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Variable compensation in British Columbia Pawluk, Lorna A. 1990

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VARIABLE COMPENSATION IN BRITISH COLUMBIA by LORNA A. PAWLUK B.A. (Hons.), The University of Alberta, 1975 M.A., The University of Alberta, 1979 L.L.B., The University of Alberta, 1982 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAW in THE FACULTY OF GRADUATE STUDIES (Law School) We accept this thesis as conforming \to the reqiris Itandard TH UNIVERSITY OF BRITISH COLUMBIA December 1990 © Lorna A. Pawluk, 1990 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. The University of British Columbia Vancouver, Canada Date DE-6 (2/88) i a ABSTRACT This study begins with a review of economic and industrial relations literature to identify changes to tha: workplace that will make industry more productive and competitive. It identifies the measures necessary for industry to take advantage of technological development and to make the workplace more : lexible. Specifi03'^ focuses on variable or F o i b l e compensation plans. After iiisnd^ Li^ Mjrtg the J<ej/ features of vaxious forms of flexible compensation, it examines approximately 30 plans being used in British Colu"1^ 1'» "»se 'studies assist in identifying the advantages and disadvantages of eac'f type of plan, from . the perspectives of the employer, the employees and th trade union. FiiialJ^ y,, it ^u^ests. -st-efxs that ca-n be ta-ke-n by government to encourage variable compensation. I 1 Chapter 1 - What will the new Industrial Order look like?..1 | | , Summary 21 s j Chapter 2 -Variable Compensation _A Primer 23 What is a variable compensation plan? 23 Profit Sharing 24 Gain Sharing 25 Employee Ownership Plans 2 9 Employee Cooperatives 31 Historical Background 32 Legislation in Canadian Jurisdictions 42 Why Variable Compensation? J7 Summary 53 Chapter 3 -Report Format and Method Chapter 4 -Case Studies 58 The Forestry Industry 58 I Kent Avsnue Plywood Northwest Bay Logging 65 Lamford Forest Products 69 Victoria Plywood * .74 Richmond Plywood ...... ..79 | .The Mining Industry s . ... 81 Bell Mines 82 renda Mines gz,Manufacturing and Processing 86 Glenayre Electronics Modstech M©iltell60 \ s i f / Ki'.'ihh i i • •*•••'• •••hi i f t .*.*.".". i l i i i Finning Merf in . Vanderpol's Eggs.... Point Hope Shipyard. ' 87 88 90 91 94 95 98 Service Sector 99 Keen Engineering. g g Isadora's [) Ocean City Realty . . " Mohawk oil 1.11!!!!!!!!!!/!!! 103 The Port of Vancouver. _ 1 0 g Privatized Employee Companies 1 1 6 Road Maintenance l l e Crown Publications .!!!.!!.! 120 Trans Sign Shop .. . ... '.'.121 Pacific Regeneration Inc ".".!!'!!!! 1 .123 Film Making. 1 2 5 Summary......... 1 3 1 Chapter 5 - Conclusion 1 3 8 Bibliography ^^  • ACKNOWLEDGEMENT I would like to tliank Professor Joseph Weiler for suggesting the topic of this thesis and for the guidance he provided throughout the writing. I also wish to thank Professor M. A. Hickling for reading the thesis and for his helpful suggestions. Professor Marilyn McCrimmon was supportive and helpful throaghout- Finally, I thank Mr. Ed Peck, my boss who kindly agreed to the 'Thesis Fridays' th t made it possible to finish a thesis while holding down a full time j<3b. Without his understanding, this would still to® a laeap of papers in my study. CHAPTER 1 : WHAT WILL THE NEW INDUSTRIAL ORDER LOOK LIKE? For the better part of this century, the superiority of the North American economy and its industrial structure was not questioned. It provided the population north of the Mexican border with a living standard unprecedented in world history and with a prosperous, secure middle class. But in the 1970s and 1980s, all that began to change. Those were decades of economic upheaval. Inflation and unemployment occurred simultaneously in a phenomenon that came to be called stagflation. North America's economic system could not keep up to the economies of countries such as Japan and Germany, which thirty years earlier had been destroyed by war. While supply side economics has fueled a, short term economic recovery, the threatening public debt and looming recession means that serious questions remain about the long term viability of the North American economy and in particular North American industry,! There can be no doubt that one of the keys to economic recovery is a more productive industrial structure that can exploit rapidly advancing technology and win against increased global competition. This wilj, require a fundamental shift, away 1 Peter G. Peterson, "The Morrii no After." The At lantiB Monthly, October 19B1., 43- 69. 2 from industry that emphasizes long production runs that produce standardized goods towards industry that that can produce specialized products and which depends on a highly skilled work force. Clearly, flexibility is a critical componeht of any new system, as continuing adaptation will be the key to ongoing economic development. Collective bargaining law as it now exists in British Columbia is an adaptation of the American labour laws, developed in response to the manpower needs of mass production and the economic recovery plan of the New Deal. Generally, it is designed to minimize work stoppages, to encourage collective bargaining and to increase employee control over the work place,2 But this kind of labour relations system is ill-suited to an economy that requires continual adaptation to unstable economic conditions, just the kind of adjustment that will be critical for strong economic growth. It is the changes to the industrial relations system and more specifically the compensation structure that is the focus of this study. It is an attem^ >% to determine how variable compensation— that is 2Joseph M. Weiler, "The Role of Law in Labour Relations," ift Labour Law and Urban Law in Canada, published by the University of Toronto Press in cooperation with the Royal Commission on the Economic Union and Development Prospects for Canada and the Canadian Government PublisAln£ Centre, Supply and Services C nada, ed, Ivan Bernier dRd ' tajQiej (.(KS^ OJt©:- 'iWonto University Press, i§§§)i i=§3: •3 compensation determined according to productivity or profitability — can contribute to the development of more productive and efficient industry. What" sTiouId "the new-work place look like and what is the role of variable compensation? To answer this question, this work begins with an examination of current literature. It will look at what economists and labour relations specialists are saying about the economy and industrial relations system of the future. From there, it explains the features of various types of flexible compensation plans — employee share ownership plans (~SOPs),profit share, gain share and employee ownership — and the relative advantages and disadvantages of each. After that, a number of case studies are examined to see how these plans work in practice. Finally, it assesses each type of plan and ends with a set of recommendations for employers, union leaders, workers and policy makers. Only those companies with the ability to adapt to a rapidly changing environment will survive in the new economic age. Thus, one of the most important elements of a new labour relations system is flexibility. Martin Weitzman of Harvard University in The Share Economy: Conquering StagO-af.i_Q.n3 sees the main, culprit of stagflation to be the 3 (Cambridge, Mass.: Harvard University Rre.ss., 19.8.40 •4 wage payment system because it fixes compensation at a level independent of the firm's economic health. Prices, like wages, do not vary much in the existing system so that any fluctuations in demand change employment levels. Arguing that the Craditional macroeconomic tools of monetary and fiscal policy are inadequate to cope with the competing pressures of unemployment and inflation, Professor Weitzman advc-'oates a compensation system where workers are paid not on an hourly basis, but rather at a level dictated by the Pirm's financial position. In the share economy envisioned by Weitzman, employee remuneration is connected to the firm's revenue8 or profits: as the firm's market share changes, so do wage levels and number of employees. The increased number of employed workers then contribute to overall economic health which in turn, encourages consumption of the firm's product. Ultimately this means higher wage rates and higher employment levels. Unions which insist on fixed wages and on closed shop arrangements have no place in this economy: such arrangements simply impede the free movement of workers and deprive the economic system of the fluidity necessary for adapting to change.4 In addition to variable remuneration, successful companies must have the freedom to organize the workplace in order to take advantage of any business opportunities. This idea is advocated by Michael Piore and Charles Sabel in The Second Industria 1 Divide: Possibilitie_s for Prosperity5 where the authors explain how the inflexible structure of American industry has contributed to America's industrial decline and employment crisis. Its historic emphasis on mass production is ill-suited to new production demands required by modern technology. The authors propose "flexible specialization" as the only realistic strategy for American industry to regain its strength. This means that skilled workers are able to operate multiple-use equipment so that American industry can adjust to the "permanent innovation" necessary to thrive in the new economic age. The authors look at the structure of wage settlements in the American collective bargaining system and conclude that it, too, has contributed to America's economic declines They identify five factors that determine wage levels. The "keystone"6 of the system is the wage formula in the automobile industry. Federal labor legislation designed to encourage workers to collective bargaining indirectly force® non-union employers to compete with union wage levels in order to prevent unionization in their firms while minimum 5 (New York: Basic Books., Publishers Inc,., 4-984.) £>Ibid. , 80. ' wage legislation forces up costs at the lower end of the system. Finally, wage-setting mechanisms in the public sector contribute to a complex, interrelated wage determination system in the United States. As wages rise so must prices and so on until a price spiral is triggered. Rather than wages that reflect their true economic position in the world market, employers were agreeing to wage rates that reflected the federal regulatory scheme and other non-econonric factors. Even though this system established and maintained the consumer purchasing power essential for economic recovery, it did so at the expense of rigidity and inflexibility. It had the dual effect of s tandardiz ing labor costs removing all incentives for Innovation whi le at the same time overstimulating competition amongst employees.7 The authors suggest that the bonus system addresses the negative aspects of each: An approach to limiting competition without discouraging innovation is the bonus system. The incentive system is typical in Japan and common in such U.S. enterprises as IBM. In both cases, as we have noted, employment is guaranteed and wages stabilized, so as to limit the the enterprises' capacity to respond to competition with wage reductions. But largo Japanese firms pay their employees substantial bonuses if the firm does well; and IBM gives prizes and dramatic promotions for employees' innovative contributions,8 • 7 Ibid., 83. oIbid.i 271. The bonus system is to be combined with job guarantees and broad job classifications in order to facilitate the development of a new economic order that the authors refer to as flexible specia1ization, Robert Reich, in The Next Awgrican Frontier, agrees that America must change its industrial base if it is going to compete successfully again in the international marketplace.'' The existing industrial system, with its emphasis on long production runs, with separate routinized steps is good for manufacturing very large quantities of relatively simple, standard products. But such a system is incompatible with the technological and competitive challenges of the next century. This calls for the ability to make the changes required by a rapidly changing market. America's industrial base must change radically, if American prosperity is to be truly restored, a substantial fraction of capital and labor must shift toward flexible-system production. But the organization of high-volume, standardized production permits change in only one dimension: toward greater scale and a larger volume of the same standardized products,1o Anything that fosters adaptability and flexibility rather than standardization and long production runs is desirable for the American economy since successful industry must be 9The Next American Frontier (New York: Penguin Books, 1984.) 10 ibid., 138-139. capable of quick and effective adaptation. For this competitive edge, co-operation and teamwork are essential,!1 For Ray Marshall, a former American Secretary of Labour, the major causes of America's economic decline are. the rapid pace of technological change, international competition and management's short-term pr< -occupation with profits. In Unheard Voices: Labor and Economic Policy in a Competitive World, Marshall argues that the adaptability necessary for American industry to regain lost ground can be found in employee involvement in workplace decisions. This means such measures as employee ownership, employee stock option programs, cooperatives, use o r pension funds and employee representation on corporate b o a r d s . 1 2 Rejecting any suggestion that trade unions are irrelevant to the new industrial relations, he staunchly defends their role: "It is doubtful that there can be effective long-run participation without some independent worker-controlled organization or process."i3 He claims that employee participation is an effective way to improve productivity and cautions trade union leadership to re-examine the 11 Ibid.„ 278. ~ 1 2Ray Marshal 1, Unheard Voices: Labor and Economic Po? •.c.y in a Competitive World (New York: Basic Books, Pub1ishers inc., 19877, 156-157. " . ' isibid., 150. 9 adversarial nature of the labor-management relationship in North America.i' Harchaii examines a numhoT~ faii^h hncinpqq rescue attempts that involved wage Onnnflssinns in eynhan?n for share ownership plans. While he acknowledges that worker owners may be more productive than non-owners and that a worker owned ficm can often compete successfully with a conventionally owned business, he acknowledges the many serious drawbacks to employee ownership and cautions against a rash decision to participate. He urges unions to heed the ESOP guidelines developed by the Industrial Union Department of the AFL-C10.15 They encourage potential participants to conduct feasibility studies at an early stage in the process and to develop processes for employee involvement in decisions and information exchanges. Use of pension funds is discouraged since an ESOP depends on the economic viability of a single operation. Ideally, pension assets should be divarsified. Once the decision is made to use an ESOP, members whould be able to participate in management by voting their at.""1' on a one person-one vote basis and by representation on the Board of Directors. Particular care should be taken to define employee eligibility and to fix I*Ibid., isibid., 1 6 3 - 1 6 5 . 