Worker Co-Ops: A Plausible Solution to Some Big Problems

Worker Co-Ops: A Plausible Solution to Some Big Problems

Stephen H. Unger

July 11, 2011

In a conventional business, there is a strong built-in conflict between employees and management. Management, representing the owners, wants to minimize the cost of the employees (wages and benefits) and to maximize their contributions to profit. The employees (workers) want to maximize their wages and benefits, and to work under safe, satisfying conditions.

Wages and benefits are obviously very important, but there are also disputes over other matters, such as worker safety, workplace environment, working hours, abusive bosses, and unreliable workers. Such conflicts can get very bitter. In the past, some labor disputes have led to gun battles in which strikers have been attacked by private strikebreakers, police, state militia, or even the US army. In recent years, with the near disappearance of labor unions from the private sector, management generally dominates with little resistance from workers. Individual employees are virtually powerless in disputes with even small companies. This is one reason for the large and growing income inequality in the US.

A promising way to deal with the conflict between workers and owners is to eliminate it altogether by making the workers the owners. A company of this type is called a worker co-op. Let's look at how such organizations operate, the successes, problems, and solutions. But first consider a partial step in that direction which is more common in the US.

Employee Stockholders

Some companies have what are called ESOPs (Employee Stock Ownership Plans) [Crystal][Edwards]. Under an ESOP, regular employees are periodically given, or permitted to buy at special prices, shares in the company. More precisely, such shares are placed in a trust fund with each employee recorded as owning, but not controlling, a portion of the total. When employees retire or leave the company for whatever reason, the fund pays them the value of their shares in the fund. The primary objective of the ESOP idea is retirement income for employees. There are over 11,000 ESOPs in the US.

ESOPs, if properly managed, can be very helpful to both employees and companies. If management actually treats the workers as owners, they may contribute significantly to increasing efficiency and to product quality. This accounts for the fact that various studies have shown that companies with ESOPs do better than conventional companies with respect both to profits and to worker income. Two very prosperous ESOP companies wholly owned by their employees are Fastener Industries [Fastener], and the King Arthur Flour Company [KingArthur]. United Airlines is an example of an ESOP failure (tho, in the same industry, the employee ownership idea has worked out very well for Southwest Airlines) [Rosen].

Many companies have plans of various kinds to get shares of their stock into the hands of their employees. This is generally beneficial to all concerned. The ESOPs represent a particular approach that is recognized in the federal tax code which confers certain tax benefits. Examples of successful companies that are employee owned, but are neither ESOPs nor worker co-ops, are The Trust Company of Vermont [TCV], and Chroma Technology [Chroma].

While, in some cases, including the above-cited successful examples, stock ownership leads to an array of significant advantages for both workers and companies, it usually does not do more than provide some financial benefits to employees. If the goal is to resolve the basic conflict between workers and their employers, then the most promising approach is the worker co-op.

Workers in Command

In a worker co-op, the company is owned entirely by a subset of its workers. Ideally, all the workers are owners, but, especially in larger operations, it may sometimes be necessary to hire temporary workers to cope with occasional surges in activity. In very small companies, all the worker-owners usually participate directly in management, each having equal power. Larger companies have boards of directors elected by the worker owners and the boards may appoint some managers, tho, in some cases, managers may be selected by the groups they manage. Major decisions are usually made at meetings of all the worker-owners, in some co-ops by consensus, and in others by super-majorities. Company profits are generally allocated annually to retirement funds, reserves for use in expansion or as back-up during hard times, bonuses for all workers, or dividends for worker-owners. The amounts for each purpose are decided at general meetings. In all situations involving voting, each worker owner has exactly one vote.

There are about 300 worker co-ops in the US, mostly very small operations each involving perhaps 5 to 15 workers. Examples are farms, small restaurants, food markets, bicycle shops, auto repair shops, house cleaning services, commercial trash collection services, laundries, bakeries, computer software production or consulting. Examples of successful larger operations include a company doing engineering and manufacture of automated systems [Isthmus], one that provides home care for invalids [Schneider], and a taxicab company [MadWorC].

Why Worker Co-Ops Work Well

The general attitude of co-op worker-owners distinctly differs from that in almost all conventional companies. The feeling that they are working for themselves motivates them to do a better job. They also recognize that sloppy work or slacking off on the job means letting down their fellow co-op members.

