Expanding Union Ownership

[Mbindnerdc@aol.com]

Building the Union-Owned Workplace of the Future
Michael Bindner


The Enron Affair and the recommendations of the President's Commission to 
Strengthen Social Security have thrust the topic of how the workplace is owned 
into center stage.  The conventional wisdom among progressives regarding Enron 
is that it must be used as an object lesson to prevent too much concentrated 
ownership of employer stock in employee retirement accounts.  The accepted 
wisdom on the President's Commission is that any privatization is to be avoided 
at all costs.  This purpose of this essay is to challenge the conventional 
wisdom on ownership in the progressive movement, both in regard to the 
President's Commission and as a separate investment strategy in union pension 
funds.  

Labor is in the catbird seat on this issue.  It can effectively block the 
President's recommendations in the Senate and this ability will not lessen in 
the near future.  If the President is serious about bringing ownership to 
Social Security, he will have to modify his proposals to make them acceptable 
to labor.  I will suggest possible options labor might pursue in this debate 
and will propose strategies which labor can use to take full advantage of the 
ownership potential of its pension fund investments (regardless of what it 
decides to do on Social Security).

Enron

It is vital that we draw the right lesson from these events.  Many are now 
calling for legislation to limit the exposure of employee stock ownership in 
401(k) plans.  In doing so, they ignore the real reason for the Enron debacle.

For decades many have been decrying the size of executive compensation, which 
include large stock option awards and stock grants to executives.  The Enron 
situation points to why these awards are not only unfair but also a bad 
business practice.  Excessive option awards reinforce the mindset of executives 
that they are set apart from the other employees of the firm.  By giving 
executives more than their share, firms reward them for cheating lesser 
employees.  They also provide executives a direct financial incentive to look 
out for their own interests at the expense of the employees and even the 
shareholders.  There is not much moral distance from taking more than you are 
entitled to cooking the books and making deals from self-interest rather than 
the interest of the firm.  In the case of Enron, it is unlikely that 
"aggressive" accounting would not have occurred absent the overcapitalization 
of the executives.  There would have been no incentive to misstate Enron's true 
position.  Had the executives held stocks more in line with the average 
employee-shareholder, there would have been no incentive to push the envelope 
so far.

The way to correct this problem is more ownership, not less.  Such ownership 
must be independent of management, so that it can both raise a voice against 
bad business practices and prevent excessive options for executives, as well as 
other forms of undue compensation.  Direct legislation mandating such 
limitations will most likely be opposed, leaving expanded ownership by the rank 
and file the only viable option.  There are two ways to expand this type of 
ownership.  The first is to co-opt Social Security privatization.  The second 
is to increase direct ownership of firms with union contracts by the pension 
funds of the labor organizations of their workers.  I will address Social 
Security first.

Social Security Privatization

On December 21st, 2001, the President's Commission to Strengthen Social 
Security released its recommendations in a report entitled Strengthening Social 
Security and Creating Personal Wealth for All Americans.  The Commission called 
for a yearlong debate on retirement security, with no action until after the 
next election cycle.  Both parties plan to use this as an election issue, with 
both sides likely to use scare tactics for electoral advantage.  Regardless of 
the outcome of the next election, however, the plan is unlikely to pass as 
written - as it is unlikely that sixty votes in the Senate can be marshaled to 
break a filibuster, should passage seem likely.

This circumstance means that organized labor has two choices.  The first is to 
stand firm against privatization and assure that nothing passes.  The other is 
to seek modifications in the President's proposal to benefit organized labor.  
Modifications can be of two types.  The first type improve the workability of 
any privatization plan, while the second can be considered poison pills, which 
would ultimately make any legislation unpalatable for its original supporters.  
Whether an amendment is perfecting or a poison pill rests in the minds of the 
privatizers.  My aim is to list possible improvements to make the proposal more 
acceptable to labor, although many on the right may consider them killing 
amendments.  Ultimately, the fate of the recommendations of the President's 
Commission come down to the President's desire, or lack thereof, to compromise 
enough with organized labor and to force his own supporters to compromise.

Before describing my proposals, I will lay out some of the basic features of 
the Commission's recommendations.  The Commission proposed the creation of 
personal retirement accounts.  Funds for these accounts would be collected from 
employees and employers through the current payroll tax system.  A federal 
Governing Board modeled after the federal Thrift Savings Plan and the Federal 
Reserve Board would manage the program.  This design is meant to duplicate the 
low administrative costs of the current Social Security program, which it would 
augment.  Part of the Board's charge will be to find ways to speed the 
reconciliation process between fund collection and the crediting of accounts, 
which can last well over a year. 