1 9 8 - 1 9 9 . the value of the stock going into the ESOP since this will ultimately determine control over the company. Finally, he urges anyone contemplating participation in an ESOP to consider a number of 'technical' concerns, such as cash flow requirements and the need for strong day to day management to be considered by any group of employees considering ownership,i$ Another work that looks at the role of trade unions in the contemporary economic system is "What do Unions Do?i7 Richard Freeman and James L. Medoff apply a framework of 'two faces' to the trade union movement in the United States and conclude that, on balance, trade unions improve the industrial system. The first face is the 'monopoly face' which is the union's ability to' raise wages above competitive levels because of its monopoly position. This is the negative aspect of trade unionism which is outweighed by its positive side, the voice/institutional face. The latter is the collective voice of workers as articulated by the union and the. collectiTO mechanism for dealing with societal and economic issues which arise' in the workplace. Using statistics gathered from i wide variety of sources., the authors undertook a "[q]uantitative analysis of computer Teibid. , 199-200. : '. i i?New York: Basic Books Publisher,' Inc., 198'i. ' data files of the type.,,[to provide] ...numerical estimates of the magnitude of unions effects and ...[to cover] ...a sufficiently large number of workers and firms to permit generalizations about overall economic effects."is Their evidence suggests that, although trade unionism reduces employment in the organized sector, it also encourages the devzlopment of workplace practices and compensatien packages often associated with increased productivity. One aspect of the trade uni®n's monopoly face is the most significant obstacle to a variable wage rate and that is the union's preference for single wage rates: workers who do similar jobs should receive similar pay. Rather than leaving compensation levels to the discretion of management on the basis of perceived performance, the union prefers a single rate system. There are four reasons. First, unions, as political organizations whose policies depend on majority support, should prefer policies that favor a majority of the membership. Most often, this means a reduction in differences among members, including compensation levels.19 Second., single wase rates minimize managerial discretion and re Ibid.', 23; See Aptv..jdix, 253-259. The authors used statistics gathered by the U.S.Bureau of Census, The Committee on Political Education (AFL-CIO), the Bureau.of Labor Statistics, the U.S. N.L.R.B. and the University of Michigan as wall as studies previously conducted by them. Freeman andMedoff, What Do Unions Do?, 79. 12 power, thus insulating workers from arbitrary supervisory actions and decisions. Third, significant personal differences are contrary to unionism's ideological premise of equality and goal of worker solidarity and organizational unity. And last, trade union wage policy strives for wage standardization in an industry or particular area, in order to minimize competition amongst workers. Common rates mean that some members will not be tempted, especially in rough economic times, to undercut the rates of other workers. When companies compete in the same market, industry-wide wage rates have no impact on the relative competitive position of the firm, but where different markets are targeted, differential wage ratee amongst firms becomes . critical. The Transformation of Amex'ican Industrial Relations by Thomas Kochan, Harry Katz and Robert McJersie looks at the problems of American industry with a view to explaining the radical fall in trade union density since the 1960s.20 The authors examine successful non-union strategies of management and conclude that management has been responsible for major (and sometimes negative) changes in the employment 20New York: Basic Books, Publishers, Inc., 1987; the authors compILe an iBipressAve. ax-ray of c-a-se "stu«li«s dn quality of work life circles, employee participation mechanisms, employee representation on corporate boards, employee ownership and variable wage systems. ' — n - - .. .-.Blv -i r?, nnmniiir, --. , ... , .w,,,. -V-. - J li L^j "• - ? 1 - ---"*•" : . ' ' ' 13 relationship. Since government and unions have done little to counteract management's initiatives, the result was the alarming decrease in trade union membership in the United States. The three authors note the impact of intense competition and market volatility on pay setting practices of management saying management must forgo the traditional negotiating patterns and move toward "localized and contingent pay procedures"2i in order to remain competitive. In certain industries this also meant a move away from COLA clauses toward profit sharing and other contingent pay plans. This shift required a focus not on external wage comparisons but rather on the firm's profit levels an? other local conditions. They point to the Teamsters as an example of a union which has struck a balance between the interest of employees in companies on the verge of bankruptcy and those in healthier firms. After the membership rejected the first proposal made by the union, a two-tier wage concept, the union resorted to a case by case approach that would allow it to grant concessions in certain cases. The following guidelines were set out. First, the firm must demonstrate "genuine economic duress"-22 Next, a plan must 21 Kochan, Katz and McKersie, The__TMn^onnatio^_of_^n^ican • Indust_rial_ .Relations, 134. 22 ibid., 193. I ' ' ' ' . ^ • • . -;••'.? fl o il !i tlj» I I mzl.Tr f: U U U U L mjMSHO 1 Q 'i u 14 indicate where the concessions will be used: although the Teamsters prefer the savings to be reinvested in the business rather than being passed on to customers in the form of reduced prices, they generally leave the running of business to management. The third component is trade union representation on the Board of Directors and employee ownership of at least 40% of o u t s t a n d i n g stock. 23 Finally, they insist that participation in the plan is not compulsory and that no employees should be required to invest his of her savings into the share scheme. Instead, payment must be arranged through payroll deduction: While it could be argued that the Teamsters should work out concession-ownership packages for firms before severe financial pressures develop, as a practical matter, this would be difficult v,o do because once concessions were given to firms that are not in extremis, it would be impossible for the union to avoid the pressures for similar concessions from other employers.24 Innovations s'uch as quality of working life programs and worker participation (whether through decision-making or ownership) together with changes to collective bargaiftin6 are necessary for North American industry to regain • predominance. But the authors caution that the three components must tee usea tsfethetf alsne tttef are 23 In keeping with their philosophy that management should, run the business, they set a ceiling of 49% for employee ownership. 21 Ibid., 194-195• B H B 15 insufficient to effect the changes that will allow industry to adapt to the new economic environment. The idea of employee participation in corporate decision-making was also discussed in In Search_of Excellence: Lessons from America's Best—Run Companies which is an attempt to identify the dominant characteristics of successful American companies.25 According to the authors Thomas Peters and Robert Waterman, the key to economic success for any corporation is "execution and continuous adaptation: getting it done staying flexible."26 This is effectively accomplished by heavy reliance on employees who have the freedom and responsibility to assist management in improving the operation. Successful companies encouraged team work and flexibility through freguent corporate reorganization. Without endorsing a particular form of sThomas j. Peters and Robert H. Waterman, Jr. In Search Of Excellence: Lessons from America's Best-Run Co^aines^ (New York: Harper & Row, Publishers, "inc., 1982.) Those-characteristics are: "1) A bias for action, for getting on with it. 2) Close to the customer. These companies learn from the people they serve. 3) Autonomy and entr'epreneurship . . . .They encourage practical risk taking, . and support good tries. 4) Productivity through people. 5) Hands on, value driven. 6) Stick to the knitting ,,, "Never acguire a business you don't know how to run." 7) Simple form, lean staff... The underlying structural forms and systems in the excellent companies are elegantly: ' simple;...8) Simultaneous loose-tight properties. The excellent companies are both centralized and decentralized." See 13-1J5.. 26 Ibid., 4. 1 6 — -employee ownership or economic participation, the authors stress that such plans are often implemented in response to a fad and do not receive sufficient management participation or support to make then work. Either that, or it becomes bureaucratized and therefore restrictive. In The Great U-Turn: Corporate Restructuring and the Polarizing of America, Bennett Harrison and Barry Bluestone advocate a fundamental reassessment of the laissez faire economic philosophy that formed the basis of President. Reagan's supply side economic policies. The authors theorize that the economic recovery of the 1980s was a false recovery fueled not by increased industrial productivity but rather by increases in credit and in military spending. More importantly they say: "But the real test of these policies is whether they have contributed to rebuilding the basic engine of the economy so that it can grow over the long term, regain its competitiveness, assure a rising standard of living, and ultimately provide greater economic opportunity for ever greater numbers of people. This, Reaganomics has not done. Instead it mortgaged the future of the economy to pay for the mirage of recovery today, and in the process created a society more deeply divided by income and social class than at any., time-since the end of World War 11. During the 1980 presidential campaign, then-candidate George Bush referred to the supply-side proposals put forth by candidate Ronald Reagan as 'voodoo economics'. In retrospect, Bush seems to have been right after all."27 27Bennett Harrison and Barry Bluestone, The Great U-Turn: Corporate Restructuring and the Polarizing of America (New York: Basic Books, 1988), 168. " ~ ~ V ^ - 1 ^ u utu u y, u U OA' ' 17 A real economic recovery program must concentrate in several areas: development of industrial (and related educational policy); management of international trade; reconstruction of the country's physical infrastructure; re-regulation of currently de-regulated private sector activities, with particular attention to the financial sector; renewed government support for the creation of universal social programs such as day care, health insurance and care for the aging; restored commitment for the right of workers to be represented by the trade union of their choice; and the introduction of a variety of measures to enhance work place democracy. In addition to changes in public policy, democratic measureo must be introduced to the individua work place: "Essentially, the role of workers and unions must be greatly expanded in literally every enterprise within the nation. This is not so much an issue of economic justice of the dignity of labor as it is a matter of cold hard-headed economics. Corporate management alone does not hold the secret of how to produce high-quality, competitive products. It must increasingly rely on the entire range of employees within the firm . " to develop new techniques of production, judge the applicability and usefulness of new technology, assure quality control, and forge new labor-management relations that enhance productivity and equity within the firm."28 In exchange for this, employees must give up the right to rigid job classifications land inflexible (though certain) "ibid,., 185. I Jfr "v** * Ifrr - p » t - - - , * 18 _ but unproductive work rules. Any change which enhances productivity will assist the company which can expect greater profits and the employee who can anticipate greater job security and tenure. The Chrysler bailout provides a dramatic example of what can happen when a company fails to adapt to changing economic circumstances and the government- comes to the rescue. In New Deals: Thp rhry^ipr Rpv-ivai and the American System29 Robert Reich and John D. Donahue chronicle the steps taken to save The Chrysler Corporation from bank- .ptcv, They examine the reasons for Chrysler's v'-snfall, chronicle its bid for assistance and finally analyze the responses of all interested parties. Of particular interest is the discussion of the profit sharing scheme and ESOP introduced in 1980 when workers were required to take a pay cut. In a departure from its usual' opposition to wage cuts and other concessions from even troubled firms, the United Auto Workers agreed to a pay cuf coupled with a profit share scheme and share ownership plan-that would permit the employees to benefit from any _ improvement in the company's economic performance. According to the authors, the union's usual reluctance to grant concessions is based on its decision making structure; 2^Mew York: Pesguin Books, layoffs occur in reverse order of seniority with newsr employees being laid off first. This means that the newest employees with the most relative stake in job security are pitted against senior employees who would rather sacrifice jobs than wage increases. After all, seniority protects their jobs. Moreover, it is sometimes more advantageous for the senior employees to close the plant down and accept lucrative pension benefits rather than to continue working. But at Chrysler not even senior employees were safe. Only in such circumstances, is the union's about face possible. In 1982, the workers rejected profit sharing in favor ' of a seventy-five cent per hour wage increase, although the employee stock ownership plan remained in place at government's insistence. One of the most important contributing factor's was the union's inability to gain access to the company's financial information: ... before workers would willingly trade rigid claims for flexible stakes, they would need far better access to company information than they typically had and an ability to analyze such information. Otherwise, why believe management when it ssys the company needs a wage cut? Who's to be certain the money won't ,go for executive bonuses and perks or higher dividends? By 1985 labor negotiators still almost universally lacked such access. The new financial deals struck as part of the Chrylser rescue involved sophisticated analysis and detailed, current data and projections; labor's negotiations were primitive by comparison. For labor to negotiate at the same level of economic sophistication as finance required a leap in unions' analytical capacity and orientation,3o 3 0ibid., 279=280. 