Stock handouts might help save the US ruling class
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jeffrey Goldfarb
NEW YORK, June 13 (Reuters Breakingviews) -The American dream now runs through the stock market. It’s evident from the yawning gap between the ultra-rich and the rest of the population. Although politicians are struggling to narrow the wealth chasm, capitalists from GE Aerospace boss Larry Culp to buyout baron Steve Schwarzman are taking steps to hand equity to the working masses. By doing so, they might help fend off the threat of pitchfork-armed mobs assailing the ruling classes.
Home ownership used to be the ticket to social mobility and prosperity in the United States, and it remains a significant marker of ascension to the middle class. Over the past three decades, the median sale price for U.S. houses has more than tripled to about $420,000, according to the U.S. Census Bureau. The amount of household equity in the hands of owners has increased even faster.
When it comes to generating wealth, however, owning real estate has been no match for backing large publicly traded companies. Since January 1994, the S&P 500 Index .SPX has delivered a total return, including reinvested dividends, of more than 1,900%, per LSEG data. Those spoils have largely accrued to the top 0.1% of Americans, who now hold more than $9 trillion of the $40 trillion in national wealth derived from corporate equities and mutual fund shares. The bottom half of the population has only about $400 billion of share-based assets today, less than the most well-heeled Americans owned 30 years ago.
It is therefore encouraging to see some chief executives and financiers recognizing that stock ownership should be dispersed beyond top management, not only because it can engender a better workforce but also because it can lift poorer Americans into higher economic strata.
More and deeper research would help persuade CEOs of the benefits of turning employees into owners, but a sprinkling so far suggests there are solid reasons to do so. Equity ownership has been found to improve loyalty and job satisfaction while boosting financial literacy. The best endorsement, though, is the high value senior executives ascribe to having equity grants in their own pay packages. The willingness of profit-hungry private equity firms to share the spoils provides another strong indication that the benefits outweigh the administrative burdens.
There are other challenges, including educating staff about the virtues of equity. Many workers probably would prefer extra cash to stock. Employees also have understandable concerns about further tethering their financial fortunes to their employer’s. These sticking points are best addressed by handing out shares without sacrificing wage increases or other benefits.
Employers have other ways to distribute equity more widely, but they typically depend on employees buying it themselves. Some corporate chieftains dubiously say they make their stock more affordable for staff by issuing more of it. Chipotle Mexican Grill CMG.N, for example, will later this month give existing investors 49 extra shares for each one they hold, in the process dramatically reducing the cost of each individual share from around $3,100. Chipmaker Nvidia NVDA.O and others have expressed similar sentiments.
U.S. companies also provide 401k retirement savings plans, which tend to be invested in stock and bond indices, and in some cases match employee contributions up to a point. Only a little more than a third of working-age Americans had such accounts in 2020, however, the Census Bureau found. And in 2022, the median balance was less than $28,000, fund manager Vanguard reported.
Employee Stock Ownership Plans, which dole out stakes to workers over time, also have slowly been on the rise again. Furniture retailer Room & Board is one that recently decided to convert to the trust structure. There were some 11 million active ESOP participants in 2021, the most recent year for which data is available according to the nonprofit National Center for Employee Ownership, but workers typically cannot cash in until retirement age.
The more powerful approach is simply to give shares to workers. Culp, of GE Aerospace, said last month that all 52,000 of the company’s employees would soon be receiving equity. The airplane engine and propeller manufacturer has not said how much it will hand out and indicated the award would be a one-off, but it is nevertheless a promising step for such a large U.S. employer.
Similarly, Walmart WMT.N unveiled a plan earlier this year to dole out between $10,000 and $20,000 of stock annually to each of its 4,700 U.S. store managers, since it has always asked them to “act like business owners.” It would be even better if the program extended to more of the retailer’s 1.6 million employees.
Blackstone BX.N, too, is increasingly getting behind the slow-growing movement. The alternative asset manager told fund backers in May that it would extend broad stock ownership programs – implemented at genealogy service Ancestry, dating app Bumble BMBL.O and other portfolio companies – to employees at large new U.S. investments where it has a controlling stake. All 18,000 eligible workers at Copeland, a heating and air-conditioning manufacturer Blackstone bought most of for about $13 billion, will receive equity-linked incentives.
Rival KKR KKR.N also has had success with the idea, which is being championed by its co-head of global private equity, Pete Stavros, through the non-profit Ownership Works organization he started. At Minnesota Rubber and Plastics, for example, all 1,400 employees became owners under KKR’s stewardship, during which safety metrics improved and staff turnover declined. Non-managers who joined the company around the time of the original investment in 2018 received average payouts equal to about 12 months of annual salary when KKR sold it four years later.
Such outcomes can be life-changing for workers, helping eliminate credit card debt, pay off home loans or fund college education. KKR says it expects that about 80,000 non-senior-management employees in its 35 active equity-sharing programs will receive more than $6 billion in payouts, assuming the firm trebles the value of the equity it initially invested.
Corporate America alone cannot solve the wealth inequality crisis. Even if Culp and his comrades are unwilling to reduce their own equity stakes, spreading the wealth down the ranks could help prevent any further widening of the disparity. CEOs may have other less altruistic motives, but they stand to help themselves in the process.
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CONTEXT NEWS
GE Aerospace Chief Executive Larry Culp said on May 22 that the company would give all 52,000 of its employees shares in the newly stand-alone company as a “takeoff grant.”
Culp did not provide any further details about the nature or size of the equity distributions during an event at the Economic Club of Washington, D.C., but GE Aerospace said it plans to explain more to staff over the summer.
Graphic: Owning stocks, not homes, is the key to US wealth https://reut.rs/3WXRo14
Graphic: Percentage of Americans owning stock is back on the rise https://reut.rs/3yWmTOZ
Editing by Peter Thal Larsen and Sharon Lam
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