S., presidential candidate Hilary Clinton recently announced that she wants “to give workers the chance to share in the profits they help produce” through a two-year tax credit that would encourage profit-sharing.
It’s these bigger ideas of profit sharing and capital ownership that Canada needs to begin taking leadership on. In doing so, we will move from a debate on the bare minimums to creating a dynamic economy that values our greatest asset — our people and their ability to innovate and create new ways of doing business.
— By Camille Jensen