“Profit-sharing plans that increase efficiency”. (1911)

From the October 1911 issue of the Socialist Standard

The above title appears over an article in the July issue of “System and Modern Business,” a journal published expressly to review and suggest ways and means of running business concerns at a minimum of cost, and, consequently, at a maximum of profit.

The article in question deals with the various co-partnership and bonus systems which have been very successful from the employers’ point of view, taking first the system inaugurated by the late Sir George Livesey at the South Metropolitan Gas Works.

The basis of the South Metropolitan Gas Co.’s system is an agreement with each workman entitling him to a share in the business, and at the same time, security of occupation for a certain period.

When the co-partnership scheme first came into use every man in regular employment was permitted to sign an agreement on the assumption that he was a good man ; but afterwards discretion was used.

The usual period is 12 months, but if a man shows little regard for his work, or is wasteful and neglectful of the Company’s interest, he may find that his agreement is not renewed at the end of the period, or, in some cases, it may be renewed for three, or even six months, to give him an opportunity to improve. If he does not improve he gets no agreement, and his ultimate fate is discharge.

The bonus is paid half in the ordinary shares of the Company and half in cash. The latter is payable at any time at a weeks’ notice, or may be left with the Company at, 3 or 4 percent. interest.

There is, however, a regulation which, to some extent, protects the men from themselves, in that it impresses upon the employees the fact that, while one half is withdrawable, the success of the scheme depends on them saving some part of it ; and in consequence, any employee who regularly draws all his cash moiety will in time find that his agreement is not renewed.

While the cost of carbonising labour to the South Metropolitan Gas Co. was less than the mean of the two other metropolitan companies in 1888, the formation of the Gas Workers Union in the following year caused it to increase until it passed the mean, where it stayed for two years.

In the second year, however, the first co-partnership or “profit sharing” bonus was distributed, and costs fell sufficiently to reduce the excess above mean by two thirds. The following year it dropped well below the mean again, and from that time gradually grew less, until it nearly halved the high cost of labour during the dispute.

In eight years £820,000 was paid for carbonising labour-power, which was £260,000 (or nearly 25 per cent.) less than it cost the two other companies chosen for comparison to make the same quantity of gas.

All this, of course, was not the direct result of co-partnership; but, directly or indirectly, the changed labour conditions had by far the most to do with it.

This very interesting information, coming whence it does, ought to show the working class that the employers, when floating bonus schemes, are not influenced in the least by any philanthropic notions. They are on a good thing and they know it. They sugar coat the pill for the workers to swallow, but the end in view, despite the sweet verbiage under which it is hidden, is always the same, i.e., to increase production and reduce the cost of it.

The co-partnership scheme of Lever Bros., of Port Sunlight, is also reviewed. Mr. W. H. Lever, M.P., who may well claim to be one of the pioneers of “profit-sharing,” holds strong views on this subject.

He held that while in many industries wages remained stationary, capital increased output and raised the value of the product, building up colossal fortunes without in any way giving extra remuneration to labour, through which the success of many of the great enterprises was due—to the volume of labour employed without which the money-earning capacity of machinery would have been nil. Profit-sharing was, he thought, the best way of drawing out intelligent labour.

On the initiation of the scheme Mr. Lever invited his new co-partners, who would receive the same rate of wages as before, and work the regular hours, to join hands with him in making the profits of the business sure and increasing. He held up as a motto “Waste not want not,” recommending them to work for the business, aiming at increasing the quantity and quality of the product. When working with machine and tool they should remember that they were handling, economically or otherwise, their own property ! The inefficient worker would cause his fellow co-partners to suffer, as well as his employers.

The foregoing are the salient points of the two schemes mentioned. The workers will find on examination that the underlying motives of co-partnership are always to increase his output, to weed him out like cattle breeders weed out their stock, and to make him more than ever a slave by giving him an infinitesimal holding in the shares of the firm which exploits him—shares which, by the way, he cannot sell, and which he forfeits if he leaves voluntarily.

