Books: The Labor Divide
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Sam Vaknin >> The Labor Divide
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Yet, at the bottom of it all is the single member, the
worker, who pays his or her dues and expects in return
protection, better pay, better work conditions, larger
benefits, and, above all, a sense of belonging and purpose.
Referring to a ceremony to commemorate 20 years of
Solidarity in Poland, a disgruntled former dissident welder
poured his heart to the ILO's "World of Work":
"There are no workers at this feast, just men in coats and
ties. Nothing remains of Solidarity except its name. It has
lost its essence, they have betrayed and forgotten us."
This betrayal, the bourgeoisification and gentrification of
trade union functionaries and erstwhile rebels, the cozying
up to the powers that be, the bribes implicit in swapping
the shop floor for the air conditioned offices and minibar-
equipped limousines, the infusion of trade unionism with
nationalistic or populist agendas - these corrupting
compromises, expediencies, amenities and tranquilizers may
constitute the real danger to the continued existence of
the labor movement.
The Labour Divide
V. Employee Benefits and Ownership
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
Aligning the interests of management and shareholders in
the West by issuing stock options to the former - has
failed miserably. Options are frequently re-priced in line
with the decline in share prices, thus denuding them of
their main incentive. In other cases, fast eroding stock
options motivated managers to manipulate the price of the
underlying stock through various illegal and borderline
practices. Stock options now constitute c. 60 percent of
the pay of Fortune 500 executives.
Whitney Tilson of Tilson Capital Partners notes in "The
Motley Fool" that the hidden dilution of corporate equity
caused by stock options inflates the stated profit per
share. In the USA, stock options are not treated as a
business expense. Payment of the strike price by employees
exercising their options augments cash flow from financing
activities. Companies also get to deduct from their taxable
income the difference between the strike price of the
options and the market price of the stocks. As a result,
overall earnings figures are exaggerated, sometimes
grossly.
"The Economist" quotes studies by Bear Stearns, the Federal
Reserve, and independent economists, such as the British
anti-stock-options crusader, Andrew Smith.
These show that earnings per share may have been inflated
by as much as 9 percent in 2000, that options amounted to
c. 20 percent of the profits of big American firms (and
three quarters of the profits of dot.coms), and that the
distorted tax treatment of options overstated earnings
growth by 2.5 percent annually between 1995 and 2000.
The Federal Reserve concludes:
"... There is presently no theoretical or empirical
consensus on how stock options affect ... firm
performance."
Towers Perrin, a leading global management consultancy,
spot a trend.
"(There is) a move by employees towards placing greater
emphasis on long-term incentive plans ... (This is)
creating new international currencies in remuneration ...
(There is) a rapid, worldwide growth in stock option plans
... Regardless of the type of company, stock options are
much more widely used than performance plans, restricted
stock plans, and other long-term incentive (LTI) programs
in most countries."
Stock options are now used not only to reward employees -
but also as retention tools, building up long term loyalty
of employees to their workplace. Multinationals the world
over, in an effort to counter competitive pressures exerted
by their US adversaries in the global labour market, have
resorted to employee stock options plans (ESOP).
Vesting periods and grant terms as well as the events which
affect the conditions of ESOPs - in short, the exact
structure and design of each plan - are usually determined
by local laws and regulations as well as by the prevailing
tax regime. As opposed to popular mythology, in almost all
countries, options are granted at market price (i.e., fair
market value) and subject to certain performance criteria
("hurdles").
Eligibility is mostly automatic and determined either by
the employee's position or by his reporting level within
the organization. Management in most countries was recently
stripped of its discretionary powers to allocate options to
employees - the inevitable outcome of widespread abuses.
Ed Burmeister of Baker McKenzie delineates two interlocking
trends in the bulletin "Global Labour, Employment, and
Employee Benefits":
"Two common trends are the broad-based, worldwide option
grant, such as recently implemented at such companies as
PepsiCo, Bristol-Myers, Squibb, Merck, and Eli Lilly &
Company, and the extension of more traditional executive
stock plans or rank-and-file, payroll-based stock purchase
plans to employees of overseas subsidiaries. Employers are
also beginning to implement stock-based incentive plans
through use of offshore trusts.