Personal accounts would be invested in a two-tier system.  Tier I will be 
managed by the Governing Board, who will contract management to multiple fund 
managers on a competitive basis.  It will include three indexed balanced funds 
(conservative, medium, and growth) or any combination of five index funds 
patterned after the federal Thrift Savings Plan, as well as an 
inflation-protected bond fund.  There will be a default standard fund for 
participants who do not make a fund choice.  Private sector account managers 
will manage Tier II.  Participants will be allowed to make Tier II investments 
after their funds have accumulated to a set amount.  The Commission recommends 
that the private sector fund managers vote equity shares in both tiers, as is 
the case with the Thrift Savings Plan and private sector mutual funds.  

Pension funds will be voted for the benefit of plan participants.  In my 
opinion, this is a short hand way of stating that employees will be considered 
expendable.  This model makes little provision for accountability provided that 
the books look good.  It has given us the outsourcing of jobs and excessive 
executive compensation packages and provides little protection from another 
Enron debacle - and may in fact encourage one.

No provision is made in the Commission's recommendations for Employee Stock 
Ownership Plans, even voluntarily.  Unlike the kind of "trust fund socialism" 
proposed by the President's Commission, the inclusion of an ESOP component 
would encourage employee productivity and may well provide that extra edge 
needed to overcome a part of the long-long term actuarial deficit in the 
nation's retirement system.  

Before going into how ESOPs could be incorporated into the President's 
Commission's recommendations, I will outline the three models for funding 
private accounts proposed by the Commission.  Model One proposes that 2% of 
income be diverted to personal accounts, with no other changes to Social 
Security.  Optional within this model is to transfer these funds from the 
General Fund rather than redirecting the funds from Social Security, or to 
combine the two approaches.  

Model Two redirects four percent of income to personal accounts, with a limit 
on accounts of $1,000 in any given year.  For long-term actuarial balance, 
benefits would be adjusted for price inflation, rather than for wage inflation 
- which means that retirees and disabled workers would lose purchasing power 
relative to workers, but not relative to prices.  

Model Three requires an additional employee contribution of 1% of income, to be 
matched by a diversion of 2.5% of income up to $1,000 (which means that higher 
wage workers can contribute quite a sum, even though the amount diverted from 
current payroll taxes is capped at a lower level).  Because wealthier employees 
can contribute so much more, the "bend point" used to calculate benefits would 
be adjusted so that the benefit payout is less generous than it is currently.  
Additionally, inflation would be indexed to gains in life expectancy, which 
will result in annual growth of 0.5% over price inflation.  Both Models Two and 
Three also include a guaranteed minimum benefit, which is linked to the poverty 
level.

The President's Commission went to great pains to assure that distributional 
equity is maintained in Models Two and Three.  While the sentiment is 
admirable, organized labor should insist that the outcome be more progressive 
than the current program.  Of course, my experience debating privatizers is 
that their major complaint with Social Security is not the involvement of the 
government, but the redistributional nature of the program itself, especially 
as it impacts the upper middle class.  When these individuals look at how 
contributions are credited compared with how benefits are distributed.  
Currently, employer contributions are credited as a match to the employee 
contribution, while benefits are more in line with average income.  This leaves 
these individuals feeling cheated.

Changing the way that accounts are credited will change this perception.  The 
key lies in the way the employer match is calculated.  Instead of basing the 
employer contribution on the employee contribution, credit each full-time 
worker at the firm at the average contribution for such workers in the nation 
as a whole.  Part-time workers would be credited at a separate rate, at some 
percentage of the full-time rate based on the number of hours worked in the 
quarter.  This result will bring contributions more in line with expected 
benefits.  Even if organized labor opposes all of the President's proposals, 
advocating this accounting change will be of great benefit to workers, as it 
will take much of the wind out of the sails of privatization advocates.

To incorporate ESOPs, employer and employee contributions should be considered 
separately in funding personal accounts; with the employee contribution funding 
diversified personal accounts as proposed by the Commission.  Under Model One, 
1% of individual income would be transferred to personal accounts - or funded 
from the General Fund.  Under Model Two, 2% of income up to $500 could be 
transferred to personal accounts.  Under Model Three, after an additional 0.5% 
individual contribution, 1.25% of income up to $500 could be transferred to 
personal accounts.  Organized labor should insist that the employee 
contributions of union members be diverted to the union pension fund, rather 
than invested through the government.  This demand should be non-negotiable.  
Further, if the ESOP option below is not pursued, the employer contribution 
should also be invested by the union rather than by the government.