So you see, fellow workers, that it is not to give that “extra remuneration to labour through which the success of many of the great enterprises was due,” but to make the worker work harder, and to make each man a spy upon his fellow “co-pards,” so that “discrimination may be used” and the inefficient may be weeded out. |

Another great boon is held out to the employee “shareholders” — voting power and eligibility for election as “employee director,” with a seat on the board. It would, indeed, be a picture for a post-card to see the “employee director” at a board meeting demanding a bigger dividend for the “co-paids” who do the work. It would look comical if it happened so, but it doesn’t. The “employee director” learns better manners and behaves himself like a good boy.

Let it be clearly understood that co-partnership precludes all possibility of a strike, for, say the employer partners to the employee “partners,” “You are members of the firm and you cannot strike against yourselves. You must work harder and waste less, and then we can increase your bonus 3d. a week, which bonus you can leave with us at 3 or 4 percent, interest. So, in the course of time, you will get enough to build a house.”

The Socialist does not regard the intelligent and economical application of brain and muscle as something to be condemned in itself, but he points out that so long as the means of life are owned and controlled by the capitalist class, the application of greater effort is of no avail in the bettering of the material position of the working class as a whole, notwithstanding all the honied words of the apostles of co-partnership and bonus systems.

A. J. G.

Letter: Those bonus shares (1961)

Letter to the Editors from the October 1961 issue of the Socialist Standard

 

Those bonus shares

To the Editor

Although bonus shares “does not add to the market value of a company’s shares”, it could put increased dividends in the pockets of shareholders. Assuming that the following financial year the particular company made increased profits, the shareholders could receive £200,000 dividends in the form of 20 per cent on 1 million £1 shares, or 10 per cent on 2 million £1 shares.

It could happen (and no doubt does) that after a number of years shareholders could have returned to them in dividends the whole of their original invested capital, and yet at the same time still possess increased number of shares above their original number which have been handed out in bonus shares from time to time.

T. W. C., 

Welwyn Gdn. City, Herts.

Reply:

The article (August Socialist Standard) set out to show how erroneous is the belief that doubling or trebling a company’s shares, by an issue of bonus shares, doubles or trebles the market price of each shareholder’s holding. All that each shareholder gets from the change is double or treble the number of shares but with the market price of each share reduced to approximately a half or a third of what it was before, leaving the market price of the whole of the company’s shares unchanged. In his letter our correspondent concedes that this is correct.

He goes on, however, to claim that a bonus issue “could put increased dividends in the hands of the shareholders”, and he asks us to consider the position of the company referred to in the article if its profits increased so that it paid out a total dividend of £200,000 compared with the £100,000 of the year before. But of course this increase of dividend does not arise from or depend upon the issue of bonus shares. Our correspondent’s letter admits as much, for in his own example the shareholders get the £200,000 whether the bonus issue is made (10 per cent on 2 million shares) or whether no bonus issue is made (20 per cent on 1 million shares). All that it tells us is that if a company’s profits increase sufficiently it can pay out twice as much dividend, whether it makes a bonus issue or not.

The final paragraph is equally irrelevant to the question of bonus shares. It is quite true that if a company makes enough profit to pay out an annual dividend equal to 10 per cent of the original capital it will take only ten years for the shareholders to get back all their original investment and still hold their shareholding. But this result is achieved whether the company issues bonus shares or not, it all depends on making sufficient profit. If the company does not make enough profit an issue of bonus shares is not going to make any difference.

We repeat—the issue of bonus shares does not add to profits or dividends.

H.

Fat Cats: creaming off profits (2003)

From the July 2003 issue of the Socialist Standard

At the beginning of June, the Trade and Industry Secretary, Patricia Hewitt, unveiled a discussion document which was spun as dealing with the issue of city “Fat Cats” – that is, directors of firms who receive bloated salaries and immense pay rises.

Her document Rewards of Failure. Directors’ Remuneration – Contracts, Performance and Severance: a consultative document is ostensibly concerned with directors whose pay schemes are disproportionate to the performance of the company under their tenure. However, it was linked by “Old Labour”-sounding concern with directors’ pay.

“Fat Cats” were on the news agenda already – the shareholders of GlaxoSmithKline (GSK) had voted the previous month to not allow a £22 million severance scheme for the director of their company. News items had been filled with images of the little people standing up to the corporate monster – complete with tweedy little old ladies and retired majors venting their frustration at the iniquity of directors remuneration packages growing as the value of their shares dwindled.