These trends have led to increased scrutiny of equity-based
compensation by overseas taxing and regulatory bodies.
Certain trends, such as the relaxation of exchange and
currency controls in Europe and South America, have favored
the extension of U.S.-based equity compensation plans to
overseas employees."
Granting stock options is only one of the ways to motivate
an employee. Some companies award their workers with
stocks, rather than options, a practice known as "non-
restrictive stock bonus". Others dispense "phantom stocks"
or "simulated equity plans" - using units of measurement
and accounting whose value corresponds to the price
fluctuations of a given number of shares. Yet others allow
their employees to purchase company shares at a discount
(section 423 stock purchase plans).
David Binns, Associate Director of the Foundation for
Enterprise Development describes novel solutions to the
intricate problem of customizing a global stock options and
equity plan:
"Often the companies provide international staff with a 24-
hour loan facility whereby they can direct a designated
stock broker in the U.S. to give them a loan sufficient to
exercise their options. The broker then immediately sells
enough shares to pay off the loan and transaction fees and
deposits the remaining shares in the employee's account.
"Another approach to international equity plans is to
create an " International ESOP" in a tax-free haven. Each
of the company's international subsidiaries are given an
account within the trust and each participating employee
has an individual account with the appropriate subsidiary.
The subsidiary corporations then either purchase shares of
the parent corporation based on profitability or receive
grants of stock from the parent and those shares are
allocated to the accounts of the participating employees.
The shares are held in a trust for the employees; at
termination of service, the ESOP trustee sells the
employee's shares and makes a distribution of the proceeds
to the employee. This has the advantage of alleviating
securities registration concerns in most countries as well
as avoiding certain country regulations associated with the
ownership of shares in foreign corporations"
As far back as 1997, virtually all American, Canadian, and
British companies offered one kind of LTI plan, or another.
According to the Foundation for Enterprise Development,
employees own significant blocks of shares - aggregately
valued at more than $300-400 billion - in more than 15,000
American corporations. This amounts to 5-7 percent of the
market capitalization of American firms. The process was
facilitated by the confluence of divestiture, corporate
downsizing, and privatization of state and federal assets.
Dramatic increases have occurred elsewhere as well. In
Argentina - 40 percent of all firms offered LTI last year
(compared to 20 percent in 1997). In Belgium, the swing was
even more impressive - from 25 percent to 75 percent.
Hong Kong went from 25 percent to 50 percent. China - from
5 percent to 45 percent. Germany tripled from 20 to 60
percent. Italy jumped from 20 to half of all companies.
Spain galloped from 5 to 50 percent. Even staid Switzerland
went from 20 percent of all firms offering LTI - to 60
percent.
Stock options are gaining in popularity in central Europe
as well. More than 10 percent of the employees of S&T, a
Vienna-based IT solutions provider, owned stock options by
the end of 2000. The company operates mainly in Slovenia,
Slovakia, and the Czech Republic - but is fast expanding in
a host of other countries, including Bulgaria and Russia.
"Internet Securities" - a publisher of emerging market news
and information based in Bratislava, Bucharest, Budapest,
Prague, Sofia, and Warsaw- also rewards its employees with
stock options. The list is long and is getting longer by
the day.
Watson Wyatt, a human resources consultancy, conducted a
detailed survey among firms in CEE (central and east
Europe) in 1999. It traced the introduction of non-wage
employee benefits to the fierce competition for scarce
human capital among multinationals at the beginning of the
1990's. Later, as qualified and skilled personnel became
more abundant, employers faced the need to retain them.
Perks such as cars, death and disability insurance, medical
benefits, training, and relocation and housing loans have
become the norm in the leading EU candidates - Poland,
Hungary, Czech Republic, the Baltic States, and Slovenia.
Such habits are spreading even as far as Kazakhstan, where
most workers enjoy supplementary medical benefits. But
progress is by no means uniform. In some countries, such as
Croatia, supplemental coverage extends to less than one
quarter of the work force.
LTI programs are offered mainly by IT and telecom companies
- 63 percent of the 25 surveyed by Watson Wyatt had an ESOP
in place. But, as opposed to the practice in the West, few,
if any, firms in CEE limit eligibility to the upper
hierarchy. Still, management enjoys more sizable benefits
that non-executive employees.