20 Without significant changes in structure 'and policy, in particular layoff in reverse order of seniority, the union was bound to have difficulties with the profit sharing program. Nothing in the Chrysler plan required such changes. In Canada, the Royal Commission on Economic Union and Development Prospects for Canada, the Macdonald Commission,31 advocates such innovative measures as preventive mediation programs, quality of working life programs and gain sharing compensation arrangements. It also calls for re-examination of the adversarial nature of union-management relations in Canada: employers must take greater interest in their employees' job satisfaction and job security while unions should assist employers in these matters. The parties should cooperate fully to ensure that the enterprise remained competitive. To this end, the parties should seek solutions tailored to their situation and not look to government intervention for assistance: Employer-employee relations in Canada seem likely to be - most responsive to improvement at the level of.. individual firms, plans and union locals. Overall solutions proposed at the provincial or national level seem unlikely to be as effective as local solutions,"a 2 3iRoyal Commission on the Economic Union and Development Prospects for Canada, Report> Volume 2 (Ottawa: Ministry of Supply and Services, 1985.) 32 Ibid. jj jJ jtt) t. : rWUos;ooi]8 -Unlike the other commentaries examined here, the Macdonald Commission expressed concern with work stoppages and to that end stressed the need for bargaining through umbrella organizations and for the parties to an industrial dispute to share information that would encourage settlement. It specifically recommends the adoption of "gains-sharing/ compensation arrangements."3 3 Nummary What can be said about the ideal industrial relations system? What components should it include? There can be little doubt that it must encourage flexibility or at least not discourage it: smaller, more adaptable organizations will be necessary to meet the challenges of technological change and international competition. Corporations must be free to organized their affairs to maximize short-term and long-term profits. This in turn creates maximum job security for existing employees and opportunities for new employment. Well informed managers will make every effort to obtain the assistance of employees in implementing workplace changes and well informed union leaders will do everything necessary to facilitate management's efforts while at the same time protecting the legitimate interests of the employees. The new work place wil1 have to combine flexible work rules and flexible pay systems. In exchange 33 Ibid., 819. 22 —jt for greater participation in the corporate decision-making structure, employees will be assured greater job security and more control over workplace decisions. Governments and corporations should do everything possible to ensure that employees are able to obtain the training and knowledge necessary to meet the skill requirements of the new workplace. In other words, the new industrial relations structure will require unprecedented co-operation between management and unions and new levels of participation by employees in the day-to-day affairs of the corporation. In exchange for flexible wages and flexible workrules, employees will be assured greater job security both through explicit assurances in the collective agreement and through implicit assurances that result from being employed by a prospering, competitive corporation. And whatever changes are to take place must be sensitive to the need to maintain the union as a viable organization with which to articulate employee needs and wishes. Finally, changes to the workplace organization should come from the parties themselves, in private agreements, and should not be dictated by general legislation. In other words, if the public law is to do anything at all for the relationship, between the parties, it should leave them free to reach an accommodation which meets the unique needs of the particular enterprise. CHAPTER 2 - VARIABLE COMPENSATION: A PRIMER Before considering the research design and methodological considerations of this study, and before examining several existing plans in British Columbia, it is necessary to understand the basic characteristics of a variable compensation plan. This chapter presents this information. It will begin with a description of these plans and will proceed with a brief history of their development in the United States and Canada. It will then examine the current status of such plans in Canada and will conclude with an examination of the advantages and disadvantages of these plans from the perspective of the involved parties. What_is_ji_Varic^l A variable compensation plan is a generic term used to refer to a variety of pay systems which compensate an employee with an amount in lieu of or in addition to a fixed wage. The variable sum can be calculated in a number of different ways, depending on the type of program adopted by management. It can be a profit sharing which fixes a bonus according to corporate profit, gain sharing which ties the bonus to gains in productivity or savings in production costs and employee ownership which compensates employees in their dual roles of employee and owner. Variable 24 compensation can be remuneration paid on the basis of individual or group effort. In the case of an individual bonus plan, an employee will receive an amount commensurate with his or her individual productivity. In a group plan, which can include some of all of the employees in a firm, employees are compensated according to the productivity or profitability of the group. The group can comprise all or some of the firm's employees. The higher the group productivity, the more pay received by individual members.1 Profit Sharing Profit sharing is remuneration based on the profits of the firm. An employee is paid an amount based on corporate profits, as for example a plan that distributes 10% of the pre-tax corporate profits to the employees.2 Payment can iPlans leaving the amount of the bonus to the absolute discretion of management should be aware of the definition of "wages" in the Employment Standards Act, S.B.C. 1980, c. 107.1 which excludes "money that is paid at the discretion of the employer and that Is not related to hours of work, production or efficiency". Deferred plans should be aware of provisions in the legislation that requires payment of wages earned "at least semi monthly and not later than 8 days after each pay period." Payment in kind was first regulated in England by the Truck Acts. See Roger Wv Rideout and Jacqueline Dyson, Rideout'5 Principles of Labour Law, 4th ed. (London: Sweet & Maxwell ,1983)125-133. 2National Trust Company, Limited, A Study of Profit Sharing Plans in Canada (Toronto: National Trust Company, Limited, 1965). This is the type of plan included in the study completed by National Trus.t some 25 years ago of trust funds and profit plans which it administers. In order to maintain client confidentiality, the names of the corporations were withheld. This plan, however, was described at page 6 as belc^ging to a private electrical manufacturer. It was a 25 take place immediately at the same time as the next regular paycheque. Payment can also be indirect and delayed, with payout to the employee deferred to a future date such as retirement or involuntary termination of employment. In the meantime they will be held in trust by the employer or another impartial third party trustee for the subsequent use of the employees. The profits can be distributed to employees according a formula unilaterally developed by management, or in consultation with workers or their representative. Payment may be made on an ad hoc basis at the discretion of management or at predetermined intervals over the course of several years. Profit sharing plans can set the bonus according to individual effort so that each employee receives an amount commensurate with his or her effort or according to group effort so that each employee receives a sum commensurate with the group's contribution to profitability. Other types of profit sharing plans fix payment with reference shareholder dividends or as a percentage of the employee's fixed wage. Finally, the company can compensate employees with corporate shares rather than cash.3 cash plan in place since 1946 and was available to all regular employees who had completed 3 months service with the company. 3Natioi.al Trust Company, Limited, A•Study-of Profit_ Sharing • Plans ii> Canada, 5-12. •••••-. "• G a i n Sharing This is a form of incentive pay that links employee compensation to the performance of the company. Employees share any gain which result from more efficient production methods instituted on their recommendation or with their concurrence. For example, the manufacturer of silverware will base a gain sharing payment on savings derived from the more efficient use of an ounce of silver developed because of the workers' suggestions. The workers keep the increases resulting from more efficient production methods, or share it with management. Individual gain share plans, which compensate employees on an individual basis, are appropriate for industries with long production runs of repetitious work. It is advisable to establish such a plan only where it is possible to identify individual effort or where team work or group cooperation is not necessary. System-wide or group gain sharing plans foster team work amongst employees and are appropriate where it is difficult to discern individual contribution to the final product.V A well known gain sharing plan is the Scanlon Plan, named after the plan's creator, Joe Scanlon, a Director with the United Steel Workers of America. This plan determines 'tD^MaTd-V. Nightingale and Richard J. Long, Gain and Equity Sharing, Quality of Working Life Case Study Series (Ottawa: Labour Canada, 1984), 5. . ' » '."—•,_-.-.-'•'..-.,;•>-. ,»-» it- .• — r f " " labour cost for tl. « h . t . „ „ » « . m D 1 t h * ° P ' " t i ° - • a l l o w s e " i p l o y e e - i n i t i a + o H • , „ a t h e n d s v l s e i ; * t e d ' t . . . gains to employees — . . . « a C O ° ° ' P t " * « it, « ' t h » devotes o f expense, to Once th, , „ r k „ . incorporated i„t„ the m , ' into manufacturing process t k component g o s , d „ „ t o _ _ " " " / '^canlon P l a n , h a s m a n y u n i q u e Management's p r o f i t s a r e H • U r - v x n g . . j u s t t h o s e whn V s a v i n g s , n o t who raake p r o d u c t i v i t y S l l j [ w , t . y s u £ S e s t i o n s . TMt-h = m 0 S i W a n t , t h e r e i s e x t e n d 6 1 3 e x t e n s i v e c o n s u l t a t i o n and - o p e r a t i o n w i t h e m p l o y e e s a n d t h . . p r o d u c t i v i t y . l n f a c t M " ^ ^ ^ P l a n t y I n f a c t , Mr. S c a n l o n b e l i e v e d t h a t f t o s u c c e e d , i t harf + • 0I" 3 p l a n i x nad t o l n v o l v p t u • a method of pass in. ^ " s t r i c t l y passing on productivity • u c t l v i t y improvements t o 27 J?: 28 employees. Management derives increased profits from increase sales and no corresponding iiicrease in costsi6 Another form of gain sharing is the Rucker Share of Production Plan which was developed in the 1930s by an American, Allan Rucker. It is similar to the Scanlon Plan because it attempts to cut costs and employees jreceive a bonus if their suggestions reduce costs below ^he base figure. But the Rucker plan is based on more sophisticated, accounting techniques and looks at the historic relationship between employee earnings and corporate p r o d u c t i o n values. And whereas the Scanlon plan formula is typically negotiated with employees or their representative, the Rucker formula is not bargainable because it must be based on S detailed study of accounting records. Finally the Scanlon plav; is limited to savings in labour sssts; tsfee Rucker plan looks beyond the labour component of its costs to other costs of production.7 «The-National Steel Corporation implemented a productivity . gain sharing plan in 1985 which rewarded employees for any reduction in the number of man hours (and hence employees) necessary to produce a ton of steel. Once the union and management established a base figure for productivity, individual incentive payments were made to eligible employees. See National Steel Corporation, "Productivity Gain Sharing Plan For National Steel Corporation Employees," unpublished paper, 5 April 1986. 'Nightingale and Long, Gain and Equity Sharing, 11-14..-illjpJuQSilaaEe jis Jiiie J»as.t jiQjsm^ of 6gain-sliajiijag J-o Jae examined here. The name stands for 'improved productivity through sharing and was developed by an American industrial engineer, Mitchell Fein, who first introd®ed it in 1974 to an American manufacturing plant. Improshas•measures productivity during a base period; all amamts in excess of the base are shared equally between employees and the company.8 it differs from the Rutpker and ScanIon plans because it does not measure the improvement in dollars, but rather in productivity. Thus it is possible fi$>r an employee under this plan to receive a bonuss even when markets are poor and profits are low. Pmplnvpp OwnRr^hip Plans Giving an employee a stake ii» the capital of an enterprise through ownership is colfiMion in both Canada and the United States. Employee ownership covers/a wide range of alternatives through which employees acquire and hold a proprietary interest in tJfteir employer. It includes ownership of shares in a l1:»rge publicly traded company or a closely held, private firm. "'ith some plans, the business' is completely owned by employee^ while with others it is amUy ganrttUy ssnjpliasy®® cSWWBS®.