Similar resolutions at the general meetings of the HSBC bank and Corus, the steel firm, failed, with large institutional shareholders voting down the myriad small-holders. In the latter instance, the TUC noted in a press release that the workers at that company are under threat of pay freeze or even redundancy.

The trade unions have been banging on for years about “Fat Cat” pay. During long years of wage restraint the TUC and trade unions have complained about “inflation busting” pay rises for top executives. How, they ask, can freezes on the wages of a company’s employees be justified when directors are merrily awarding themselves massive pay packages, at many times the going rate of inflation (which is what most workers’ pay rises are held to)?

Many see condemnation of the “Fat Cats” as an old left, radical position, a useful bit of demagoguery. Clearly, it doesn’t hurt Labour every now and again to voice concerns over “Fat Cats”, especially so long as they hedge it, as the Trade and Industry Secretary did, in terms of supporting the rewards of success. All of this is a gift to the Tories, who are no doubt preparing “politics of envy speeches” at this very moment.

The problem, as can be seen by anyone who takes a moment to examine the way in which capitalism works, is that taking on the “Fat Cats” is emphatically not a radical position. It is, rather, taking sides in a dispute between capitalists and their lackeys on the boardrooms of their corporations. That is, there is no gain to be had from any of this for the workers – were the “Fat Cat” fees to be slashed, the ones to gain would not be the workers, but the shareholders, the capitalists who actually own the companies.

As Marx pointed out in Volume III of Capital, shares are not real capital, but “a share of the stock is merely a title of ownership to a corresponding portion of the surplus-value to be realised by it”. That is, share certificates represent a title to a share in the profits to be derived from capital that has already been invested in the form of the assets of a given company. These shares have no intrinsic value themselves, but can be assigned one based on the amount of income they represent. That is, the dividends – payments due to share holders – amount to a specific return on the magnitude of the share value, and should that income rise or fall, the nominal value of the shares will rise and fall accordingly.

Large companies are in competition with one another to attract new shareholders (through the issuance of new shares), and existing shareholders want to see the value of their initial investment rise. Thus, companies have to ensure that the size of their dividends is competitive compared to the general market. If the returns on the shares in a specific company are higher than in the general market, demand for them will rise, and their putative value will rise accordingly. Thus, the ratio of return will remain roughly the same as that on shares in other companies.

This means that, to stay in business, the board of directors of a firm must pay dividends on a regular basis. A good example of this was the failed Railtrack railway owning company in Britain, which managed to find funds for its shareholders dividends, despite not raising a commercial profit. It managed this largely by selling off assets, mostly land and facilities. The board of directors also has the unfortunate responsibility of setting the pay for its members.

Share in surplus value

As Hewitt’s consultative document shows, this process is regulated by legislation on the pay of directors. The members of boards of directors are chosen by, and normally from amongst, the shareholders to administer their affairs for them and in their interest. That is, they act of behalf of the absentee owners, who have now become utterly redundant to the supervision and reproduction of their own capital accumulation let alone to the actual process of production. Someone does not become a capitalist purely by dint of being the managing director of a capitalist firm. However, the possibility exists – through the position of being in practical control of the companies – for the directors to arrange affairs so that they may cream off some of the profits that would otherwise go to the absentee shareholders.

In the case of most directors it is not a free market that sets their “pay”, i.e., their share of surplus value in return for managing the affairs of the other shareholders. They apply networks of association to restrict access to the jobs, and then set one another’s pay. They have a number of means by which they can supplement the appearance of receiving a set salary. They pay each other bonuses for performance, which they get automatically, no matter how they have performed. They get share options, the right to buy shares at a future date at a set price, which will usually be less than the going market price (giving them an instant windfall). They get, as they tried to get at GSK, severance packages that ensure massive payments on departure.

These directors use control over the process of exploitation to secure a share in the surplus value produced. The source, ultimately, of capitalist profits is the difference between the price of product of labour, and the cost of hiring the specific types of labour involved in realising it. That is, between the value of the work we do, and the cost of maintaining and reproducing our capacity to do that work. That is, the profit falling to capital is set by the conditions in the labour market which regulate how hard they can make employees work, and how much they can pay them. Once that profit has been realised, there is no essential mechanism determining how that profit is divided among the various members of the capitalist class.