Watson Wyatt note that offering enhanced retirement
benefits is fast becoming a major attraction and retention
technique. Where state provision of pensions is insecure or
dwindling - Russia, Bulgaria, Hungary, Slovenia - close to
20 percent of all workers had supplementary retirement
funds provided by their employers in 1999.
Their ranks have been since joined by other pension-
reforming countries, such as Croatia and Romania. Where
pension reform has stalled - e.g., Lithuania and the Czech
Republic - less than 1 percent of all workers enjoyed
employer retirement largesse in 1999.
There is a convergence between East and West. Privatization
in post-communist CEE countries often took the form of
management and employee buyouts (MEBO). Employees ended up
with small stakes in their firms, now owned by the
managers. This model proved popular in countries as diverse
as Croatia, Macedonia, Poland, Romania, Slovakia, and
Slovenia.
In Poland, more than 1000 small and medium enterprises were
privatized by "liquidation" - a management cum employee
lease-buyout. Leveraged ESOP's - employees purchasing
company shares over many years and on credit - played a
part in at least 150 major Hungarian privatization deals.
Russia has become the country with the largest employee-
ownership in the world. More than two thirds of the 12,000
medium and big Russian enterprises privatized after 1992
are majority owned by employees. But MEBO also
characterized privatizations in France, the UK, Nigeria,
Sri Lanka, Chile, Argentina, Pakistan, and Egypt, among
many others.
More than 4 percent of all Dutch firms - c. 2000 in all -
are partly employee-owned. More than 12,000 French
companies sold $10 billion in shares to their employees -
an average of $1000 per employee. Profit sharing schemes in
firms with less than 50 employees are compulsory in France.
More than a quarter of the workforce - some 5 million
people - are covered by 16,000 such schemes. Ten thousand
other, voluntary, plans cover 2.5 million workers.
Sixty percent of all MEBO's in the former East Germany
relied on public financing. The government of British
Columbia in Canada is equally involved through its
"Employee Share Ownership Program". Chile provided
employees with subsidized loans to purchase shares in
privatized firms in what was dubbed "labour capitalism".
Egypt encouraged the establishment of almost 150 Employee
Shareholder Associations.
Initially, MEBO resulted in gross inefficiencies as the new
owners looted their own firms and maintained an
insupportably high level of employment. The newly private
firms suffered from under-investment and poor management.
Shoddy, unwanted, products and deficient marketing led to
poor sales, massive layoffs, and labour conflicts.
Employees were quick to turn around and sell their
privatization vouchers or shares to their managers, to
speculators, or to foreign investors.
Yet, as foreign capital replaced corrupt or inapt
indigenous managers and as workers became more
sophisticated and less amenable to manipulation - employee
ownership began to bear fruit. China has learned the lesson
and has introduced a gradual transition to employee
("social") ownership of enterprises at the grassroots,
local community, level. It also strives to emulate Japan's
extensive and successful experience since the early 1960's.
Employee ownership is evolving in ways the fathers of
socialism would have approved of. Employees throughout
Asia, Africa, and Latin America - egged on by the likes of
the World Bank and regional development institutions - now
form numerous collectives and labour or producer
cooperatives. Some firms are even owned by trade unions
through their proactive pension funds.
Jacquelyn Yates describes a typical cooperative in her
essay "National Practices in Employee Ownership":
"... The employees own their firms. Typically, prospective
members work for a probationary period, must apply to join
the cooperative and are screened by a membership committee.
Labor cooperatives vary in the percentage of their
employees who are members. A common guideline is to take no
more members than the cooperative can guarantee to employ
on a full-time basis. Members make a capital contribution
in kind or in cash, sometimes through payroll withholdings.
This is the member's account value, which will be refunded
(with or without interest), at the time of separation from
the enterprise.
Governance is usually based on one vote for each member,
and the elected directors of the enterprise set overall
policy and hire top management. The main benefits of
membership are job security, participation in the
distribution of profits, and above average social benefits.
Sometimes membership means participation in enterprise
losses or making additional contributions to the reserve.