- Other plans apply to all ^Nightingale and Long, Gain and F.giiiit.y Shar_in.g, 15. The-ratio of gain over base determines* a? percentage which is applied to the base pay ,the OTFpP&Pyee. If the gain n^ar®»emtts <® 7% iuwresse> the employee receives a ,7% bonus. employees while other plans a® available to only some employees. The former is a "broad-based" plan while the latter is a "top hat plan", tontrol of employee owned operations can remain with maiegement or rest in the hands of the employee, their union or a neutral third party such as a pension fund managed by a trust company. . An employee share ownership plan , an 'ESOP', is a form of employee ownership which derives its name from special trusts crested with the encousigement of tax legislation in the United States. In the American ESOP, a trust contained shares deposited there by the employer for the benefit of employees; the empi~ — — 1 deduct the contribution from taxable income and the employ® did not have to declare the accrued value as income until the shares were distributed to them by the trus4- ~~™bined with employee participation in the management of the company or can be separate from day to day workings. ESOPs in Canada are similar t© those in the United States because they involve fr&e purchase of shares in the emplbying corporation either directly by the employee, or by another party, often the emplo^1" itsfilf. for the employee's beaaadLkti... The shares can b® heJisl in tjcwsfc fej? the employees or be owned by them directly. Canadian ESOPs also differ from their American counterparts in the nature and extent of the tax advantages that accrue to the various parties. There are no special tax provisions aimed at ESOPs, although employees can defer tax on accruing share values, but several of the provinces, in Legislation to be described later in this chapter, have or tax credits available to companies setting up such a plan. One of the most well publicized stock ownership plans in North American exists as Chrysler, part of the Chrysler 'bail out' package. Indeed, over 16% of Chrylser stock is now owned by employees or their pension f u n d .9 In Canada in 1980, Conrad Black contributed all of his Massey Ferguson shares — 1 6 % of the total— to an ESOP for employee pensions although voting powers were retained by management appointees,io Financial institutions such as .the Royal Bank and the Toronto Dominion Bank have well-publicized plans to assist their employees to purchase stock in their employer carpoxation: these banks will match an^ purchase made by the employee and will underwrite the costs of acquisition.n 9"Workers, retirees hold 15% of Chrysler, " Globe and Mail, 11 July 1984, B2. ioIan Allaby, "Sharing the Wealth," Canadi^Business, September, 1985, 42-48 at 48. UMartin Mittelstaedt, "Employee stock buying plan is launched by Royal Bank," Globe_and_Ma.il, 19 December 1984, B5. • " •••.".• 32 Employee Cooperatives One of the most familiar forms of employee ownership is the worker' 5 cooperative where the workers are also owners. A l t h o u g h a familiar form of emjloyee ownership, the worker's co-op is relatively rare in Canada. It has been estimated that in 1986 there were only 350 such organizations in Canada even though that is double the 1983 f i g u r e , T h e r e are several features which distinguish a cooperative from other forms of employee ownership, especially the ESOP. The Philadelphia Association for Cooperative Enterprises ("PACE"), a non-profit organization that provides technical assistance to employee-owned organizations, defines a co-op with four criteria: 1) a majority of the workers must be owners; 2) each employee owner must have only one vote; 3) profits are distributed on the basis of labour rather than size of financial investment; 4) workers must control '/he board of directors,13 Thus, a co-oy typically provides greater opportunity for worker control than that available through i2Constance Mungall, More than Just A Job: Worker Cooperatives—in--Canada (Ottawa; Steel Rail Publishing, 1986) 3. 13Sherman L. Kreiner,, "Wor_ker Ownership a5 the Basis Jor an Integrated, Proactive Development Model," New_York University Review of Law and Social Change"""15 "(1986/87): 227-238 at 228. ~ " "" . V an ESOP and unlike an ESOP structure requires share ownership as a condition of emp loyment. t. <i Historical Background It is impossible to identify, with any precision, the first time a variable compensation plan was used by an employer as a device to enhance profitability or productivity of an enterprise. E.J. Leclaire, a French house painter and decorator, has been identified as the first employer to use profit sharing to pay his workers: in 1842 he introduced a profit sharing plan into his house painting operation which employed anywhere from 60 to 80 painters, is By the turn of the century, othej: social scientists and management theorists were advocating the use of profit sharing, incentive pay and employee ownership as a way to redistribute the wealth created by increased industrialization and as a vehicle to improve the condition of the working class. Other reasons for these plans included-: . ..the encouragement of thrift, or tho associated idea of offering a sound security for surplus funds, or again the definite desire to strike a blow at the too i4 Nightingale and Long, Gain and Eguity Sharing, 30-31. is Nicholas Paine Gilman in Profit Sharing Between Employer • and-EmpLoyeej A St_ud^_jja_JJie_E^ (London: "flacmi 1 Lan" & 'Co., 1890) 66; Aneurin Williams, Co- ' Partnership and Profit Sharing (London: Williams and Norgate1913) at 28 also acknowledges Leclaire as the first person to use the profit sharing plan. , ' severe distinction between wage-earners and shareholders or lastly to encourage merit by rewarding It, is As early as 1887, Procter & Gamble Company had a profit sharing scheme that involved stock ownership by some 6500 e m p l o y e e s , 1 7 'In 1909, Pilgrim Laundry Inc. in Brooklyn was owned by approximately 500 employee. A New York camera store, Willoughby's, introduced a share ownership plan in 1916 to all employees who had been with the store for at least two years and by 1948, 170 workers were also shareholders. In 1923, Snow-Nabstedt Gear Corporation, a metal processing plant in Connecticut, introduced an employee ownership plan that also allowed some employees to serve on the Board of Directors.is Simple piece rate payment was common in factories in the 19th century. It has been estimated that by the mid 1920s, half of the factory workers in the United States isjames A. Bowie, Profit Sharing With Employees (London: Sir Isaac Pilman & Sons, Ltd., 1922), 112. " 17Council of Profit Sharing Indus txias,, Profit Sharing-. Mjinualj CMta.inijig_a_M Representative Profit Sharing Plans (Columbus, Ohio: Council of Profit Sharing Industries, 1948) 255-256. Management attributed its lack of labour relations problems to employee ownership and profit sharing plans. isfor a detailed description,of each of these plans, see: Council of Profit Sharing Industries, Profit_Sharing. Manual: Containing a Digest and Analysis of Eight-four lipreaenl'al'ivp Profit -SharinqJlans. 35 participated in some type of incentive pay plan.19 Interest in employee stock ownership also reached a peak in the U.S. in the 1920s, but was dealt a severe blow by the stock market crash of 1929.20 Although some economists believed that flexible wages were an important component of economic recovery, there was a trend, largely because of New Deal income security goals, towards fixed and guaranteed income levels,2l A renaissance in the employee ownership plans occurred in the 1950s when Louis Kelso, an American financier and investment banker, advocated the creation of a personal capital estate which would benefit both the employee by redistributing profit and the company by financing expansion.22 He believed that as long as workers did nol iSRenae F. Broderick and Daniel J.B. Mitchell, "Flexible Pay Systems in the American Context: History, Policy, Research,, and Implications," a paper presented at the Pacific Rim Comparative Labour Policy Conference, Vancouver, June, 1987,, 484-534 at 496. iORaymond Russell, Sharing- Ownership in the Workplace (Albany, State University of New York Press , 1985)^11. 2 1'Broderick and Mitchell, "Flexible Pay Systems in the American Context: History, Policy, Research, and Implications," 499. 22Louis Kelso a»d Morti«sj: Adler, The Capitalist Manifesto (Westport, Conn.: Greenwood Press, 1956); Louis Kelso and Mortimer Adler, The New Capitalists (New York: Random House, 1961); Louis Kelso and Patricia Hetter Kelso, Two' Factor Theory: The Economics of Reality (New York: Vintage, 1967);-Louis Keison and Patricia Hetter Kelso, Democracy and Economic Power: Extending the ESOP Revolution (Cambridge: Ballinger Publications, 1986). own a capital interest in the enterprise, they would constantly press for wages that exceeded what the firm and the economy as a whole could afford to pay. Senator Huey Long, Chairman of the Senate's tax committee believed in Kelso's ideas and spearheaded the move in the early 1970s for tax incentives to encourage ESOPs.2 3 Because of the tax advantages, ESOPs became a very popular method of financing leveraged buyouts until 1986 when the most lucrative 23Corey M, Rosen, Katherine J. Klein and Karen M. Youhg, Employee Ownership in America (Lexington, Massachusetts: d'Tc, Heath and Company, 1986)", 18. In the ESOP, employers contribute their own stonk £o_r the benefit of employees to a trust which holds the shares until the employee's ownership rights vest. Once the rights vest, the employee may hold' the share, sell them to another buyer (the company has a : right of first refusal) or require the company to repurchase them at fair market value. The employees pay no tax on the shares' unti J. they are distributed by the trust and even at that point, several ways exist to minimize the tax impact. loopholes were closed,Figures reveal that in the United States in 1981 there were some 7000 ESOPs,25 It is impossible to present an accurate historical account of variable compensation in Canada and only somewhat less difficult to accurately portray the current situation. 2 4 In 1974, these plans were referred to as TRASOPs, or tax-credit ESOPs. Only firms involved in eligible projects would qualify for the tax advantages in a TRASOP. In 1983, the American Congress created the PAYSOP to replace the TRASOP: the new program was available to any employer and the tax credit was increased so that a tax subsidy exceeded 100%. The PAYSOP was repealed in 1986 but the so called ' leveraged'ESOP — a form of contribution that is a loan to the company _ still exists. The leveraged plan has two distinct advantages over a conventional loan. Banks or other institutions can lend money to an ESOP which in turn exchanges the money for stocks in the employer corporation. Because the bank must declare only half of the interest paid on the loan as taxable income, it can offer the loan on more favorable terms than would otherwise be available to the employer. Moreover, the employer's stock contribution to the ESOP is tax deductible so that it repays the entire loan, rather than just the interest, in pre-tax dollars. See Broderick and Mitchell, "Flexible Pay Systems in the American Context: History, Policy, Research and Implications,"512-513; also see Alan Hibben and Barry Nowoselski, "Using ESOPs to Finance the Acquisition of a U,S,_ Company." Business Quarterly 50 (1985) : 16 for a detailed explanation of leveraged buyouts in the United States. 25Rosen, Klein and Young, Employee Ownership in America, 16-17. These figures reflect the situation in 1981. Larger firms are more likel.y to have an ESOP than smaller firms, (those with fewer than 15 employees) and typically the company will transfer only, small sums to each employee, approximately 5-15% of the payroll. In 25-30% of ail ESOPs, employees vote on all some or all issues relating to the ESOP. Where employees do not have the right to vote, the responsibility is assumed by a management appointed trustee. ESOPs which are majority owned by employees are more likely than not to have full voting rights. The information now avai.Vable results in, at best, a sketchy view of the development of wage innovations in this country and only a rudimentary understanding of their popularity at the present time. Comprehensive figures are not available, probably because until recently (except for a narrow exception to the tax laws for certain types of deferred plans) no government program or other form of incentive was available to encouraged variable compensation. As in the United States, Canadian management's enthusiasm for flexible compensation plans was dampened by the severe economic conditions of the 1930s. It is estimated that one-half to two-thirds of profit sharing plans were discontinued or inactive during this period,26 Nevertheless, companies such as Dofasco and Dominion Foundries introduced profit sharing plans in this time period while Canadian Tire established an employee ownership scheme designed to provide pension benefits for its workers,27 During World War 11,.wage controls required 26National Trust Company, A Study of Profit Sharing Plans in Canada, 8. 2?Dofasco Inc. has a broad based profit share plan, introduced in 1938, which distributes 11% of the company's before tax steel-making profits. The sum is paid to the Dofasco Employees' Deferred profit Sharing Plan. All . Employees with 3 or more years service are eligible. See W. Craig Riddcll, "Wage Flexibility and Public Policy In ' Canada," a paper presented at the Pacific Rim Comparative Labour-Policy Conference, Vancouver, June, 1987, 571-636. . Dominion Foundries., in 1938, introduced a contributory profit sharing plan in which employees could contribute 3% 3? employers to be creative in matters of employee compensation. Without a method to supplement the wages fixed by war time controls, employers could not attract workers in the keenly competitive employment market.28 Companies such as Canadian Line Materials Limited, an electrical equipment manufacturer in Scarboro, Ontario, introduced a profit sharing plan in 1941 that distributed 15% of corporate profits to employees. The bonus was calculated according to a complicated formula which reduced the employee's share for absenteeism and lateness but increased it according to per capita p r o d u c t i o n , 2 9 By the mid 1950s, there were 2000 deferred profit sharing plans registered under the Tncome-Tax Act in Canadav Registration took place in a limited number of cases where it was desirable to defer tax liability and only where the or 5% of their earnings to a plan. The "company would match the employee contribution with a payment of 10% of its aftet tax profits, to a maximum of four times the amount contributed by employees. The employee received payment at retirement age, 65'. See Council of Profit Sharing Industries, Profit Sharing Manual, 295. In the 1930s> Canadian Tire introduced a deferred profit sharing plan to provide retirement benefits for its employees and to improve employee absenteeism and lateness. J. Dean MulcasteC. "Employee Ownership and Productivity Improvement," Business Quarterly 49 (1984/85) : 99-100. 