The Corporate Revolution

"Corporation” is perhaps one of the greatest inventions of human being. Having made the separation of ownership and management possible, it has played an important role in creating the enormous wealth of our nations. However, as a profit seeking entity operated by professional managers, it has created a problem – namely the growing inequality of wealth in our society. A capitalist with a sense of seeking opportunities to generate more wealth tends to act cruelly in pursuing a higher rate of return on investment. Some investors may have thought that more money is available where cheaper labors are accessible, and the diminishing living standard of working class is not an issue.

workersThe systems and rules of corporation concerning the wealth allocation – such as wages and salaries have been always questioned. Particularly, the working class has not been treated well, and many workers felt that they had been exploited due to the weak bargaining positions. Under the circumstances, such things as labor unions were organized to protect the interest of working class. While they have worked with the collective bargaining power over wages, benefits, and their working conditions, having even engaged in lobbying activities and electioneering, they were counter-productive, and ironically may have caused the diminishing job opportunities for the working class.

It appears there are two areas that need to be changed: 1) poor utilization of human resource, 2) inefficient wealth allocations. These two points are our problems but at the same time our opportunities. Let me propose to revolutionize the capitalism by introducing a new idea – the class E corporation.

The E corporation is not much different from the ordinary corporation, but the stockholders agree to share a fixed proportion (15% is suggested) of the net income from operation to all the workers (including temporary contract workers) by means of bonus on an equal basis – provided that the bonus never exceeds the amount of base annual incomes. It commits fully to the equal profit sharing (“EPS”) plan. Part-time workers should be eligible to any EPS plan on a pro-rata basis.

In return, the E corporation receives a special tax status – whereby the capital gain tax is waved. Suppose the ordinary capital gain is taxed at a rate of 20%, the shareholders of E corporation will be benefited as much as that. This status should be granted only to companies that meet a set of standards – which allow employees to realize higher income through their own efforts. Any corporation solely attempting to take advantage of the capital gain tax break should not be eligible.

As you may know, profit sharing plans are not new nor unique. They are normally offered to recruit and/or motivate a limited number of highly skilled workers or managers. Nonetheless, it may have contributed to widen the income gaps between a few rich elites and ordinary workers in organizations. EPS, on the other hand, is significantly different in a sense that all the employees are eligible for the bonus on an equal basis, and therefore is expected to narrow the income gap between the two. Although the effectiveness of such plan as EPS in improving the performance of corporation has never been examined and uncertain, it is this authors belief that EPS will work effectively since it provides the all – shareholders, management and labors – with a strong common interest. Productivity could soar with higher employee motivation and the performance of corporation will be improved.

If the financial gain from the improved productivity exceeds the cost of financial incentives (EPS plans), this plan works perfectly without tax incentives. However, as the productivity improvement may not be as good as we hope to be, our proposal is such that an entire capital gain tax is waived for a 15% operational profit to be equally shared among all the employees. Having learned the mechanism of EPS, employees of E corporation will be motivated, at least more than the time when no such plan was available, and a difference must be made. Shareholders and employees now share a common interest. Perhaps, this has never happened in the history of modern capitalism.

Walmart with an approximate revenue of $480 billion and operating income of $25 billion hires roughly 2.3 million employees. If a $3.75 billion (15% of $25 billion) operating income is shared by 2 million employees – a $1,630 of bonus per employee could be paid. If you were a shareholder, you would immediately think of the impact of EPS plan to the operating income together with the capital gain tax benefit. If the operating income increases 15% or more from the first year, many shareholders would prefer the E conversion even without tax incentive and would put an EPS plan into practice. Nonetheless, off the top of head, many assume that an immediate increase of 15% or more in the operating income is not easy to accomplish with any EPS plan. Some could be cautious and pessimistic. Even for those who are pessimistic, however, the capital gain tax benefit is hard not to buy.

For some corporations starting an EPS plan, it might take 2 to 3 years to reach the bench mark of a 15% increase in operating income, but once it reaches to the point, it could exceed the level year after year. In other words, when the impact of becoming E corporation is evaluated on a long-term basis, shareholders tend to take the change as a lot more positive incident. Do you believe that Walmart performance never improves despite the EPS plan? With the improved employee motivation and attitudes, what is the chance of $25 billion of net income becomes more than $29 billion and stays at a higher level? One would assume that the increase in the net operating income of $10 billion dollar to $35 billion may be easily attainable. Then the net profit after EPS should be $31.5 billion and the stock price will soar. Gladly, the shareholders can take advantage of no capital gain tax when the stocks are sold.

Also, if the net operating income increases $10 billion dollar to $35 billion, the bonus per employee now becomes $2,283. If the operating income is doubled up to $50 billion, it becomes as high as $3,261 per person – more than 10% of the annual income for some employees. Many employees will recognize for the first time in their life that their efforts can change their standard of living.

The EPS plan might become even more effective if a large corporation like Walmart provide EPS plans on a regional manner. For instance, using the time zones – Eastern, Central, Mountain, Pacific. Let some groups compete for higher operating incomes. All the employees will act and hope that the region of the store they work for will become the number one of the four. Walmart shareholders now provide an additional bonus (i.e. additional 5%) for the winning region. It would be nice, if some E corporations find the performance of corporation can be further improved by paying more than the set profit share rate of 15%. While the effectiveness of EPS is uncertain, it could become extremely effective. It is very important to study the methodology for maximizing the effect of EPS if it is introduced.

It is this authors belief that the effectiveness of EPS varies from one industry to the other, and perhaps such industries as retailing and fast-food (as the cost is high while the bonus per employee is relatively low) may be less effective compared to other industries. However, as the retailing industry and the fast-food industry and alike hire a significant number of low-wage workers, it is critical to see that many corporations in such industries choose to become E corporation so that many low-wage workers can have some hopes in the future. Working class people can be paid more if their E corporations make bigger profits. And if the retailing and fast-food industries prove the effectiveness of EPS plan, there is very few industries where EPS plans do not work.

Politicians should realize that such incentive and reward systems as stock options are very effective in reducing taxes from the cream of society; on the other hand, the EPS plan is opposite, and very favorable and useful to increase the tax revenue. In addition, the working class will strongly support the idea. (Perhaps, this is a very timely idea for the Trump administration.)

In any event, the idea of corporate revolution and the class E corporation could become our savior to revitalize the democratic capitalism by improving the productivity and at the same time diminishing the inequality of wealth in our society. Although the idea may not be able to solve the problem completely, it should alleviate pain of low-income households.

With this idea become reality, a significant volume of legal work needs to be taken care of. Also, some investment banks and accounting firms may find a wide range of opportunities. As to the tax revenue of the country, while the capital gain tax revenue may decrease on the one hand, some other tax revenues that surpass the loss can be expected on the other. As a matter of fact, everyone who will be involved in the Corporate Revolution should be benefited, and the world will become a littele better place to live.

Now, we need to think about a lot of ifs - what if the profit exceeds the max? what if an operational profit is made but the net income is loss? what if base salaries and wages tend to become lower? – we would like to leave such question and answer sessions to the hands of politicians.