The following is an article review I did on the book for my MBA program. Much of the content is good, but the framing of the argument is based on compassion rather than economic interest. I gave it 3 stars because the research is good and can be applied in many workplaces. It lost 2 because of the disingenuous sociopolitical undertones. It would have been stronger, IMHO, if the authors had allowed the research to speak for itself rather than applying in an irrelevant context, i.e. to global wealth and asset distribution.
Building Assets to Ensure That the Lowest-Level Employees Are Not Left Behind begins by employing an incomplete comparison fallacy to create the false argument that inequality in international wealth and asset distribution justifies profit sharing in America. This red herring encourages a moral or compassionate response to distribute profits by using extreme statistical metaphors and emotionally-charged words like "grievous" and "inequality" (Heymann & Barrera, 2010). It also appears that this argument essentially uses proportional comparisons to emphasize wealth inequality as a human rights issue. This use of ratios, however, avoids discussion of actual income improvement, and absolute income. The initial phrasing of the article's argument is unfortunate, because ultimately, profit sharing can be used as a good motivational incentive.
The assertion that this article's argument is framed to push a social agenda is bold, but logically follows Dr. Heyman's research and other works. She recently excoriated the U.S. labor market because it does not guarantee the same social amenities as other UN nations (Heymann, 2010). These benefits included: paid leave for new fathers, breastfeeding breaks, and a weekly day of rest. According to Dr. Heymann's professional biography, she researches and teaches public- and social policy (Jody Heymann, 2011). Most striking are her actual words, "low income employees are at a significant disadvantage...it is grossly inadequate for our national policies to be framed on a private, voluntary system for employers. It hasn't worked so far, and we can't expect it to work in the future" (Heymann, 2000, final paragraph). Clearly, Heymann's intent is influencing social and political policies, and not providing insight into human resource management or economics.
Heymann employs proportional comparisons and extreme examples in (Heymann & Barrera (2010) to elicit an emotional response from the reader, which is consistent with her other works (Heymann, 2000). Hearing that the top 1% of the population holds 33.4% of the wealth is enough to create anger, jealousy, and subsequent cries for equality and social justice in some ill-informed Americans. Heymann's research method is grievously flawed, and the fact that Dr. Heymann is an experienced researcher creates suspicion as to the underlying intent of her intellectual dishonesty.
First, her research method is flawed because percentages of wealth distribution do not describe the absolute positions of the poor. In other words, even though poor Americans have a lower percentage of gross income than the poor in some other countries, their absolute income is far higher. Heymann mentions that the bottom 50% of the Chinese holds 14.4% of their country's assets, with 2.8% being the figure for the U.S. (Heymann & Barrera, 2010). Per capita GDP in China is only $4,260 compared to $47,140 in the U.S. (China GNI, 2011; US GNI, 2011). The lowest paid occupation in America is the fast food worker, who earns about $18,120 a year (Lowest paying jobs, 2009). Even though the American poor hold a smaller portion of the assets, they eat from a bigger pie. Poor Americans are far better off than poor Chinese regardless of their relative asset holdings.
Secondly, Heymann fails to acknowledge the movement in individual income over time. A University of Michigan study shows that 95% of households that were poor in 1975 were no longer poor by 1991, which indicates that Americans persistently and universally improve their positions in life (Williams, 2006). So much so that America's poor is the "envy of the world's poor" (Perry, 2007). Heymann's statistics say nothing about the opportunities that already exist in America's labor system.
Third, Heymann laughably alleges that America's asset disparity contributed to a gap in home ownership that created vulnerability to the 2008 subprime mortgage crisis (Heymann & Barrera, 2010, p. 2). In 2007, 45% of America's poor owned homes (Perry, 2007), compared to 68.4% of all Americans (Home ownership rates for the US, 2007). In reality, there was not much of a gap at all. She also alleges that this notional "gap" circuitously led to the sub-prime mortgage crisis. Many economists agree that the crisis was caused by the US government subsidizing risk, which encouraged over-investment in housing and risky mortgage-backed assets (Miron, 2011). If anything, the mortgage crisis contributed to the asset gap, because poor people lost their homes, while the rich cut their losses (Streitfeld, 2010).
The article's framing argument would have been more convincing had it appealed to the economic benefits of profit sharing, which the examples do quite well. In stark contrast from the beginning interlude, the Jenkins Brick (JB) and Dancing Deer Baking Company (DDB) examples illustrate how profit sharing can reduce turnover and increase productivity. These are economically sustainable outcomes that justify profit-sharing incentives as a mutually beneficial incentive for the businesses and their workers. This economic arguments of reducing turnover costs and increasing profitability appeals to the sensibility of business owners, economists, and accountants alike. They are economic objectives, and should be discussed as such.
It can be assumed that Magda Barrera is responsible for the bulk of the actual research; she has a bachelor's in economics, and her research focus is improving working conditions in economically sustainable ways (Magda Barrera, n.d.). In this article, she shows examples of fundamental economic principles - namely incentives - working in a capitalistic society. This concept of the "incentive" is a fundamental concept of economics, which underlie the remainder of this discussion.
Economics, capitalism, and trade depend on incentives. In economics, "an incentive motivates action by consumers, businesses, or other participants in the economy" (Incentive, 2008). A wage is an incentive to work. The meat of Heymann & Barrera (2010) is its thesis on human resources techniques that act as mutually-beneficial economic incentives and create favorable socioeconomic outcomes. The outcomes that specifically build employee assets are the 401(k) plan at JB and DDB's stock options. These benefits build assets by encouraging employees to save capital. The asset-building capacity of each plan depends solely on the employee's ability and intent to keep the money in the plan. If the employee chooses to withdraw and spend the money on a non-asset, then no actual asset-building has taken place. However, saved money is only one facet of the actual asset growth that has occurred.
A company's employees are often referred to as its most valuable assets. The value of these resources depends on the concept of human capital. Human capital is the sum value of an employee's job skills, knowledge, education, and experience (Becker, 2008). Reducing turnover builds a company's human capital by retaining the experience, skills, and knowledge that are built over time.
Encouraging innovation also helps a company build its assets. The most popular and often quoted ideas from Adam Smith's work The Wealth of Nations is The Invisible Hand. This is the notion that a business can inadvertently do good for society even though it is operating in its own self-serving interest (Minowitz, 2004). They create jobs, pay taxes, and so forth. Smith's observation that the most successful societies were that allowed individuals to focus their ingenuity on problem solving and innovation supports the economic reasoning of profit sharing. All things being equal, a country -or company in this case- that encourages innovation will be more successful than those that do not. Dancing Deer Baking Company effectively harnessed its human capital, innovated, and solved a packaging problem. Though simple, these small innovations in sum contribute to a company's success or failure.
The final economic concept discussed in Heymann & Barrera (2010) is price. A wage is conceptually the price an employee charges his employer for his time, effort, and the use of his human capital. In a purely capitalistic economy, i.e. without price fixing, a price is a metric that describes consumer demand, or value; ergo, a worker's wage is a metric of the value of his work. This is basically true in the case of a salesperson who is paid solely on commission. This system rewards people who are productive. Those people who work hard, have talent, have good ideas, and gain skills earn more and become more successful (Hessen, 2008). Profit sharing is simply another type of commission. It creates a framework whereby a worker or team of workers can be rewarded by the fruits of their labors. By creating value through innovation, and additional production, the employees at DDB were able to commensurately raise the value of their time. The profit sharing plan was essentially a financial feedback mechanism to reward employee productivity.
Are these incentives long-term in nature, or short-term?
The incentives covered in Heymann & Barrera (2010) appear to be economically sustainable (long-term).
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