“Revenue per employee—calculated as a
company’s total revenue divided by its current number of employees—is an
important ratio that roughly measures how much money each employee generates
for the firm.” [1] It is considered
“a meaningful analytical tool because it measures how efficiently a particular
firm utilizes its employees.” But in this post, your humble servant would like
to suggest a new application.
In the capitalist system, profits are
awarded to the owners of a business which owns the company’s capital, defined
here as the tools, machinery, and equipment used by the company in the
production of either goods or services. “Long ago, when the first human beings
walked the earth, they produced food by picking leaves or fruit off a plant or
by catching an animal and eating it. We know that very early on, however, they
began shaping stones into tools, apparently for use in butchering animals.
Those tools were the first capital because they were produced for use in
producing other goods—food and clothing.
“Modern versions of the first stone tools
include saws, meat cleavers, hooks, and grinders; all are used in butchering
animals. Tools such as hammers, screwdrivers, and wrenches are also capital.
Transportation equipment, such as cars and trucks, is capital. Facilities such
as roads, bridges, ports, and airports are capital. Buildings, too, are
capital; they help us to produce goods and services.
“Capital does not consist solely of
physical objects. The score for a new symphony is capital because it will be
used to produce concerts. Computer software used by business firms or
government agencies to produce goods and services is capital. Capital may thus
include physical goods and intellectual discoveries. Any resource is capital if
it satisfies two criteria:
1.
The resource must have been produced.
2. The resource can be used to produce other goods and services.” [2]
Tools are the means by which we extend our
capabilities. Not too many people can drive a nail with their fist, so we have
hammers. No one can saw a wooden board in half with his teeth and make a very
straight line, so we have saws. At the same time, nobody credits a hammer with
driving a nail. If I use a hammer to drive a nail, I confidently make the claim
that I did so; I don’t say that the hammer drove the nail, and I just happened
to be holding it. That’s because the tool was wielded by me, and was completely
subject to my volition.
Nonetheless, in economics, we do, in a
sense, credit the tool. Whoever owns the tool is considered to be entitled to
the profits of production, while the one who wields the tool is not. But this
arrangement didn’t come down for us from Mount Sinai. It is simply the way our
society has been organized. There was a time, before there were capitalists,
before there were landowners, when the reward of labor was what labor produced.
As Adam Smith put it, “The produce of labour constitutes the natural recompence
or wages of labour. In that original state of things which precedes both the
appropriation of land and the accumulation of stock, the whole produce of
labour belongs to the labourer. He has neither landlord nor master to share
with him.” [3]
To whatever extent the present system is
maintained by the ever-present threat of violence by the State, it wouldn’t be
rational to maintain that tool ownership doesn’t contribute to production.
Tools are usually purchased with money, which, except in certain cases (e.g.,
interest, rent, or gambling) is an abstraction of labor—it is given in exchange
for labor, and makes labor useful for exchange in the market. So, it wouldn’t
make sense to say that capital isn’t entitled to any share in the profits. But
once we strip ourselves of the predispositions instilled in us through
residence in our historical epoch, it becomes plain that it also makes little
sense to insist that labor isn’t entitled to any such share.
This arrangement is so commonplace that it
will be difficult to see why it presents a problem. A comparison between an
employee and an investor is, therefore, useful.
If an investor puts money into a firm, he
does so in anticipation of eventually receiving more in return. A prospective
investor who was promised that he would take less would take his money
elsewhere and look for more profitable investments. While it is true that an
investor risks the loss of his money, that isn’t the outcome he anticipates.
But an employee is guaranteed a loss on the value he puts into his company.
Money has value; so does labor. If labor
had no value, no one would pay anything for it. But every employee is guaranteed
to be compensated less than the value he contributes to his company. If it were
not so, then his employer couldn’t make a profit.
Labor is viewed by every business as a
cost. Reducing labor costs will, if properly executed, increase profits. Thus, labor
costs must be less than revenue for there to be profitability. But revenue is
the measure of the value the employees contribute to the firm.
There is a doctrine in contract law known
as “unconscionability.” [4]
It arises where one of the parties to the contract has little bargaining power,
and the contract is one-sided in favor of the other party. Unconscionability is
an issue that generally arises in consumer contracts. But the elements of
unconscionability are almost always present in employment contracts.
Few prospective employees have much in the
way of bargaining power when seeking a job. The employer holds all the cards.
And it is a systemic reality that an employee will be expected to put more
value into a company than he takes out. This is why we have trade unions and
labor laws. Employees are in need of legal protections that employers don’t
require because of the inequality of bargaining positions.
The reason why this is a problem, outside
of the possibility oppressive wages or working conditions, is that there ends
up being a built-in conflict in the system. If everyone in a firm should be
working in the same direction, toward the same end, this is clearly not the
best way to make it happen. Instead, management and labor pull in opposite
directions. In point of fact, all employees, management and labor, pull in an
opposite direction from the shareholders. The reason why we tend to identify
the interests of management with the shareholders is because the top executive
officers of a company are usually major shareholders. The founder of a business
is often its CEO as well. But whoever works for a company, considered as such,
seeks the highest compensation possible, regardless of where he appears on the
organizational chart; while the owners of a company, considered as such, seek
the highest profits possible. And those two interests are always going to be in
conflict.
It seems a worthy goal, therefore, to
unify the interests in a firm; and the closer we can get to actually rewarding
employees for the value they impart to their companies, the closer we will get
to that goal. And the way to do that is to utilize the revenue per employee
calculation. But how can this be done in a manner that allows firms to make a
profit?
Simply put, begin by awarding shares
(whether in the form of corporate shares or partnership shares, as appropriate)
to every investor, with percentages allocated in accordance with the amount of
the investments. This would include the amount of indebtedness contracted by an
investor for which he or she is personally liable and used for the company.
Next, after a specified period of time
(say, a year) the amount of revenue generated by the company will be allocated
to each employee based on how much time the employee has spent working
(calculated on the basis of hours, or some other appropriate measurement). In
this sense, an “investor” can also be an “employee,” provided he or she has put
work into the firm during the designated period. No one is to be designated a
“volunteer” or an “intern,” in order to avoid an allocation to that person.
The shares allocated to the employees
based on revenue in the manner described, shall be of the same class as shares
allocated to the investors. If the investors receive a dividend, so will the
employees, calculated in the same manner. Where the investors vote for the board
of directors, so will the employees, according to the number of their shares;
and employee shares will not be voted by a trust, as is the case with some
statutory employee stock ownership plans. Employee shares will be transferable
on the same basis as investor shares.
Professionals and tradespeople will need
special protections against being ordered to do things contrary to acceptable
practice. Firms devoted to delivering such services will need to be configured
in a manner to avoid that kind of situation. Nonetheless, even firms of this
kind can be organized in such a fashion that the work of everyone will be
represented by ownership shares. The idea is to get all concerned to pull in
the same direction, and directly benefit from the firm’s success.
This, then, is an outline of the plan I am
proposing. Because of the general unfamiliarity with this idea, it will have to
be incentivized; and to that end, favorable tax treatment will be a necessary
concomitant.
In the next installment, I will present an
illustration of how the plan would work in a specific situation.