In any organization, those doing the work are an invaluable source of constructive ideas for doing it better. This resource is seldom utilized to any significant extent in conventional commercial enterprises, which are almost invariably organized as top-down hierarchies. Here is where worker co-ops excel. Co-op members are systematically kept informed about company plans and problems, and are encouraged to suggest ways to improve products and processes. In many cases, workers in various subdivisions operate with a great deal of autonomy, deciding among themselves how best to carry out their assignments.

A consequence of the above factors is that worker co-ops tend to operate more efficiently than ordinary companies, and their products are likely to be of higher quality. Furthermore, workers are generally more satisfied with their jobs. This last factor also contributes to efficiency as satisfied workers are less likely to leave, and so expenses associated with recruiting and training new workers are minimized.

How Much to Pay?

How are salaries determined in worker co-ops? For small operations such as a retail bakery, it is most common for all workers to be paid the same, at a rate determined by the members. But problems arise if, even in a small company, there is a great disparity in the kinds of skills required. Consider, for example, a retail pharmacy, employing 2 pharmacists, 5 salespeople, a bookkeeper, and a janitor. The median annual salary is over $110,000 for pharmacists in the US, $38,000 for bookkeepers, $25,000 for salespeople, $16,000 for janitors. It would not be economically feasible to pay all 9 employees salaries anywhere near the range for pharmacists. Nor is it reasonable to expect to find pharmacists willing to work for anywhere near the usual pay for salespeople. So, what can be done?

The obvious solution is simply to set salaries for each position commensurate with the prevailing market rates for each category. An alternative, where only a small fraction of the workforce is out of line with the rest with respect to expected salary, is to hire people for these positions who will be paid market rates, but will not be co-op members. This, however, would be a significant departure from the basic principle that all the workers be owners.

Some jobs at the bottom end might be eliminated by having them carried out by the other workers. In the pharmacy example, janitorial tasks might be allocated among the other 8 employees, each spending an hour or so a day at such work.

Another possibility is to have some co-ops whose members are all high-skilled professionals of some sort, e.g., pharmacists, who work as contractors for other co-ops, such as the pharmacy in the above example. The pharmacy pays the pharmacists co-op at about the market rate for the services of one or more of its members, who are paid by their own co-op at about that rate. There might also be co-ops providing lower skilled, e.g, janitorial, services in the same manner. This way, members of each co-op are compensated at the same rate as fellow members. I don't know the extent, if any, that this approach has been implemented.

In larger co-ops it might be necessary to have skilled managers in certain positions. This poses the same problem of pay rates discussed above, and the same alternatives apply. In most worker co-ops, if pay rates are not equal for all, the ratio of highest to lowest rates is kept low, generally well under eleven. Note that, in most worker co-ops, wage rates tend to be above the market rates, more so for the lowest paid workers. Furthermore wages are usually supplemented by bonuses or dividends derived from profits.

Worker Co-Ops in Other Countries

While there are only about 300 worker co-ops in the US, there are other countries, including Italy, Spain, and France in which this idea is much more widely implemented.

Mondragon

One of the world's largest worker co-op organizations is the Mondragon federation of worker cooperatives in the Basque region of Spain. Founded in 1956, it started with 5 people and now employs over 80,000 people worldwide in 256 companies [Wikipedia][Kelly]. It is the seventh largest company in Spain. Its component companies are involved in a wide variety of activities including manufacturing, retail sales, finance, research, and education, but, apparently, not in agriculture. The federation also includes a bank that helps finance the other components, and is particularly important in helping the formation of new co-ops.

The members of each associated Mondragon co-op determine what the pay rate differentials should be within their organization. The ratio of highest to lowest pay rates vary from 3:1 to 9:1, with the average over all the components being about 5:1. In general, compared to conventional companies in the same area, pay rates for high level managers are roughly 30%, middle level managers and professionals are paid about the same, and lower level workers are paid about 13% more.

Tho obviously very successful in most respects, there are indications that Mondragon may be drifting away from the basic principles of worker co-ops. Concern has been expressed over its operations in other countries, where it has set up factories of a conventional nature in which the employees are not co-op members and may not be well treated [Huet][TrustCurrency]. Part of the problem is the effect on Mondragon's industrial operations of unfair competition from low-pay countries, particularly those that use techniques such as artificial currency exchange rates. Apparently, rather than try to get the Spanish government to pass laws protecting Spanish industry from such competition, Modragon's leadership has apparently elected to do as US companies have done: set up their own factories abroad, not operated as worker co-ops, to exploit the same cheap labor. It is not yet clear whether this approach will be resisted effectively by Mondragon members.

