What Happens When Low-Wage Workers Are Given a Stake in Their Own Company?

As the economist Dean Baker has noted, companies don’t share—they don’t pay people or treat them well—without expecting anything in exchange.

HEB, a family-owned grocery-store chain and one of the largest private employers in Texas, announced that it will give 15 percent of the company to 55,000 of its employees. If HEB is giving a portion of its own stock to its workers, what is the chain getting in return?

Perhaps HEB wants its workers to feel more loyalty to the company. For over 20 years, economists from the right and left, including Berkeley’s Carl Shapiro, the Nobel laureates Joe Stiglitz and George Akerlof, and Fed Chief Janet Yellen, have advanced what’s called “efficiency wage theory”—the idea that employers can strategically pay wages higher than the market rate so that their employees care more about keeping their above-average jobs. For a company, this would reduce turnover and save money.

When the unemployment rate is high, low-wage workers tend to fear losing their jobs because there are countless workers eager to take their place. But when the unemployment rate is low, as it is now, that fear isn’t as widespread, so some employers, like HEB, might start sharing profits to make their workers stick around longer.

Another possibility is that HEB thinks it’s strategic to make workers feel like they have a stake in the company. By paying workers based on the performance of the entire enterprise, they might work harder because they feel they’re contributing to something they’ll share the spoils of. This is not far off from John Stuart Mill’s concept of industrial cooperatives, or Robert Owen’s experimental utopian communities during the Industrial Revolution, first in Scotland and then in a town called New Harmony, Indiana.

Maybe HEB instituted its new profit-sharing program in order to get good publicity. There are several ways to treat workers well: HEB could’ve boosted wages, or increased their 401(k) matching, or implemented more family-friendly work policies. Costco, for example, has a more generous 401(k) arrangement and has a company-wide minimum wage that’s higher than HEB’s. But as beneficial as these changes would have been for HEB’s workers, they wouldn’t attract nearly as much media attention as a profit-sharing program. HEB’s announcement certainly wasn’t a devious ploy for attention, but it does have the perk of bringing in more publicity than, say, an improvement in pensions.

Whatever HEB’s reasoning was, more and more companies might start sharing profits with workers in a similar way. Today, proponents of profit-sharing include Hillary Clinton, Harvard’s Richard Freeman, and Rutgers’s Joseph Blasi and Douglas Kruse. They’d like to see companies with profit-sharing programs get tax breaks and preferential treatment when government contracts are awarded. Clinton’s proposal would give a lot more money to workers than even HEB’s.

Profit-sharing programs, though, can sometimes be risky because they can violate the principle of portfolio diversification: It’s not a good idea for a worker’s income and assets to be coming from the same place. (HEB’s plan avoids this, because the chain has a 401(k) plan, which allows workers to invest in companies other than their own employer.)

There’s another reason that could explain how HEB arrived at its decision: Maybe it realized that this is the direction the economy is going. The unemployment rate is marching ever lower, and pressure from labor activists to treat workers better is only growing. What will happen when unemployment falls below 5 percent? Will more employers improve compensation and worker training? Will they start investing in the rank and file?