This becomes a matter for legal and contractual relations between capitalists, as they use a variety of rights to secure their share of the profit, with landowners securing rent, financiers securing interest, etc. Each takes a profit from the total of surplus value extracted. In the case of stock held companies, the shareholders take their share in the form of dividends. The board of directors are able, in this circumstance, to use their position, to secure whatever profit remains after the dividends have been paid out.

In effect, the directors are swindling the shareholders, taking a share in their profits, based on the fact that they aren’t in a position to control the directors effectively. Hence why it is shareholders who are leading the attack against “Fat Cats” – they understand that it is their money that is paying those salaries, it is their profit that is supporting the half million pounds or more a year for a top corporate director. It is, for all its apparent radicalism, a spat over who gets the booty, who gets what share of the unpaid labour of the working class.

These facts are reflected in the craven pro-shareholder outpourings from the TUC on this subject. In their press release “TUC join with Dutch and German unions against excessive executive pay”, they maintain that “business legitimacy is being eroded as Europe’s citizens are shocked by further examples of this new creed of greed” and that “too often in recent years it has seemed that executives regard companies as vehicles for self-enrichment rather than for the creation of wealth for all stakeholders” which they interpret by asking “are these excessive executive pay arrangements in the interests of shareholders, and likely to lead to wealth creation?”

Socialists look at this trend and stand by their contention that it is the workers who produce the wealth, and the capitalists who make their profits from our unpaid labour. Further, we look upon this squabbling between the capitalists and their agents, and see how redundant the capitalist has become to the whole economic process. The “Fat Cats” question is a matter of a spat among parasites. Rather than seeking to hold down the pay of the directors, we should be seeking to take control of the productive process for ourselves, so that the immense riches it produces can be directed toward our benefit not theirs.

Pik Smeet

A Ray of Hope — For the Capitalist. (1922)

Book Review from the April 1922 issue of the Socialist Standard

"Wages, Prices and Profits." The Labour Publishing Company, Ltd., 6, Tavistock  Square, W.C.1. Price 6s.

At a moment when the capitalist Press and apologists are shrieking to the workers that "business is being ruined" by the huge wages paid to the employees, when drastic wage cuts and longer hours are being enforced in every industry, it will be comforting and refreshing, as well as reassuring, for those workers to turn to the pages of this slim volume.

In its 110 pages the workers who are greatly worried by "the serious difficulties" of the employers, and who wonder how the masters can stand the strain of "high wages" and "bad trade," will find balm and solace for their harassed feelings. A wave of relief will surge through their minds when they find that, after all, there are a few gleams of hope—for the masters —and even a fragment or two of resources left to them to tide over the present "time of terrible strain."

The book consists largely of tables and figures dealing with wages, prices, profits, capitalisations, etc. These tables are compiled almost entirely from "official" sources—that is, sources provided by the masters themselves in various Government Departments. It is well known, however, that Government officials are terribly busy men, and thus some of the information they supply is sometimes deficient in certain details. The compilers of this book have endeavoured to make good such deficiencies from other sources.

The essential reason for the existence and continuance of capitalism is Profit— of course, "Fair" Profit—so we will take one or two points from that section first.

The vast majority of business undertakings to-day are in the form of joint stock companies. When these are public companies, they must issue a balance-sheet each year. A useful account and analysis of these balance-sheets, and how they are "arranged" to conceal the truth, is given on pages 31-36 of this work. On these sheets the nominal profits made during the year are shown. These profits are usually tabulated as a percentage of the capital of the company, and here one of the gleams of hope shines, through the somewhat mystifying figures of the balance-sheets.

The ordinary uninstructed person would imagine that the "capital" shown on the balance-sheet was the amount of actual cash invested by the shareholders. Fortunately for the shareholders, this need not be so, and in many cases is far from being so. Sometimes the shareholders are given shares, called "bonus" shares, for which they pay nothing, but on which they are entitled to draw dividends. Thus a company with £200,000 capital might distribute "bonus" shares in the ratio of one new share for every two original shares. This would increase the "paid-up" capital—so called—to £300,000, and the profits would now be reckoned against this new figure, although the shareholders had only provided two-thirds of that amount.

If the profits made in a year were £20,000, this would be entered as 10 per cent, on the original capital, but the same amount of profit would only represent 6.6 per cent, on the new "watered" capital.