28National Trust, A Study—of Profit Sharing Plans. 5. 29Council of Profit Sharing Industries, I^ofitShari^ng Manual, , 75-77. The employer reported that the plan dramatically reduced employee turnover. . plan deferred payment to the employee. By the mid- 1970~~ this number increased to 8,000 and by the mid-1980s to 25,000,30 a 1986 study of 1000 Canadian workplaces discovered that 23% had some type of profit sharing plan while 9% had a gain sharing plan,3 l The study concluded that unionized firms were less likely than non-unionized firms to have such a plan, but were more likely to be involved in a joint labour-management problem solving committee. Another study conducted in 1985 by Labour Canada Pound that only 11% (or 8.9% of employees) of collective agreements covering more than 500 employees contained any type of wage incentive. Most frequent was the piece rate incentive plan, in of the agreements, primarily in the manufacturing sector. Next was an individual wage incentive plan at 2.4% and last was a group incentive plan at .9%.32 Finally and as previously noted, as of October 1986, there were some 350 operating co-operatives in Canada, more than double the number in 1983.33 3 0 Nightingale and "Long, Gain and Equity Sharing, 7. ... 3iGordon Betcherman and Kathryn McMullen, Wpjrkin.g_.with Technologyi ASurvey of Automation in Canada (Ottawa: Minister of Supply and Services, 1986), 42. 32Labour Canada, Provisions in Major Collective Agreements in^Canaxia Covering ^^_and_Mpj-e._jEmplpyees (Ottawa: Ministry "of Supply and ""Services, 1985), 80~ • ' 33Munga11 , More_Than Just A Job, 1. . ' The most notable source of recent information is the Toronto Stock Exchange study Employee Share Ownership at Canada's Public CorporationsS* which collected information on employee ownership plans of corporations with shares listed on the Toronto Stock Exchange. The study found that 63% of the listed companies had either an employee share purchase plan or a stock option plan in place—23% offer share purchase plans while 54% offer stock option plans. Over 90% of the purchase plans provided employees with financial assistance in acquiring the shares with such measures as market or commission discounts, payroll deduction schemes, direct purchase on behalf of employee, low interest loans and employer matching schemes. By contrast, stock option plans were left entirely to the employee in 73% of the plans.35 Employee satisfaction with the ESOPs and with their employing companies were very high.36 Employees report that they are proud to own shares in their companies and are very satisfied with the plans at their firm. Employers responded that ESOPs have a direct and positive impact on productivity, job satisfaction and 3''Toronto Stock Exchange, Employee ^hare_0w^^ship at Ceaadals—Buhl-i.c-Corporations (Toronto: Toronto Stock Exchange, 1987) . ~ 35 Ibid.,7. 36 Ibid., 30. employee motivation. The TSE study reinforces this impression with its conclusion that companies with an employee ownership plan are likely to be more profitable than companies without such plans. Legislation in Canadian Jurisdictions Governments in several Canadian jurisdictions are beginning to take an interest in employee ownership. The governments of Canada and the provinces of Quebec, Alberta, Saskatchewan, Ontario and British Columbia all have legislation to encourage employee investment. The federal government uses general provisions in the Income Tax Act as a vehicle to tncourage employee investment, while the provinces have more specific legislation. Under the Income Tax Act anyone owning shares in an ESOP which meets the requirements for registration can deduct certain expenses and can defer tax liability on the accumulated income.37 Shares also qualify for the dividend tax credit. However, no special treatment is extended to employee owned shares; rather, these provisions apply to all shareholders. But two other provisions in the income tax are specifically aimed at employee ownership, although the orientation of those sections differ substantially from what is available under provincial legislation. To begin 3 7 Income Tax Act, R.S.C. 1952, c. 148, s. 14. 43 with, Section 127.4 provides a tax credit to individuals purchasing shares in "Labour Sponsored Funds" established under provincial legislation. In order to qualify under the federal oct, the labour sponsored fund must be established under provincial legislation and there must be a federal-provincial agreement coordinating the initiatives of the two levels of government. Individuals holding shares in the fund, which operates much like a mutual fund, qualify for a 20% tax credit of up to $700. The provincial legislation must offer a 20% credit but the federal credit will be reduced by any amount the provincial government pays in excess of 20%. To date, only Saskatchwan, in the Labour Sponsored Venture Capita) Corporations A c t 3 8 , has taken advantage of this federal initiative. The other federal measure is established under section 2(H. 81 (1) of the Income .Tax Act, a National Labour-Sponsored Fund which permits national labour organizations to establish a venture capital fund to assist in the development of small and medium sized J8Labour Sponsored Venture_Capital Corporations Act S.S. 1986, c.~L-0.2.~ It provides a "tax credit of"20%~of acquisition costs up to a value of $700 €or anyone purchasing shares in an investment cooperative or corporation sponsored by a trade union, employee cooperative or group of employees. Bru«;e Evans, Advisor, Investment Programs Branch, Department of Economic Diversification and Trade, Saskatoon, Government of Saskatchewan, interview by author, telephone, November 27, 1990. 44 businesses. Anyone purchasing class A shares in the fund qualifies for the section 127.4 tax credit described above. The Canadian Federation of Labour took advantage of the. section 204.81(1) to establish a venture capital fund know as 'Working Ventures' . Intended as a long-term investment, the shares can be purchased through an RRSP and will be purchased back from the fund when the employee retires. It is important to note that this plan differs significantly from an ESOP. In an ESOP workers become owners in their workplace and their investment is used in only that business but with a fund such as 'Working Ventures' the capital is invested in a broad range of companies in different economic sectors and in different regions of the country,3 9 'Working Ventures' does not require shareholder/ecnploy^e involvement in the enterprise and in this way it does not differ from any other mutual fund. The Quebec government was the first government in Canada to introduce share ownership legislation. In 1979 it passed amendments t,o the Taxation_Act and the Securities Actjto to provide a tax credit for those Quebec residents who purchase stock in qualifying companies and then place them 39Canadian Federation of Labour, "Working Ventures: Common Questions," Pamphlet, April, 1988, 6. '>oAn Act respecting stock savingri j>Jwid__to_aj;ajJL.amend the Taxation Act and"the Securitie§„Act, S. Q . l g 7 9 7 c. 14, as amended. ~ . 45 in an approved stock savings plan. The programme is not limited to investment in the workplace, but extends to any one purchasing stock in Quebec corporations. Until this year, Alberta had a stock saving plan similar to the Quebec plan in that it applied to the sale of shares in Alberta corporations, regardless of the shareholder's status as an employee. The qualifying corporation had to be carrying on business in Alberta and had to have shares listed on an Alberta stock exchange. It was not designed to enhance employee participation in business but rather to provide expansion capital for the private sector, to encourage equity ownership in Alberta companies by Alberta residents and to strengthen the Alberta Stock Exchange,41 The plan was discontinued this year in the budget cuts intended to help the province balance its budget. In contrast to the Alberta and Quebec governments, the Ontario government has a plan specifically aimed at the encouragement of employee ownership.42 It is designed to Alberta, Department of the Treasury, Undated Pamphlet, "Questions and Answers on the Alberta Stock Savings Plan." Alberta Stock Savings Plan Act, S.A. 1986, c. 37.". 42Bill 11, 3rd Session, 33rd Legislature, Ontario 36 Elizabeth 2, 1987. Andrew Cohen, "Ontario Debates Worker Share Plan," Financial Post, 24 November 1986, 4; "Ontario introduces bill for worker share ownership plan," Globe and Mail, February 13, 1987, B5. ~ 46 encourage the purchase of shares in smaller and medium sized Ontario corporations. Companies are eligible for grants of up to $10, 000 to cover the cost of establishing a plan, while groups of employees are eligible for $5,000. Employee investors are eligible for a one time grant of $300 or 15% the value of the shares.43 The Ontario plan differs from those in Alberta and Quebec in two significant ways. First, it is limited to employee ownership and second, the-' legislation is designed to assist smaller corporations than those which qualify for assistance in Quebec and Alberta. 4 4 Private closely held corporations can establish a stock savings plan; it is not necessary for their shares to be listed on a provincial stock exchange. The British Columbia government encourages employee ownership by a programme of tax incentives outlined in the Employee Investment Act.''S It has two components, an ESOP commponent and an Employee Venture Capital Corporation (EVCC) component. The ESOP programme provides a tax credit of up to 20% or $2,000 of the cost of the shares to ^Ontario, Employee Share Ownership Plan Act, 1988, S.O. 1988, c.3, s. 12. 4 4 Ontario, Employe£ 9B8 , s. 2. An employee already owning 10% of the stock, or someone who owns 10% is not eligible. 45S.B.C. 1989, c. 24. See also: Ministry of Regional and .. Economic Development, Employee Investment Programing: Guidelines-., undated booklet, distributed to the public.-47 — * employees who purchase shares in their place of work. The other component provides a tax credit to anyone purchasing shares in a corporation registered under the act, an Employee Venture Capital Corporation which operates like a mutual fund and is authorized to purchase shares in any number of businesses that meet the investment guidelines in the act and regulations. The programme subsidizes start up costs for an ESOP established by a small or medium-sized company or an EVCC set up by an employee group.46 The legislation leaves questions such as whether or not ownership is combined with employee participation to the discretion of the participants. Instead, it has recently embarked on an education programme to inform employers of the benefits a more participative management style combined with ownership.47 ! ? } ! £ l i r i a b j _ e C9in.]^„nsaJ:ion From a company's perspective, there are many reasons to implement a variable compensation plan. The most frequently cited reason is increased worker productivity. A profit sharing plan, for example, which gives the individual 46The sum is limited to $5,000 during any two year period by regulation 16(1) , Employee Investment Act Regulations, B.C. Reg. 248/89. ------ • • — — - -—--, 47Richard Long, College of Commerce, University of Saskatchewan, Saskatoon, interview with author, telephone, Vancouver. November 27, 1990. employee a bonus for increased corporate profits will encourage production, reduce costs and penalize absenteeism. Management is also attracted to such plans by claims that they increase loyalty to the company, a feature particularly attractive to those enterprises with problems attracting or retaining specialized workers. Especially in the case of employee ownership plans, it is thought that the plan also discourses absenteeism and encourages identification with the goals of the enterprise,48 Productivity and emotional concerns aside, there are other benefits of an ESOP for employers. First, as an employee benefit plan, ESOPs provide the company with an alternate form of employee compensation. Second, the ESOP is valuable as a market for shares in an closely-held corporation where the current owner/shareholders are no longer int erested in carrying on business and the employees are in a position to take over. Third, payment into an ESOP is an effective demonstration 0f management's commitment to employee involvement. Fourth, employee buyouts can be an effective way to save failing enterprises. Fifth, when a corporation wishes to divesi itself of a spin off or 'i a Raymond Russell, Sharing Ownership_ in the Workplace (Albany: State University"of~New YorkPress, 1985), 199 Robert N. Stern and Philip Comstock, Employee Stock Ownership Plans (ESOPs) : Benefits _for Whom? (Tthaca, New York: H e w York State Sciiooi -of - Industrial "and Labor. Relations, 1978), 45. • ---'-'—-••-•-.-.v1-'!.'-^'- J — A . . : . - 1 1 . ?''..'.-•:•. •. ^ j subsidiary it could be sold to an ESOP rather than a (possibly hostile) third party. Finally, ESOPs can be exchanged for employee concessions on monetary and non-monetary matters, providing they also include an opportunity to make up for current concessions or losses in the future.49 The advantages of a gain sharing plan are obvious: if the bonus is calculated according to savings in production costs, employees will be encouraged to cut costs. This means a larger bonus for the employees and greater profits for the corporation. Another advantage of the bonus is that it varies according to the economic performance of the company so that there is no obligation to pay at a time when the company cannot afford it.5o This is particularly useful in an uncertain or cyclical industry where the company cannot undertake a definite and fixed commitment. A group gain snare plan is an effective way to encourage team work while an individual plan fosters, obviously, individual effort and creativity. Companies often turn to such plans to provide employee pension benefits.51 The non-adversarial *>9Rosen, K l e i n and Young, Employee Ownership in America, 1 8 -3 3 . " "" •'.."' • " " ' 5"The obvious exception to this statement is the Improshare which rewards employees strictly on the basis of savings in production costs. It is thus possible that a company will be required to pay bonuses even when profits are down. si National Trust, A Study of Profit Sharing Plans, 10. £ way in which the bonus is determined, is according to some commentators, a hidden benefit of the gain share: Gain sharing wages are determined in a non-adversarial manner. That is, the gain sharing wage is determined on the basis of the total equity or cost savings created by the firm and not by the relative power of labour and management at the bargaining table. Gain sharing wages are paid after profits are made and not on a negotiated guess of what profits might be in the future. Gain sharing wages are increased when labour and management work collaboratively, and they are reduced by labour-management conflict. Gain sharing unites all employees in a common purpose — the enhancement of the firm's competitive position. Through gain sharing plans, employees come to understand how the firm operates, how profits are made, and how costs can be reduced.52 American research has also concluded that gain sharing reduces grievances, employee turnover and absenteeism, but only where the plan is combined with participative management.53 While many unions vociferously oppose flexible pay systems - and this will be examined in some detail later in this section - some unions favor workplace innovations including variable compensation. Some approve of gain sharing because of the opportunities it gives individual employees to increase both their pay and their work tv/vtisfaction. Increased job security is another important 52Nightingale and Long, Gain- and Equity Sharing» 6. 