Italy

The Emilia-Romagna region of Italy, population just under four million, is the home of over 8000 co-ops [Scribd][Corcoran]. These include housing co-ops, consumer co-ops and worker co-ops. A factor that has helped is that, by law, three percent of a co-op's profits must be placed into co-operative development funds, which are used to help other co-ops. In general, there is a great deal of cooperation amongst Italian co-ops of all types. It is interesting that, at the end of WWII this region was impoverished, but it is now one of the most prosperous parts of Europe. In general, co-ops are doing very well in Italy and the number is growing.

Conclusions

There is ample evidence that worker co-ops can be very successful both in the conventional business sense, and as a means for improving the lot of workers at all levels, both economically and with respect to job satisfaction. At a time when so many American workers, whether engineers, or skilled machinists, or farm workers, are going thru hard times [unger-1], it would be appropriate to consider how they might help themselves by organizing more worker co-ops.

Starting a small business, such as a restaurant, laundry, bicycle shop, home cleaning service, day care center, or software consulting firm is not easy, but many groups have done so successfully. In some cases, retiring owners of such enterprises sell them to their employees. The main problem is obtaining credit for purchasing or starting up the enterprise. Where the amount of necessary start-up money per worker is small, e.g., for a home cleaning business, the workers themselves might be able to supply it. Otherwise, they need access to credit. There are a few organizations trying to fulfill this need [USFWC].

The USW (United Steel Workers), one of the largest American unions (over 600,000 members) is collaborating with Mondragon to explore the idea of forming substantial industrial worker co-ops in the US [Witherell]. It will be interesting to see what results from an alliance of a union and a federation of worker co-ops.

Since large American corporations, and financial interests have made it clear that they have no use for Americans as workers, and that they don't even need them as customers [unger-2], it is very appropriate for ordinary Americans to get together and create jobs for themselves.

Along the same lines, people might consider other types of cooperative enterprises such as conventional consumer co-ops, housing co-ops, banking co-ops [CoBank], and the less well known CSA (Community Supported Agriculture) idea [LocalHarvest]. In the UK, there is a giant organization [Wikipedia-G] encompassing a variety of co-ops, somewhat reminiscent of the Mondragon federation, but not including worker co-ops.

References

Chroma, "Being their own bosses", Chroma Technology, January 17, 2009

CoBank, "CoBank", CoBank

Corcoran, H, Wilson D, "The Worker Co-operative Movements in Italy, Mondragon and France: Context, Success Factors and Lessons", American Worker Cooperative, 2010

Garry Crystal, "What Is an ESOP?", wiseGEEK, 2003

Bruce Edwards", "Vermont embraces employee-owned companies", The Rutland Herald, May 15, 2011

Fastener, "The Nuts and Bolts of a Modern Ownership Culture: Fastener Industries", The Center for Economic and Social Justice

Tim Huet, "Can Coops Go Global? Mondragon Is Trying", Dollars & Sense Magazine, November/December 1997

Isthmus, "Worker-Owned Cooperative: A different kind of company. A leader in custom automation equipment", isthmuseng.comb(

Georgia Kelly, Shaula Massena, "Mondragon Worker-Cooperatives Decide How to Ride Out a Downturn", YES! Magazine, June 5, 2009

KingArthur, "About the King Arthur Flour company", KingArthurFlour.com

LocalHarvest, "Community Supported Agriculture", LocalHarvest.org

MadWorC, "Co-op spotlight: Union Cab of Madison Worker Owned and Operated", WorCPlace News, 05/13/2010

Corey Rosen, "Observations on Employee Ownership United Airlines, ESOPs, and Employee Ownership", National Center for Employee Ownership, November 2002

Scribd, "The Story of Emilia Romagna, Italy", Scribd

Stu Schneider, , "Cooperative Home Care Associates: Participation with 1600 Employees", GEO Newsletter, 2010

TrustCurrency, "Mondragon Cooperative Built on Sweatshop Labor? ", TrustCurrency, January 31, 2011

TCV, "The Trust Company of Vermont", TCVermont, April 2011

unger-1, "Jobs", Ends and Means, May 31, 2011

unger-2, "Are Americans Obsolete?", Ends and Means, May 31, 2011

USFWC, "Worker Ownership Fund", US Federation of Worker Cooperatives

Wikipedia-G, "The Co-operative Group", Wikipedia

Wikipedia-M, "Mondragon Corporation", Wikipedia, 2011

Rob Witherell, "Steelworkers Form Collaboration with MONDRAGON, the World's Largest Worker-Owned Cooperative", USW News, October 27, 2009

Comments can be sent to me at unger(at)cs(dot)columbia(dot)edu

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