On page 92 the following table is given of the Bonus shares issued in 1920, as far as these are obtainable :—

The totals show that bonus shares were distributed over all the industries mentioned, in the ratio of two new shares for every three original ones held; but in certain cases—as Tea and Textiles—the bonus shares distributed exceeded the original capital—in the latter case by over £4,000,000. In some cases bonus shares are paid for, but always at a price below the market rate prevailing at the time. Some instances are given on page 94 :—

  "The Imperial Tobacco Co., for instance, issued in 1920 new £1 shares to its ordinary shareholders in the proportion of one new share for every three held, at the price of 40s. ; immediately after this operation the shares were quoted at 55s. 6d., thus enabling the shareholder to sell out his holding and pocket 15s. 6d. per share on the transaction, and enabled the company to increase its reserve (generally entitled 'share premium account ') by 20s. on each share issued."

Further on we are told :—

   "The Aerated Bread Co., for instance, in February, 1920, issued 63,750 £1 shares to its shareholders at the price of £4. The premiums derived from these shares were put to reserve. In the next month, however, the company capitalised these premiums, together with certain other reserves, and issued fully paid-up bonus-shares to its ordinary shareholders in the proportion of one new share for every share held, the new shares ranking for dividend as from March 28th of that year." ....
   "Thus the Shell Transport & Trading Co, issued 6,433,852 £1 shares at par to its ordinary shareholders. The price of the ordinary shares, immediately after this operation, was quoted at £6 ; at this price consequently by selling all these shares, the shareholders would have been able to. make a profit of £38,603,112."

While on page 100 we read that the coal firm of William Cory and Son "distributed a bonus in April, 1919, of two new shares for every one held."

Not so bad. Quite a few contingencies could be met from these little emoluments. The worried workers who were so anxious about how the poor employers could exist in the present state of affairs may now breathe more freely. The resources of these employees would seem to at least compare with the funds of the Amalgamated Engineering Union.

Another table is given on page 101 wherein it is shown that the nominal capital of new companies registered in Great Britain (Black-and-Tans are not given in this list) in 1920 was £593,189,032. It is thus evident that those wonderful high wages did not extract every penny from the employers' pockets.

The "concentration of wealth" theory of Marx has been disputed at various times by more various people, but a table on page 101 supports this contention. The number of Joint Stock Banks has decreased from 43 in 1913 to 20 in 1920—or by more than half. This has been due to amalgamation. The Capital and Reserves, however, have stood the strain fairly well, as they have increased from £83,068,000 in 1913 to £128,154,000 in 1920. Another factor that seems to possess moderate stamina is that of Deposits, which have risen in the same period from £809,352,000 to £1,961,527,000, or 142 per cent.

This is only part of the story. Of the above 20 Banks there are five (the "Big Five") that hold £1,628,375,000 of the deposits, or, roughly, 83 per cent, of the total.

Numerous other tables are given that are of great interest to the workers, and certain features are shown more clearly by means of charts at the end of the book. We have only room for two further quotations. Referring to war bonuses, we read :—

  "Nor did the workers succeed by this means in keeping wages fully abreast of prices, but the advance always followed behind, and never went before, the rise in the cost of living " (page 14).

While with reference to wages and prices we are told :—

  "There is, moreover, no necessary connection between wages and prices. It is significant that the drastic reduction of wages to which the miners were subject at the end of the coalowners' lockout, was immediately followed by a rise of 3s. per ton in the price of domestic coal " (page 43).

A most comforting and valuable book. The only regret is that it has not been found possible to issue it at a price within the reach of every worker. Still, even at 6s., it is well worth buying—if one can spare the cash—for it shows that, even without Reparations, the capitalists of this country can still hold out a little longer against the "bad times."

Jack Fitzgerald

Those bonus shares (1961)

From the August 1961 issue of the Socialist Standard

From time to time, announcements appear in the Press saying that a company is to make a free issue of shares, a bonus or scrip issue. This means that existing shareholders will receive an additional number of shares without having to make any payment for them (it differs from a “rights” issue when shareholders receive the right to buy shares at a price below the market price).