In some countries, the assets of the cooperative can never
be distributed to its members, preventing them from
realizing long-term appreciation in the cooperative's
value, but creating an incentive to continue it over many
years."
Yates reviews other practices, such as the labour banks and
the workingmen's funds. The former are financial
institutions that invest in the shares of companies that
employ their depositors. Workingmen's funds are
collectively owned portfolios of the employer's stock owned
by employees and they were first tried in Sweden.
Similarly, the UK and Ireland have legalized the employee
stock ownership trust.
Employee ownership of firms is a controversial issue with
strange bedfellows on both sides of the raging debate.
Thus, the idea has been fiercely resisted in the past by
both employers and unions. There is no social consensus
regarding the voting rights of stocks owned by employees,
their voluntary or compulsory nature, their tax treatment,
their relationship to retirement accounts, the desired
length of holding period, the role of the unions and the
state, employee representation on the board of directors
and so on.
It is ironic, though, that the ostensible triumph of
capitalism resulted in the resurgence of employee-ownership
of the means of production. It seems that to preserve
industrial peace as well as to motivate one's workers -
sharing of ownership and its attendant pecuniary benefits
is called for, on a scale which far exceeds anything dreamt
of in socialist countries.
Immigrants and the Fallacy of Labour Scarcity
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
Jean-Marie Le Pen - France's dark horse presidential
contender - is clearly emotional about the issue of
immigration and, according to him, its correlates, crime
and unemployment. His logic is dodgy at best and his
paranoid xenophobia ill-disguised. But Le Pen and his ilk -
from Carinthia to Copenhagen - succeeded to force upon
European mainstream discourse topics considered hitherto
taboos. For decades, the European far right has been asking
all the right questions and proffering all the far answers.
Consider the sacred cow of immigration and its emaciated
twin, labour scarcity, or labour shortage.
Immigrants can't be choosy. They do the dirty and dangerous
menial chores spurned by the native population. At the
other extreme, highly skilled and richly educated
foreigners substitute for the dwindling, unmotivated, and
incompetent output of crumbling indigenous education
systems in the West. As sated and effete white populations
decline and age, immigrants gush forth like invigorated
blood into a sclerotic system.
According to the United Nations Population Division, the EU
would need to import 1.6 million migrant workers annually
to maintain its current level of working age population.
But it would need to absorb almost 14 million new, working
age, immigrants per year just to preserve a stable ratio of
workers to pensioners.
Similarly hysterical predictions of labour shortages and
worker scarcity abounded in each of the previous three
historic economic revolutions.
As agriculture developed and required increasingly more
advanced skills, the extended family was brutally thrust
from self-sufficiency to insufficiency. Many of its
functions - from shoemaking to education - were farmed out
to specialists. But such experts were in very short supply.
To overcome the perceived workforce deficiency, slave
labour was introduced and wars were fought to maintain
precious sources of "hands", skilled and unskilled alike.
Labour panics engulfed Britain - and later other
industrialized nations such as Germany - during the 19th
century and the beginning of the twentieth.
At first, industrialization seemed to be undermining the
livelihood of the people and the production of "real"
(read: agricultural) goods. There was fear of over-
population and colonial immigration coupled with
mercantilism was considered to be the solution.
Yet, skill shortages erupted in the metropolitan areas,
even as villages were deserted in an accelerated process of
mass urbanization and overseas migration. A nascent
education system tried to upgrade the skills of the
newcomers and to match labour supply with demand. Later,
automation usurped the place of the more expensive and
fickle laborer. But for a short while scarce labour was so
strong as to be able to unionize and dictate employment
terms to employers the world over.
The services and knowledge revolutions seemed to
demonstrate the indispensability of immigration as an
efficient market-orientated answer to shortages of skilled
labour. Foreign scientists were lured and imported to form
the backbone of the computer and Internet industries in
countries such as the USA. Desperate German politicians
cried "Kinder, not Inder" (children, not Indians) when
chancellor Schroeder allowed a miserly 20,000 foreigners to
emigrate to Germany on computer-related work visas.
Sporadic, skill-specific scarcities notwithstanding - all
previous apocalyptic Jeremiads regarding the economic
implosion of rich countries brought on by their own
demographic erosion - have proven spectacularly false.