5 3Broderick and Mitchell, "Flexible 'Pay Systems in the American Context: History, Policy, Research, and Implications," 519. •••••: point in favor of such plans. Often, union support for measures which are desired by the rank and file increases the union'^ visibility .and credibility. Union involvement in the plan will increase its understanding of the operation, an advantage when it handles grievances ana negotiates the collective agreement. Finally, a successful plan will reflect positively on the union.54 Management although fundamentally in favor of variable wage schemes is not without certain concerns. Disclosure of eismfitdemtiiaJ. fiaaacial information, necessary for employees or their representatives to verify the amount of the bonus, is a major drawback.55. ' Extended periods where a company is not making a profit, for reasons outside the control of either the company or the employees, will have a negative effect on employee morale and motivation. This effect is exaggerated where the employees are also owners: they stand to lose not just their job but their savings or retirement security.56 Where the profit sharing or other scheme has stfimothy L. Ross, 'Larry L. Hatcher,, and Dan B. Adams, "How Unions View Gainsharing," Business Horizons, July-August 1985, 20; also see Nightingale and Long, Gain-and Equity Shar_ing, 31. 55National Trust, Profit Sharing Plnns. Q. 5 6 In a study of ESOPs, Carey Rosen and Alan Cohen deal ft , blow to the common misconception that the creation of aft,'; ESOPs by management signals economic difficulties for the cctmpvaqy. . They discovered that «nia> 1%. of Amerie-a« ESQP1 are created by employees hoping to save their jobs. See Corey Rosen and Alan Cohen, "Employees to the Rescue: The Record 52 been in place for an extended period of time, its impact may be watered down because employees see it as their right. Consequently, a drop in the bonus can have a deleterious effect on workplace attitudes. Problems also occur in operations where it is difficult to link employee effort with the bonus. This is typical of an incentive plan that applies to the profits or gains earned by a group since it is difficult or impossible to accurately determine individual productivity. A 'free rider' problem also arises.57 More productive workers will be forced to carry those who are less productive. It is also difficult to identify the productivity gains of a smaller group that is part of a larger, highly integrated organization with several divisions. Finally, profit increases are difficult to allocate where the company expands or installs new equipment. In such circumstances it is difficult to ascertain profits which are the result of employee effort.58 Some of the most severe criticism of variable compensation comes from the trade union movement. According of Worker Buyouts," journal of Law. ami Commerce 6 (1986): 213-226 at 214. — — • - - - - . 57Riddell, "Wage Flexibility and Public Policy In Canada," 45. ssNational Trust, A Study of Profit Sharing Plans,•12. to the results of a 1985 survey, one of the most serious misgivings is that management will substitute the bonus for basic wages.59 There is also a fear that management will manipulate production records and will eventually lay off employees after productivity gains are made. Peer pressure to increase output can divide the bargaining unit and place unfair pressure on older employees who are unable to keep up with younger, more productive co-workers. It can also divide the workplace into groups, according to their place in the bonus scheme. Difficulty in understanding bonus calculations or obtaining access to records in order to verify bonus calculations is another problem cited by unions. A union is also concerned that its influence will be undermined by an employee involvement system that is seen to be more effective in ameliorating workplace problems than the grievance procedure to which the union has access.&o Swnmary It is not possible to neatly define or categorize all forms of variable compensation. There are as many different types as there are companies and management problems or goals. The type of plan adopted by a company is a function of the company's unique needs. And although such plans are 59Ross, Hatcher and Adams, "How Unions View Gainsharing," Business Horizons, 15-22. so Ibid.,18. 54 —1 not new, their use is still not widespread in either Canada or the United States. It is difficult to determine whether they are used more frequently now that a decade ago, but governments in Canada are now trying to promote the use of one type of plan, the ESOP. Government policy doos not cater to the broad range of plans that are being used in private industry, including gain sharing, profits sharing and ESOPs, choosing instead to become involved with only share ownership. CHAPTER 3: REPORT FORMAT This work will proceed with several case studies that illustrate the practical difficulties which can arise when performance based pay is being incorporated into the employee compensation program. These studies have been selected with only one criterion in mind, and that is to demonstrate the broad range of plans. Selection has not been "scientific", that is statistically representative of plans actually in place, or "normative" in that one type of plan is being selected to the exclusion of other, less desirable plans. Rather, they were selected on a random basis in order to provide an overview of plans, their advantages and their disadvantages. There is one obvious bias in this work: implied throughout is the value and benefit that accrues to a workplace which has variable pay in its employee compensation package , 1 Finally, no attempt is made to obtain information on plans outside the province iThe study, conducted by the Toronto Stock Exchange of its member companies, revealed a strong preference for ESOPs regardless of the type of business or company. Employers in particular believe that the plans increase employee identification with the firm, so enhancing productivity and . profitability. 31% of the companies listed on the TSE have ESOPs. The report advocates government initiatives to ensure that employees across the country have the • opportunity to participate. Toronto Stock Exchange, Employee. Share Ownership at Cajiada's Pujalic CorporatJjDns of British Columbia. The reason is practical: time and resources do not allow travel to other provinces. Each case study will address the following issues. What was the impetus for introducing variable compensation? What are the details of the current plan? Why was this particular scheme chosen? How was the plan formulated? Who represented management in the discussions and who, if anyone, represented affected employees? How was the plan modified following the discussions? How long has the plan been in place and what changes, if any, have been made as the plan settled into the workplace? Are there future changes being planned? What mechanisms permit ongoing monitoring of the plan's progress? What has been employee and management reaction to the plan? Has the plan achieved its anticipated goals, and are there unanticipated benefits which justify continued pursuit of variable compensation? Are there plans to change the plan, to introduce a new plan to replace or supplement the existing plan? It is also important to examine these plans from the perspective of the affected employees. Do employees like the plan? How do they perceive their consultative role with management? Is it a 'top down' plan or is it one formulated from the grassroots? What is the role of the trade union . * - „ > - 1, . 1 ^  |\ % f Vjr ' ' J r J . , . «» i «• ,? - - J ,r !• »« ^  | ^  ; ^ j! 57 vis-a-vis the employees? How has the presence of a union affected employee aspirations and expectations?2 From the trade union perspective, the focus will be on the union's ability to maintain exclusivity as a bargaining agent for the affected employees. Was the plan formulated with a view to involving the trade union or to undermining its influence? What, precisely, has management asked the union to do? What benefits (if any) have accrued to the union? Is there a perceived increase in flexibility in the workplace? What is the future of similar plans in this and other enterprises, from the perspective of this union? Finally, we will focus on the role of government assistance. This includes an examination of employee owned operations that were formed from the B.C. government's privatization programme and an examination of companies that have taken advantage of the provincial tax credit. We will also examine the role of federal intervention in the Port of Vancouver and the attempt to replace traditional work preservation mechanisms with innovative gain share and profit share plans. These will assist us to identify elements necessary in any government plan designed to encourage variable compensation. 2The response to questions about employee reaction was quite • disappointing.. While the questions were asked in each.case, by aiid large, management could not answer the question and could not refer the questions to an employee representative. I _ I I I I II _ U U U Lb Q u m V A ' CHAPTER 4 - CASE STUDIES Thia chapter examines employee ownership and variable compensation schemes used by employers in British Columbia. It begins with an examination of the most important economic sector, forestry, where we will look at the plans used by Kent Avenue Plywood, McMillan Bloedel, the now defunct Lamford Forest Products, the employee cooperative Victoria Plywood and finally Richmond Plywood. From there, the chapter proceeds to the mining, manufacturing and value added processing sector and the service sector. Special sections will be devoted to the profit sharing and gain sharing plans now in effect in the Port of Vancouver, the employee owned operations which resulted from the government's privatization policy of several years ago and the plans being used in the new film making industry. Forestry In 1986, following a period of particularly bitter labour -relations in British Columbia, the Minister of Labour and Consumer Services appointed a commission to report on labour relations in the forestry industry. The Commission was asked to look into contracting and sub-contracting, flexibility in shift scheduling, and add on compensation and then to make non-binding recommendations to the government on how to improve labour relations and to avoid a repetition 59 of earlier problems. On January 19, 1988, the Commissioner delivered his report.1 In it, he endorsed so called 'add-on' compensation plans, concluding that "... :ompanies should have the right to establish add-on compensation arrangements which are in addition to, and not in lieu of, any portion of the existing compensation package or any modifications thereof which may be negotiated by the parties."2 The report noted that a well-designed plan would not only increase productivity, it would also enhance both job satisfaction and safety in the operation.3 To complete the part of the study dealing with compensation, the report looked to the American forestry industry where such plans are common. It concluded first, that plans tied exclusively to productivity did not work because they were not sensitive to market requirements. The latter was necessary in order to ensure economic survival of the operation, independent of the productivity issue. Secondly, most compensation plans in the U.S. were part of wage and benefits concessions accepted by employees. Third, successful plans were carefully designed to meet the needs of the particular iCommission of Inquiry into Contracting and Sub-contracting, flexibility of shift scheduling, and add-on compensation systems in logging and manufacturing sectors of the B.C. Forest Industry, Deport, January 19, 1988, Vancouver B.C. 2 Ibid.,56. ' 3 Ibid.,57. • operation and carefully implemented to ensure sensitivity to the overall operation. Last, it observed, that any successful compensation plan was part of a larger management move towards greater employee participation and consultation. As part of the report's recommendations, it concluded that employers (particularly in the area of logging) ought to have the right to implement variable compensation schemes but only if the plan is in addition to and not in lieu of regular compensation. Care should be taken to consult with employees and the union i -id attention should b e paid to timing: "The late stage of the business cycle when industry profits are at or near a cyclical peak probably is a poor time to introduce a plan. Employees could be discouraged if profits start falling shortly after implementation, As for unions, the report cautioned against opposition to variable compensation in principle, urging instead "a constructive attitude''^ toward such innovations. Ken t Ayenue_ Ply wood In July of 1988, Weldwood of Canada Limited announced closure of its Kent Avenue Division plywood operation.6 ^ Ibid".", 5~6~ ~~ •"-.•. • ' 5 Ibid. , 55. 6Gordon Grc,y4 Director, Industrial Relations, Weldwood of Canada Limited^- interview by author, Vancouver, 2 August 1990. Many coastal plywood operations were under severe economic pressure at that time and Weldwood's response was to dispose of that part of its business. But rather than close the division entirely, lay off employees and sell the assets, the company decided to offer the division to the Division's 450 employees. With that in mind, it presented the trade union and employees at the plant with a detailed proposal for a transfer of the business.' Included was an offer by the company to pay for the cost of a consultant to assist the employees in making their decision. Initially, the company hoped that the plan could be evaluated in a few weeks, but eventually realized that the time frame was unrealistic. Consequently, it entered an interim agreement with the employees concerning the terms and conditions of employment until a decision was made about the sale. Once the employees and the union agreed to consider the proposal, Weldwood agreed to continue operating the Kent Avenue Division, provided that it was able to do so on a break even basis. It was thus necessary to modify various aspects of the business, including employee compensation. The restructuring included a 25% reduction in salary and participation in a profit share plan that would allow the employees to share in any profits made during the 7Valerie'Casselton, "Sale to Staff for Severance Considered," Vancouver Sun, 12 July 1988, A3. 