Who profits from company profits – and who should?

There are many groups who gain when a company makes a profit.

You and I may gain via the public purse by the corporation tax paid to the Treasury, the directors will usually gain with high salaries and sometimes bonuses or share options, shareholders will gain by taking a dividend on their shareholding. But one group who don’t usually gain are the company’s staff, paid below the living wage who actually worked to make that profit in the first place.

Let’s look at those groups in turn.

1. First the public purse. Now it is true that most companies (except those globally structured to minimise UK tax) pay corporation tax on profits, and we should all benefit from those taxes to fund our schools and hospitals.  However , if workers in that company are paid below a living wage, most of them have to claim tax credits to be able to make ends meet. Those tax credits are funded by the taxpayer, by me and you, by the public purse. So in effect the public purse is just subsidising the company’s staff costs and maybe you and I don’t gain from company profits at all.

2. Directors and senior staff. Well yes I believe they probably do gain when the company they work for makes a profit as there is often a bonus system or, in my experience, your career progression at senior management level is nearly always linked to company profit. So ok the senior staff are doing fine.

3. Shareholders. Some of the best employers have schemes where all of their staff hold shares, however what I want to look at here are external shareholders. These are investors who have no real involvement in the company, but have just bought some shares and are waiting for their dividend payments. Currently the law says that a dividend can only be paid to shareholders if a company has made enough profit.  The company cannot pay out more in dividends than there is available profits. That means the lower the overheads such as staff costs the higher the profit and the higher the dividend. So the shareholders are doing nicely.

4. Staff on Minimum Wage. As set out in point 1 most workers on minimum wage, although working for a living, are not able to live on that wage and have to claim benefits such as tax credits. No matter how hard they work to increase productivity and profit they don’t gain.

So we have a situation that a company can pay poverty pay rates and have a higher profit margin which is then paid out to the shareholders. Meanwhile the rest of us are subsidising not only the company but the shareholder by propping up the poverty pay of the workforce. There are the very people whose work make the company profitable in the first place. That is madness.

This is why I believe that we should look at the current law around dividends.

I propose that before a profit making company makes a pay-out in dividends to shareholders it must commit to paying the Living Wage to its workforce. It cannot be right that passive shareholders take their cut whilst the workers who made the profit have to rely on the benefit system which the taxpayer pays for. If you want to invest in a company, then surely it’s right that you invest in its workforce, and don’t expect a state subsidy of staffing costs.

Ok, I know people will say “but investors will sell their shares if they don’t get good dividends and what about the pension funds invested in shares in PLCs?”

Well my answer to that is surely a sound solid investment is one based on sustainability, and a company that invests in its workers and treats them fairly is far more likely to grow and grow than one that just focuses solely on short term profits. I personally think that profitable employers who say they can’t afford to pay living wages or who depend on cheap labour are not the business model we should be investing in and building the recovery on.

I am just throwing the idea of Living Wage before Dividends out there to start a proper, clear, informed discussion about this and the public needs to understand the level to which these companies and shareholders are helped by public funds.

It’s often said that asking employers to pay the Living Wage in times of austerity is unworkable but I think if you can pay out a dividend to a shareholder but not pay a decent wage to the person who helped make the profit then that is unethical and we should consider doing something about it.