The American model of capitalism needs major institutional reforms to regain its economic health and do what it has failed to do for the past three to four decades—ensure that the benefits of economic progress reach the bulk of our citizens. Well before the recent housing and financial crises, the Great Recession of 2007-2009, and the ensuing jobless recovery, the U.S. economy was not delivering the benefits of sustained economic growth to the vast bulk of workers.
The recent housing and financial crises, the ensuing recession, and the current jobless economic recovery exacerbate these long-term trends. Indeed, despair about the direction of the economy is overwhelming earlier hopes that the recent economic turmoil was a temporary breakdown from which our country would rapidly recover. The reason why most Americans have a pessimistic view about our economic future is clear. High unemployment will likely last through the end of the decade, which will depress wage growth for most workers and together with unemployment add to economic disparity.
So what can be done to reverse the economic disparity in our nation and restore prosperity for all? This paper lays out a policy reform that will help restore the link between economic growth and the earnings of workers so that the recovery re-establishes a prosperous middle class. The reform encourages firms to develop broad-based incentive compensation systems that link employee earnings to the performance of the firm. This reform would give employees access to the capital-related earnings of their companies comparable to that of the senior executives who run these firms.
Some of the country’s leading firms, such as Wegmans Food Markets, Inc., one of the nation’s top grocery chains, and technology giants Cisco Systems Inc. and Google Inc., among others, boast incentive compensation systems that our policy seeks to encourage alongside a track record of successful business performance that benefits both workers and firms. For these and other firms that practice an inclusive form of capitalism, broad-based wealth creation and business success go hand in hand, but most firms limit pay for performance to a small number of high earners or have no access to meaningful incentive pay systems at all.
Our proposal is designed to encourage the senior executives and board members of firms that do not have inclusive incentive compensation systems to adopt such systems for the good of their employees, their companies, and the broader economy. To the extent that broad-based incentive compensation systems affect these firms as they do the firms that already use such systems, it is likely that productivity will rise as well, increasing output as well as spreading the rewards of growth to more workers.