62 interim period. The company agreed to absorb any losses incurred in the interim and to pass them on to employees in the event of a sale. If no sale took place, the company agreed to take sole responsibility for any losses.8 One complicating factor in the proposed sale arose because Weldwood, as a member of Forest Industrial Relations, was bound by the master agreement between FIR and IWA that Was in the process of being re-negotiated. Although Weldwood obtained permission from FIR to bargain separately with the Kent Avenue employees, the Union was less enthusiastic and insisted that the Kent Avenue employees receive the same wages ana benefits as other employees.' bound by the master agreement. When the matter was put to a vote among the employees, the raise was rejected when the employees realized that the greater salary and benefits now would come out of their own pockets in the future if they went ahead with the purchase.9 A variety of factors encouraged the employees to go ahead with the purchase. A desire to retain their jobs was particularly important amongst the older, senior employees who felt they would have difficulty securing other employment at such a late date in their careers. For other BPatrick Durrant, "Touch Wood," The province, 2 October 1988, 51. .••••, 9Gordon Grey, interview by author, 2 August 1990. > 63 employees, eligibility in the IWA pension plan was another important factor, since a two year break in employment in the forestry industry meant a member was no longer eligible to participate.10 For others, it was simply a question of keeping a job they enjoyed. And the consultant's report was positive: the operation was financially feasible on the terms offered by Weldwood. This was concurred in by an accountant from IWA head office, who also examined the offer on behalf of the employees.n All these factors together convinced 270 of the employees to go ahead. Non-participating employees took their severance pay and left the company, while participating employees each invested anywhere from $10,000 to $16,000 in shares in the new company.12 In order to encourage share purchase and to make purchase possible by those employees who could not afforr" the maximum investment, a sliding scale of share price was devised. The initial investment would determine the an.ount the employee would receive upon disposition. For example, those employees who put in $10,000 would receive one half of the increase in value whereas thor.e who invested lOLance Rippley, President, Kent Avenue Plywood, interview by author, telephone, Vancouver, 1'?. September 1990. UGary Wong, Officer, Local 217 IWA-Canada, interview by author, telephone, Vancouver, 17 September 1990. I ^ Patrick Durrant, "Plywood Workers Cash In," The_ Province, II October 1989, 36. •,.:•.•• : $16,000 would receive ninety per cent.13 At the current time, shares are selling for $22,000, with employees entitled to eight-five per cent of the increase.14 Those who purchased the shares were eligible for a $2,000 tax rebate because the transaction qualified under the B.C. Employee Investment Act discussed elsewhere in this paper. Finally, the provincial government also assisted by guaranteeing a line of credit in the amount of $2.5 million for the new company. Today, the company operates with a traditional management structure. In order to assuage concerns of some of the banking institutions over control and operation of the company, the parties agreed to a tripartite Board of Directors, composed of three representatives from employees in the bargaining unit, three from salaried employees and three from the outside business community. The three outside members are appointed with the idea of bringing in business acumen and expertise not available in existing personnel. Both management and the union feel that this system works well because it brings another perspective "to every issue decided by the Board and employees, is 13Lance Rippley, interview by author, 14 September 1990. 14Gary Wong, interview by author, 17 September 1990. iSLance Rippley, interview by author, 14 September 1990; Gary Wong, interview by author, 17 September 1990. . ' • • v „ • * . 6 5 For its part the union is satisfied with how the sale has turned out, to this point at least. It believes that it is fulfilling an important function by being there to act on behalf of employee/owners. The Union is of the view that its presence provides extra protection for employee/owners by giving them another perspective on matters which they must decide. Kent Avenue management was pleased with the eventual sale but expressed concern over the rather long period of time which it took to make the decision to purchase. Because employees were uncertain about their future, morale problems began to develop- While all the participants believe it is too soon to judge the economic viability of the operation, they are optimistic about the future and both say that the labour relations in the plant is working to everyone's advantage. Faced with losses in its Northwest Bay Logging Division, McMillan Bloedel began to consider a number of options for the division's future.is While the company was skeptical about NW Bay's longterm viability, it believed that any solution involved more efficient use of the log supply.17 The only way to achieve this was to give the 1 6 L o m e Armstrong, interview by author, 26 September 1990. 1 7See Commission of Inquiry into Contracting and Sub-' contracting, flexibility of shift scheduling, and add-on 66 employees the information necessary to make better decisions concerning the logs and to this end MB considered an Improsnare, Scanlon gain share plan and a profit share plan. MB hired a consultant, Fred Lesieur, who worked directly with Joseph Scanlon until the latter's death and who held the Joseph N. Scanlon chair at the Massachusetts Institute of Technology for a number of years. Lesieur concluded that a gain share would be too radical for a large conservative organization like MB; but contrary to this recommendation, the company settled on the Scanlon gain share plan. The company concluded that the gain share was most advantageous because it was more sensitive to market conditions and employee effort than other plans. The plan divided any increase in the value of production between the employees and the company on a 75-25 basis.18" The bonus was paid compensation systems in logging and manufacturings^ tors" of the B.C. Forest Industry, Report, 32. lflThe bonus was calculated in this ways 1. Value of Production • Standard ratio wages: value of•production = - Allowed Wages 2. Allowed Wages - Actual Wages = Bonus Pool 3. When Allowed Wages > Actual Wages: 75% to a monthly bonus reserve. 4. When Actual Wages > Allowed Wages: 100% deduction from bonus reserve. 5. 25% of the bonus reserve paid cjuarterly . v quarterly (with an adjustment at the end of the calendar year) and could not exceed 20% of an employee's wages. Typically, the plan results in an annual payment of $4,000 to $7,000 per employee. As far as the company is concerned, the NW Bay gain share plan is a model for future variable compensation plans. This plan has been far more successful than the Improshares at Nipigan, Hudson Bay, Saskatchewan or Thunder Bay, Ontario; no part of the plan is seen by management as a failure. Anticipated production increases have materialized and employee morale is at an all time high. The current supervisor has high praise for the plan and says that the crew takes care of all day to day operational concerns, leaving him free to deal with long-term planning matters.19 MB believes that employee consultation is the key to the plan's success. Indeed, the suggestion for the plsa originated with one of the crew supervisors who actively encouraged employees to participate in every step of the process, beginning in 1983 when MB started to consider alternatives for the division. Then in 1986 when MB decided to go with the gainshare plan, the question was put to a vote by the crew. (A vote of eighty per cent in favor was Value of Production is defined in the plan as sales plus closing 'inventory minus boomstick purchases. i^Lorne Armstrong, interview by author, 26 September 1990. 68 necessary for the company to adopt the plan. In fact, ninety per cent of the employees approved it.) As part of the ongoing dialogue with employees, NW Bay has a Gainshare Committee that meets once per month to discuss issues arising from the gain share plan. It conveys information on productivity enhancement from the crew to management and takes back to the crew decisions of management. Committee membership comprises 11 hourly employees and 13 salaried employees who are elected from amongst members of their respective groups. The NW Bay plant employees arc represented by IWA-Canada which in an exception to its general policy of opposition to variable compensation conditionally supports the gain share plan.20 The union opposes all such plans where they are simply a bandaid solution to a problem related to viability and simply allow an uneconomic operation to continue. The reason for the tentative support for the NW Bay plan is that wage cuts have not been necessary and payment is a supplement to basic wages. Indeed, most plans related to productivity are met with" suspicion by the IWA: where the plan is based on individual effort, competition amongst bargaining unit members is encouraged, to the detriment of the group. And often 2ophilli.p Legg, Research Division, TWA-Canada, interview by author, telephone, Vancouver, 5 July 1990. , ' individual productivity is dependent upon factors beyond the employee's control, such as quality of materials and equipment. Similar problems arise with group plans since productivity often has little to do with group effort and more to do with other factors within management's control. The technical complexity of the forestry industry exacerbates these problems. The union believes that the NW Bay plan illustrates the latter point well. The gain share formula to determine extra value is awkward as it depends on an internal pricing system that has nothing to do with the open market. To date, it has not become a problem at NW Bay because the employees continue to receive payments but the union thinks that the formula may become an issue if payments cease under the plan. Lamford Forest Products In 1985, Sooke Forest Products, a company with a sawmill operation in Sooke and a cedar siding manufacturing plant in New Westminster, went bankrupt.21 The Toronto Dominion Bank was owed some $56 million and refused to extend anymore credit J Sooke also owed approximately $1 million in back property taxes.22 Sooke employees made an 2iPatrick Durrant, "Worker-owned mills producing new jobs," The Province, 4 December 1985,. 28. 22Kirnberley Noble, "Woodworkers 1 ose bid to make bank assume lumber firm debts," Globe and Mail, 8 April 1985, B6.* ' 70 unsuccessful application to the Labour Relations Board to have the Toronto Dominion Bank declared the successor to Sooke, in an effort to have the bank assume the previous owners' collective bargaining commitments.23 Eventually, the employees decided to purchase the corporation's assets for approximately $1 million and set forth on one of the most interesting employee ownership experiences documented in this study. At first, Lamford was the ideal employee owned operation: productivity and morale were high while employee turnover was very l o w . A n d in 1987, Lamford won the Federal Excellence in Business Award in the management/ labour c a t e g o r y - 2 5 indeed in 1988, the workers were asked to purchase additional shares.26 But all that ended in December of 1989 when both locations were temporarily shut down.27 Poor cedar markets, along with the high value of the Canadian dollar were cited by management as reasons for 23Rod Nickleburgh, "Laid-off Workers Jolted," The Province, 28 March 1985, 69. " — — — " John Faustman, "When Workers Turn Bosses," Repo_rt_ on B us_iness__Ma_ga 2.ine (March, 1988) 25Mia Stainsby, "3 Firms Award Finalists," Vjanc..ouver_Sun., 22 September 1987, Bl. 26"Forest products workers vote on 'shares or wages,' Vancouver Sun, 16 June 1989, F4. -27A1 Sheehan, "Lamford shutdowns affect 200," Vancouver Sun.•.• 2 January 1990, B4. the failure.28 Initially, the company hoped that the closures were temporary and attempted to restructure the Sooke division. But by the spring of 1990, the assets of the New Westminster plant were sold and any attempt to save the Sooke operation was seen to be fruitless. At the time of writing, fall of 1990, it is unclear whether the employees would receive severance pay in accordance with the collective agreement, or whether the employee/shareholders could recoup money invested in corporate shares.29 Critical Industries Commissioner Art Phillips played a key role in the employee takeover, assisting the employees to obtain financing.30 But perhaps the most interesting 28The difficult with the market arose in 1987 when the U.S. Eastern Seaboard market, which purchased the high-end, high quality cedar, dried up. According to Terry Smith, Secretary-Treasurer of IWA-Canada, the problems arose because of the stock market crash in late 1987 which hit the high income people who purchased the cedar. No problem arose with the low end cedar market, but without the high-priced sales, profits declined. Terry Smith, Secretary-Treasurer, IWA-Canada, interview by author, Vancouver, 4 October 1990. 2 9"Curtains down on Lamford," The Province, 11 May 1990, 59. 