Scrip issues are made when a company has accumulated large reserves and decides to “capitalise” them. The result in the balance sheet is that the reserves are reduced and the capital correspondingly increased. If the company decided to issue one £1 share for each existing £1 share, each shareholder would have his holding doubled. If he held 100 £1 before the issue he would hold 200 £1 shares afterwards. It does not mean that the shareholder receives a cash payment.

On the face of it this would seem to be very pleasing for the shareholder: he appears to be twice as well off as he was before. And some observers imagine that it is so. For example, in 1959 when the Westminster Bank capitalised £3½ million from reserves and issued 3,500,000 new £1 shares the Daily Worker (16/7/59) reported it under the heading “£3½ Million Gift to Bank's shareholders,” and the Daily Herald (24/5/55) had the following comment on British Petroleum's issue of four new shares for each share held

  Did you happen to buy a few hundred shares in the British Petroleum Company last year? No? Bad luck. It would have been well worth it—worth it four times over, in fact. In November the company handed out £80 million from its reserves in the form of a 400 per cent share bonus—that is four new shares of £1 for every share held. Easy to make a tax-free fortune here—if you have the money to start.

It sounds too good to be true. It also presents a problem for the Marxist, who knows that profit, rent and interest come out of the unpaid labour of the workers and cannot suppose that between one day and the next, by means of a piece of manipulation in a balance-sheet, surplus value has become five times as great.

There is, of course, a catch in it, because the stock-exchange price of each share immediately falls in approximately the same proportion as the number of shares increases. Recently the Limmer and Trinidad Lake Asphalt Co., Ltd., made an issue of shares (and also an adjustment of the nominal value of each share), with the result that the shareholder who on 22nd June, 1961, held one hundred 10s shares with a stock-exchange price of 60s. each, found himself a few days later with three hundred 5s. shares with a stock-exchange price of 20s. each. The total price at which he could have sold the one hundred shares was £300, exactly the same as the price at which he could afterwards sell the three hundred shares.

The British Petroleum shareholder, referred to above, saw his shares fall from a stock-exchange price of £18 2s. 6d. each on 16th December, 1954, to £3 14s, 4½d. on 21st December. So the Daily Worker’s statement on 4th November, 1954, that the “oil kings get £80 million,” implying that the shareholders had suddenly become richer by that amount, was pure phantasy.

The real explanation is that, apart from the fluctuations of stock-exchange prices due to other causes, including general waves of buying and selling and varying estimates of the future profits of the company in question, stock-exchange prices are determined by the amount of profit the company has been earning and the amount they have been retaining for paying out as dividends. If profits are high and go on rising a share of nominal value £1 may be selling at say £3, and no capitalising of reserves will make any appreciable difference to the stock-exchange valuation of the total of the company’s shares.

The late Sir Oscar Hobson was quite correct when he wrote in the News Chronicle (1/2/51):

  Shareholders who vote to capitalise reserves of their companies and convert them into new shares for distribution among them in proportion to their existing holdings give themselves nothing which they do not already possess. . . . The issuing of bonus shares does not and cannot add to the value of a company's assets or to its earning power. It does not add to the market value of a company’s shares.

A recent issue of the Daily Worker (17/6/61) repeats its old delusion, though so qualified that it really gives away the main case: having roundly declared that it is “nonsense” to say that doubling the number of shares would be accompanied by halving the stock-exchange price of each share, it lamely concludes:

  The total shares owned by the firm's shareholders after a bonus issue are almost always worth more—and often considerably more—than they were before it.

This qualified statement is indeed partly true. The B.P. shareholder who at first had one share quoted at £18 2s. 6d. later had five shares quoted at a total for the five of £18 11s. 10½d., a gain of 9s 4½d. The reason why there is sometimes a small total gain is that a bonus issue is usually read as a sign that the directors are optimistic about future prospects.

It may then be asked why do directors go to the trouble and expense of making such an issue? One reason is that directors do not want to make their dividends look very large because, or so they believe, this encourages workers to press harder for higher wages. The directors think that paying out dividends of £100,000 in the form of 20 per cent. on 500,000 £1 shares does not look so tempting as paying out £100,000 in the form of 10 per cent. on 1,000,000 £1 shares. An additional reason for bonus share issues is that some companies see advantage in raising their issued capital up to the £1,000,000 required by law to qualify their shares to be held by those responsible for the investment of Trust Funds.

Edgar Hardcastle