The employer contribution could be paid to an ESOP, at the option of the 
employee, rather than to the government.  Separate ESOPs should be established 
for each type of worker (union, professional, management) or each type of 
worker should be represented on the ESOP board (with union employees 
represented through the union).  The amount contributed to the ESOP reflects 
the rebasing of the employer contribution on the average wage.  Under Model 
One, the employer would contribute 1% of average income to the ESOP for each 
employee, regardless of wage, rather than contributing it to FICA.  Under Model 
Two the employer contribution would be 2% of average income.  Under Model 
Three, the employer would contribute an additional 0.5% of average income to 
the ESOP for each employee, as well as redirecting 1.25% from FICA.  To prevent 
workers from losing their ESOP savings, as at Enron, this option should include 
some form of insurance for ESOP contributions, in the manner that the FDIC 
insures deposits.

Average income can be calculated in different ways for the purposes of the 
employer contribution.  Different averages can be credited for full-time and 
part-time workers. The average can be for the firm or for the economy at-large. 
 If a firm average is used, contract and temporary workers should be included 
in the average for the client firm.  If the national average is used, the 
amount paid into FICA by the firm should be adjusted so that the total cost to 
the firm of the employer contribution is the same percentage of payroll as the 
current obligation.

Employer contributions based on average income would be a change in the way 
most ESOPs distribute shares to their employees, as the common method is as a 
percentage of income.  In my experience as an ESOP employee-owner, the current 
practice is demoralizing to lower salaried junior employees, causing retention 
problems.  The effect of longevity should be enough to reward higher salaried 
employees and to provide them with enough control over the operation of the 
firm.  Adding a differential based on wage is a perceived double hit on equity 
as seen by these employees.  Additionally, the awarding of an equal number of 
shares each pay period to each employee prevents the kind of incentives found 
at Enron, especially if the award of additional shares are limited to rewarding 
results rather than salary level and are distributed to an entire work team.  
This development will also benefit workers, especially the rank and file.

Investing private account funds in ESOPs provides for a more direct avenue of 
investment in plant and equipment, rather than encouraging stock speculation 
and subsidizing mutual fund managers.  It gives the employees of the firm an 
ownership incentive and long-term protection against layoffs, provided that 
employees also have the appropriate voice in the leadership of the firm.  

It is hoped that allowing factional representation on the ESOP Trust Board will 
encourage Union consideration of the President's Plan.  Such a structure might 
also encourage Union pension funds to convert a portion of their assets from 
diversified ownership to ESOP participation in the firms at which their members 
are employed (which I will address below). 

The existence of both private accounts and the ESOP option makes a discussion 
of raising or abolishing the income cap on contributions more palatable, as 
such an increase will raise the average income which can be invested in the 
ESOP trust fund.  Higher percentage contributions would also be more acceptable 
to both employees and employers, provided that a portion of these increases 
goes to the personal and ESOP retirement accounts.  

For progressives, increasing the income cap is more palatable than subsidizing 
Social Security privatization using the general fund.  When the general fund is 
tapped for this purpose, either income tax rates must be raised or debt 
increased.  Increases in the debt draw money from the same demographic as 
income taxes or increased payroll taxes, though the wealthy would much rather 
lend their money and receive interest than to have it confiscated.  If the rich 
must be taxed, they prefer income taxes so that they can attempt to shelter 
some or all of the money.  This is one of those areas where organized labor can 
be effective in exacting concessions, although more than any other provision, 
insisting on higher payroll taxes may be considered a poison pill - although 
the ownership component makes it less so.

Union Pension Fund Conversion

The second option for increasing employee ownership is for unions to convert a 
portion of their pension funds to direct share ownership, possibly including 
ESOPs.  In some cases, the result of such a conversion would be either voting 
control, or at least control of enough shares so that the union employees at 
the firm have a significant voice in the management of the firm.  The majority 
of ESOP conversion clients are privately held firms that are held by their 
founders and transferred to employees.  Unions can use the same types of 
capital credit mechanisms used to create ESOPs to buy out some, if not all, of 
the non-employee shareholders.  

Gaining control is only half the battle, however.  The other half is to change 
the management of these firms so that they maximize the potential for employee 
control of the workplace, and thereby change the standard by which performance 
is measured.  The remainder of this essay will detail areas where Union-ESOPs 
can significantly impact how business in done.  Among these areas are board 
structure, share distribution, profit distribution, management salary 
determination, innovation incentives, union cultural transformation, 
recruitment and training, expanded benefits and dependent allowances.  