Some prophets of doom fell prey to Malthusian fallacies.
According to these scenarios of ruination, state pension
and health obligations grow exponentially as the population
grays. The number of active taxpayers - those who
underwrite these obligations - declines as more people
retire and others migrate. At a certain point in time, the
graphs diverge, leaving in their wake disgruntled and
cheated pensioners and rebellious workers who refuse to
shoulder the inane burden much longer. The only fix is to
import taxable workers from the outside.
Other doomsayers gorge on "lumping fallacies". These
postulate that the quantities of all economic goods are
fixed and conserved. There are immutable amounts of labour
(known as the "lump of labour fallacy"), of pension
benefits, and of taxpayers who support the increasingly
insupportable and tenuous system. Thus, any deviation from
an infinitesimally fine equilibrium threatens the very
foundations of the economy.
To maintain this equilibrium, certain replacement ratios
are crucial. The ratio of active workers to pensioners, for
instance, must not fall below 2 to 1. To maintain this
ratio, many European countries (and Japan) need to import
millions of fresh tax-paying (i.e., legal) immigrants per
year.
Either way, according to these sages, immigration is both
inevitable and desirable. This squares nicely with
politically correct - yet vague - liberal ideals and so
everyone in academe is content. A conventional wisdom was
born.
Yet, both ideas are wrong. These are fallacies because
economics deals in non-deterministic and open systems. At
least nine forces countermand the gloomy prognoses
aforementioned and vitiate the alleged need for
immigration:
I. Labour Replacement
Labour is constantly being replaced by technology and
automation. Even very high skilled jobs are partially
supplanted by artificial intelligence, expert systems,
smart agents, software authoring applications, remotely
manipulated devices, and the like. The need for labour
inputs is not constant. It decreases as technological
sophistication and penetration increases. Technology also
influences the composition of the work force and the
profile of skills in demand.
As productivity grows, fewer workers produce more. American
agriculture is a fine example. Less than 3 percent of the
population are now engaged in agriculture in the USA. Yet,
they produce many times the output produced a century ago
by 30 percent of the population. Per capita the rise in
productivity is even more impressive.
II. Chaotic Behaviour
All the Malthusian and Lumping models assume that pension
and health benefits adhere to some linear function with a
few well-known, actuarial, variables. This is not so. The
actual benefits payable are very sensitive to the
assumptions and threshold conditions incorporated in the
predictive mathematical models used. Even a tiny change in
one of the assumptions can yield a huge difference in the
quantitative forecasts.
III. Incentive Structure
The doomsayers often assume a static and entropic social
and economic environment. That is rarely true, if ever.
Governments invariably influence economic outcomes by
providing incentives and disincentives and thus distorting
the "ideal" and "efficient" market. The size of
unemployment benefits influences the size of the workforce.
A higher or lower pension age coupled with specific tax
incentives or disincentives can render the most rigorous
mathematical model obsolete.
IV. Labour Force Participation
At a labour force participation rate of merely 60%
(compared to the USA's 70%) - Europe still has an enormous
reservoir of manpower to draw on. Add the unemployed -
another 8% of the workforce - to these gargantuan numbers -
and Europe has no shortage of labour to talk of. These
workers are reluctant to work because the incentive
structure is titled against low-skilled, low-pay, work. But
this is a matter of policy. It can be changed. When push
comes to shove, Europe will respond by adapting, not by
perishing, or by flooding itself with 150 million
foreigners.
V. International Trade
The role of international trade - now a pervasive
phenomenon - is oft-neglected. Trade allows rich countries
to purchase the fruits of foreign labour - without
importing the laborers themselves. Moreover, according to
economic theory, trade is preferable to immigration because
it embodies the comparative advantages of the trading
parties. These reflect local endowments.
VI. Virtual Space
Modern economies are comprised 70% of services and are
sustained by vast networks of telecommunications and
transport. Advances in computing allow to incorporate
skilled foreign workers in local economic activities - from
afar. Distributed manufacturing, virtual teams (e.g., of
designers or engineers or lawyers or medical doctors),
multinationals - are all part of this growing trend. Many
Indian programmers are employed by American firms without
ever having crossed the ocean or making it into the
immigration statistics.
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