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  • Rambling Economy Series: How Profit Sharing Can Destroy An Economy 0 comments
    Dec 18, 2013 12:08 AM

    The most important point on the subject of compensation practices is that it is unreasonable to suggest that the government is able to run firms better than the owners. The owners of a firm typically have extensive experience in the field and they are frequently in contact with their firm and its workers. The idea of financial participation by employees and profit sharing is a very interesting concept. Research has shown that profit sharing often leads to a slight boost in productivity and getting employees more involved in the company may also have unseen effects, such as production innovations.

    However, it is hard for me to see any advantage to having the government intervene in the choice of a firm to have profit sharing. If profit sharing were truly advantageous for a firm then they would have it as part of their compensation structure. Freedman suggests that there should be incentives for stock ownership and profit sharing for employees. If the government were to provide incentives to firms to use more profit sharing, more firms would use profit sharing then if the government were not involved. This means that many firms would be using profit sharing despite it being uneconomical for their business. The unintended consequences of incentivizing firms to use profit sharing could be substantial. One part of profit sharing that many don't consider is that the employees share profits, but should they also share losses? Let's say a recession hits and a particular industry is heavily affected. If the firms in the industry begin losing money, the employees with stock ownership or profit sharing will lose too. Their wages will be hit even harder in the midst of a recession. This could be detrimental to an economy if profit sharing is widespread.

    Consider 2008 for example, at that time, many people, especially workers who may be uneducated in regards to financial markets, expected the stock market (and housing market) to basically go up indefinitely. If the lower class were holding more assets in the equity market they would have had a larger portion of assets that they believed to be worth more then they actually were. For instance, as housing prices went up, people borrowed more and more because they expected the value to continue going up and because they owned this asset that they believed was worth more than it truly was. This caused people to spend beyond their means and the recession was the worst in 80 years.

    I cannot conclude, nor do I believe anyone truly can, whether or not incentives from the government to use more profit sharing will be beneficial to the economy. There are clear benefits to profit sharing, but I believe having the government intervene into people's decisions seems radical. It is important to consider consequences to having the government intervene into compensation structure practices. I have raised some important points revealing that owning stock presents more risk and volatility in income and therefore the economy. The costs of intervening are extensive: risk and volatility, the lack of diversification workers will have owning stock in the company they work for, the cost of less tax revenues due to tax breaks used to incentivize firms. Whether the benefits offset the costs is unknown, but I believe the decision should ultimately be made by the firm not the government.

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