Board Structure

Union ESOP shareholders can insist that firms and ESOP trusts update their 
board structures so that each major ownership faction is fairly represented, 
including management shareholders, labor employee shareholders and professional 
employee shareholders, as applicable to the structure of the firm.  This 
restructuring will include a method to assure that factional votes on the ESOP 
board are reflected in votes of the board of directors in those firms that are 
not wholly owned by the ESOP.

Share Distribution

The majority of ESOPs distribute shares based on salary.  This has the 
potential to demotivate lower salaried and shorter-term employees.  Union ESOP 
shareholders can develop more equal share distribution and dividend 
reinvestment structures.

Profit Distribution 

In firms with substantial, but not total, employee ownership, Union ESOP 
shareholders can insist that profits are fairly distributed between investors 
and employees, based on the relative contribution to production based on cost.

Management Salary Determination

Managers in Union ESOP firms must be retrained to cope with an ownership 
culture to emphasize training and team building.  Union ESOP shareholders can 
insist upon management selection and salary determination structures based on 
competitive bidding for management positions within the firm by all qualified 
applicants and selection by those managed at the shop floor level and higher.  
Such structures would go hand in hand with such technologies as Total Quality 
Management, whose flaw may be that they drive responsibility to the lowest 
possible level without at the same time adjusting salary structures to reflect 
this.

Innovation Incentives

Union ESOPs must inaugurate incentive systems to reward actual performance 
rather than conformity within a hierarchical structure.  Such systems include 
the decision structures used to identify particular innovations or actions that 
resulted in short or long term profitability, to assign credit for these 
actions and the mix of rewards granted, including cash bonuses and stock 
grants.  Incentive systems are necessary to reward initiative and attract the 
best workers, which will increase market share and lead other firms to adopt 
Union ESOP management structures.

Union ESOP Cultural Transformation

Unions who move from diversified to less diversified ESOP portfolios must 
develop a profitability culture of ownership, which highlights team building 
with management and professionals and de-emphasizes work rules that maximize 
employment rather than safety. 

Recruitment and Training

Union ESOP firms can develop an edge in recruitment and training systems by 
providing both tuition and pay during training and education.  They could 
recruit the best and brightest individuals prior to technical training or 
during their college careers.  In exchange employees would finance an equal 
share of their tuition through a student loan that the firm would repay for the 
new employee over a period of years (two years of work for each year of 
education).  The employer could also provide off-campus living arrangements and 
paid work experience as a supplement to education.  Such a system removes the 
financial risk from the employee and transfers it to the employer, which 
contributes to a culture of equality and flatter wage structures in the firm.  
These arrangements would include systems to finance loans of employees who 
terminate before contract maturity.

Expanded Benefits

Union ESOPs will feature new benefit structures, including limited payroll line 
of credit accounts and low interest home mortgages in cooperation with employee 
credit unions.  Such accounts can be used as a retention incentive.  The term 
of the home loan and the planned retirement date can be matched so that at loan 
maturity the number of ESOP shares held will provide for payment of the base 
salary.  Provisions would be made to refinance loans of employees who terminate 
before maturity.

Dependent Allowances

Union ESOPs can include a compensation system that links pay to the number of 
dependents supported by the worker.  This is an option that employee-owned 
firms may find attractive that traditional firms would not attempt.  Such a 
system removes the incentive to layoff older workers, who have built up higher 
salaries due to longevity increases - the covert purpose of which in the 
current system is to fund child rearing and education.  Paying for the former 
explicitly and the latter by actually hiring the young person will allow the 
worker to remain competitive by accepting a lower wage.  Overall compensation 
will remain higher, as older workers will receive dividends (which will be 
reinvested) reflecting long-term stock accumulation in the firm.  If a worker 
arrives mid career, the worker could be given the option to invest a portion of 
any accumulated retirement funds in the Union ESOP Trust fund.  

Dependent allowances of this type will ultimately be needed nationwide, as the 
Social Security liquidity crisis is ultimately an aging crisis.  The only way 
to mitigate this crisis is to incentivize childbirth in working families.  
Fighting for such a benefit for all workers, as well as transferring tax 
benefits to employers who subsidize educational and home mortgage costs must be 
added to labor's legislative agenda.


Expanding ownership will bring the union movement into the Twenty-first 
Century, and will ultimately fulfill the long-term goal of workers controlling 
the means of production.  In the short term, adopting these proposals will give 
both non-union laborers and professionals an additional incentive to organize.  
More than anything else, these strategies will reverse the decline in union 
membership as a share of the workforce.