“Protected profit” and value sharing to boost non-interfering investment, employee ownership and democratic businesses

What the paper says

Purpose Employee ownership (EO) and profit sharing have numerous benefits. Employee Ownership Trusts (EOTs) are proliferating, but EO could grow faster by harnessing “non-interfering”, risk-sharing investment. Companies with common ownership (such as EOTs) are at risk, longer-term, from inadequate equity, which could lead to under-investment, slower growth or demutualisation. Other private businesses are also held back by substantial gaps in non-interfering, risk-sharing investment. Design/methodology/approach Existing financial instruments do not meet these challenges. We design a viable alternative, balancing the needs of entrepreneurs, workers and investors. Findings “Protected profit” sharing between workers and investors achieves this balance: guaranteed “base” pay is capped at a pre-agreed average level; profit-sharing pay and payments to loans, bonds or shares are all agreed fractions of “protected profit” (= revenue – non-pay costs – base pay costs). This aligns interests between workers, entrepreneurs and investors, and together with restricted voting rights, solves the principal-agent/risk-control problems, allowing reward-/risk-sharing equity investment. Practical implications Sharing protected profit allows sustainable employee/trust (or entrepreneur) control, while increasing liquidity, reducing the risk of “degeneration” and expanding the range of firms that can transition sustainably to control for/by employees. It also enables private firms in general to attract capital, boosting productivity and growth. Social implications Our mechanism removes the “need” for exorbitant executive pay (a driver of inequality), is compatible with Islamic finance and will catalyse business, thus civic, democratisation. Originality/value “Protected profit” sharing prevents whoever controls a company from unilaterally raising wages at the expense of investors, while protecting and incentivising everyone in the firm.