Kiplinger Today

Money & Ethics

Should Firms Share the Wealth With Workers?

Knight Kiplinger

Companies don’t have any general moral obligation to pay more than the market dictates, but it often makes good business sense.

Q: I’ve read that the total profits of U.S. corporations recently hit their all-time highest share of the nation’s annual output—somewhere between 11% and 14% of gross domestic product. At the same time, the share going to labor has fallen to a five- or six-decade low (62% of GDP for total compensation, including benefits, or 44% for cash wages and salaries). This suggests to me that business has the ability—and moral obligation—to start restoring some of the pay and benefits that were slashed in the Great Recession. What do you think?

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I agree, but with plenty of caveats. Many businesses have not recovered to their normal levels of sales and profits, and they are appropriately cautious about whether their improved situations will last. And even corporations now enjoying record profits are understandably conflicted about how to deploy their retained earnings: Invest them in internal growth, buy other firms, or reward shareholders with stock buybacks and higher dividends.

As for those highly profitable firms that are giving big cash rewards to their owners and senior executives, I believe they have a moral obligation—and also a strong self-interest—to include their rank-and-file employees in the largess, especially if employees bore more than their fair share of the pain during the slump. This should include bigger year-end bonuses, larger contributions to retirement accounts, and—if the renewed profitability looks secure—higher wages and salaries.

Ultimately, the price of employee compensation is set by supply and demand. Companies don’t have any general moral obligation to pay more than the market dictates, but it often makes good business sense to do so if they can. Strong compensation helps attract and retain the most-talented staff, boosting perform­ance and reducing the cost of turnover. It benefits society, too, because employees are everyone’s customers. Henry Ford, a hard-nosed capitalist, said he paid higher wages because he wanted his workers to be able to afford the cars they were building.

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