30Malcolm Turnbull, "Sooke millworkers are in business,." The. Province, 3 December 1985, 17. The Bank of British Columbia extended $6 million worth of credit while the Toronto Dominion made available an additional $3 million. The BC Development Corporation made two loans to the company, one for $2 million to the new owners and another $1 million on. standby. The City of New Westminster owned the mill at that location, because Sooke Forest Products failed to pay its • property taxes. The City agreed to lease the land to the new company and forgave interest on the back taxes owed, if the new company covered the arrears in accordance with the schedule set out in the agreement. •72 aspect of the financing was the $500,000 loan from the IWA Credit Union. According to Terry Smith of IWA Canada, the IWA cannot afford, as a matter of course, to get involved in all employee buyout schemes: regardless of ideological or philosophical considerations, the union could not afford to do this and would be involved in an area outside its expertise. But the unique circumstances of this operation caused the credit union to take another look at its policy and to extend credit. Since Lamford quickly repaid the loan, in the first year of operation, financial difficulties did not result from this instance of union participation; nevertheless the reluctance to make this a regular policy is not difficult to understand. Except for the fact that Lamford has shut its doors after 4 years of operation, it is difficult to identify any serious criticisr.s of it. From the workers' point of view, they were given an excellent economic opportunity to purchase valuable assets at fire sale prices and were able to continue working at good salaries for an additional three years. At one point, it was estimated that 400 jobs were saved by the plan although eventually the company employed approximately 300 employee owners.31 During the time 3iPatrick Durrant, "Plan rescues 400 jobs," The' Province, 31 January 1986, 43; "Forest Products Workers Vote on 'Shares or Wages'," VancouverJun, 16 June 1988, F4. . ...... .. f IJ Lamford was in operation, those employees who retired were able to do so at full pension and making a profit on the sale of their shares back to the company. Because the employees had a greater stake in the outcome of the operation, the desire to make things work out was greater. As a result there were fewer management problems and fewer grievances. It is also interesting to note the greater emphasis placed on safety in the new operation: as owners, the employees became sensitive to the costs of industrial accidents and the safety record at the plant improved.32 Monthly crew meetings meant that everyone was given an opportunity to keep abreast of the newest developments at the plant; the open lines of communication were the key to the operation's success. Lamford's failure originates in the economics of the operation, even though, aside from its dependence on the eastern seaboard market in the U.S., there was nothing inherently uneconomical about the operation. To begin with, the price of cedar and the level of the Canadian dollar affected all forestry operations in the province, and Lamford was no exception. The previous owners ran into difficulty because of ambitious expansion plans but employee/owners benefited from this mistake by purchasing , 3 2Torry Smith, interview by author, 4 October1990.. ' new assets for an excellent price. However, this was not enough to overcome difficulties to arise from the small line of credit and other problems characteristic of small, one product operations. Larger operations, such as McMillan Bloedel have less difficulty weathering bad economic times because of their product diversity. With a larger inventory of items, losses in one area do not have as great an impact on the corporation's overall cash flow as they would if the corporation had only one product. The only area where employee ownership may have made a difference was with bank financing. According to Terry Smith, the bank was less willing to extend a line of credit to an employee owned operations Chan it would have been if the company had been conventionally owned. YJjltP.ria.^^yLwop.d As pointed out in the previous chapter, worker cooperatives are another form of employee ownership, but one not frequently used in British Columbia. One example in the forestry industry is Victoria Plywood, set up in 1985 by the employees of Pacific Forest Products. Pacific lost $3.5 million in its last three years of operation and finally in 1984 shut its doors, putting 124 employees out of work.33 With the assistance of Critical Industries Commissioner Art 33"Workers decertify union, allow lower wages at co-op plywood mill," JlaLl, 1 May 1985, B3. Phillips, the out of work employees concluded a deal with their former employer to take over the operation. It included a lease of the land and assets, with an option to purchase in ten years. Phillips convinced BC Hydro to reduce the plant's bill by 6% and to waive the usual security deposit of $51,000 and also made arrangements for the elimination of the machinery and equipment tax for one year. The provincial government agreed to cut its school tax bill by 50% and the B.C. Development Corporation agreed to forego a $400,000 payment for one year.3* Part of the deal included employee ownership and each employee was required to purchase one share in the co-operative, for a cost of $2,500 per share.35 The IWA which had been the bargaining agent for Pacific employees opposed the buyout plan and eventually was decertified by the employees. The reason for the union opposition was that mill employees were required to take a cut in pay of $5 per hour from $13.48, the base IWA rate at that point.36 Not only did the IWA oppose the buyout, but 3'i "Plywood Co-op has Guts: Curtis," Vancouver. Sun, 14 May 1985,. CI. . • 35Rich White, Manager of Payrol1 and Personnel, Victoria Plywood, interview by author, telephone, Vancouver, 13 October 1988. 36"Don't buy co-op plywood, fed says," Vaneouver_Sun, 11 September 1985, B2. the B.C. Federation of Labour called for a boycott of the co-op's products. At one point, the union softened its demands, agreeing to an employee buyout on two conditions. First, there were to be no wage cuts and secondly the union was to have representation on the Board of Directors. The employees did not agree to the union being on the Board of Directors because of the feeling that anyone on the board ought to have equity in the company. Consequently, the union withdrew all support for the plan. This cost the union its support amongst the employees and decertification ensued. Once it was clear that the employee purchase was going to take place, the union withdrew its opposition to the decertification.37 All management-employee difficulties are handled by an employee management committee called the Social Council. Functioning as a grievance procedure, it is similar to the old plant committee that operated in the days of the IWA certification. The cooperative has no other formal employee participation mechanisms except for shareholder meetings where each owner has only one vote, regardless of the number of shares actually owned.30 This of course does not give non-owner employees a say in the operation. 3 7"Union withdraws objection,on bid to decertify Island mill," Vancouyejl__Sun, 16 April 1985, C3. 3BBr ian Mackay, PIant Manager, Victoria Plywood Cooperat ive » interview by author, telephone, Vancouver, 15 October 1990. t« Victoria Plywood is a financial success. Aside from the fact that the plant has operated at a profit for five years after Pacific Logging decided to shut down, it has paid dividends on its shares and made payments under its profit sharing plan. This, in spite of a dwindling log supply and aging equipment. The profit share scheme pays out all its profits, after payment of the dividend whose rate is set by the provincial legislation governing cooperatives, to owner employees and non-owners alike. A rate is set by the Board of Directors after profits have been determined for the year and divided into 'profit shares' for the employees. Owner shareholders receive one share per year while non-owners receive a one-fifth share.39 Casual employees do not qualify. The implications of a cooperative rather than a corporate structure are subtle, but nevertheless important from management's perspective. To being with, the co-operative permits only one vote per owner, regardless of the actual number of shares owned, making it more difficult for an outsider to succeed in a hostile take over.^o The share The cooperative operates under the Cooperative Association Act, R.S.B.C. 1979, c. 66. - . 39Rich White, Manager of Payroll and Personnel, Victoria Plywood, interview by author., telephone, Vancouver. 22 • November 1990. lORich White, interview by author, 22 November 1990. •78 value is fixed at a constant of $2500 and the shares must be sold back to the cooperative once an employee leaves. The latter deters sales and encourages stability of ownership. The plant manager points out that the mandate of a cooperative differs somewhat from that of a corporation, with the profit motive being less important in the cooperative. In the case of Victoria Plywood, one of the objectives has been to keep people working. This is particularly important because of the demographics of the operation's employees: many of them are near retirement so that new employment or retraining are not viable options. They nust keep working at Victoria Plywood. Understandably, this objective often conflicts with the operation's efficiency and productivity; there are often more employees than necessary to get a job done.''2 Another problem encountered by this employee owned operation is a problem that commonly arises in businesses with an unconventional structure, and that is bank financing. Simply put, banks are reluctant to finance any operation that strays from the conventional corporate-shareholder structure.'13 Brian Mackay, interview by author, 15 October 1990. 42Brian Mackay, interview by author, 15 October 1990. 43Both Mr. Mackay and Mr. White concur on this point. i TP"'TT'WTTTTJE1,C" . » *> U,UVU, <J U-U-O-Q ' j •79 The Plant Manager points to the difference in the interests of the older employees and the younger employees as one of the problems which Victoria Plywood is going to have to address in the future. Whereas the senior employees are interested in keeping the plant going only long enough to allow them to retire, younger employees want greater long term prospects. The inherent conflict between long term and short term goals is heightened where, as in this case, decisions with long term consequences, such as the replacement of aging equipment, must be made.^ Richmond Plywood One of the oldest employee owned corporations to be included in this study is the Richmond Plywood which has been in operation since the 1950s. Currently under threat of take over by an outside group, management was extremely reluctant to discuss many details of the operation beyond some basic information. The plant employs 500 persons, 283 of which are owners. All employees are eligible for share purchase. There are no restrictions on share sales so that non-employees may become shareholders. The price of the shares has increased from an original value of $5,000 each to a current value of $60,000, the latter figure down from an all time high several years ago when the company was very 'tiBrian Mackay, interview by author, 15 October 1990,. ' rn 7-/, ri 7f7;7TT n]lT i1 , » x • ni mu^in^smQib u, «• * ' * f •80 profitable. It is important to note that no dividends are paid on the shares so that the only financial benefit accruing directly from share ownership, per se, is the increase in share value affected upon sale or disposition.45 Indirectly, share owner/employees benefit in two ways: they receive a bonus from the company profit share system and have greater tenure of employment that non-owners. The profit share plan pays out to all employee-owners on the basis of hours worked in the year. In 1988, no bonus was paid but in the last six months of 1989 and first 3 months of 1990, the plan paid out at a rate of 35% of the owner's fixed wage.46 On at least two occasions in recent history, non-owners have been laid off, while owners continued to work, albeit at reduced hours and salaries. In 1974, large wage cuts were necessary because of sagging plywood markets. In 1982, non-owners were laid off while owners worked continued to work but at the equivalent of half time and collected unemployment insurance benefits for the other half." :' V^ '':,;.'/' 45Bob Touchet, President, Richmond Plywood, interview by author, telephone, Vancouver, 7 May 1990. 4 6 0ob Touchet, interview by author, 7 May 1990. 4 7"0wner-Workers pick one week' on, one off," Vancouver Sun, 17 July 1982, A10. ~ According to management, it is the operation's flexibility that is its strength and the reason for its continued success.IB Nevertheless, there is ongoing concern about Richmond's long term economic viability in the face of free trade and in light of the large capital investment that is necessary for the operation to keep abreast of the latest technological developments. An inflexible wage structure would make it difficult or impossible for a company as small as Richmond to compete.49 Mining The cyclical nature of the international copper market creates wild fluctuations in the demand for labour in British Columbia copper mines. Where employees work for fixed wages, high prices usually mean dramatic increases in the number of employees to cope with the temporary, but increased demand. Ultimately it also means a drastic increase in wages, which the company can absorb because of higher profits. By contrast, low prices means drastic reductions in the workforce, an drop in wages and, eventually, layoffs. As markets recover, the cycle begins again. Ironically, profit sharing or other forms of leBrian Williams, Employee Liaison, Richmond Plywood, interview by author, telephone, Vancouver, 22 November 1990. 9Bob Touchet, interview by author, 7 May 1990. • flexible compensation introduces an element of stability by removing the constraints created by fixed wages.so Bell Mine Bell Mine, near Granisle, has had a profit sharing syst em since 1985 when the Critical Industries Commission put together a rescue package for what was then a failing operation.51 The mine had been shut down for a three year-period during which mine management closely assessed its past performance to determine whether or not anything could be done to re-open a successful operation. At^that point, the mine approached government and asked for assistance. Eventually the Critical Industries Commissioner was able to put together a bail out package satisfactory to all the involved parties. It included concessions on taxes and hydro payments; a commitment by Noranda to capital expenditures and commencement of operations; and a forfeiture by the Union of the previously negotiated wage sopeter Gordon, "Profit Sharing and Gain Sharing Trends in the British Columbia Copper Mining Industry," unpublished paper, undated, University of British Columbia, Vancouver. 51 In 1982 Noranda shut down both of its operations in British Columbia, Bell and Granisle. Granisle never re-opened but Bell did in 1985, albeit with a significantly reduced operation. The company took the time from 1982-1985 to re-evaluate the operation; in 1983, it re-opened with a • reduced work force and when markets recovered in 1985, it resumed full operation. The .collective agreement with the " United Steel Workers expired in 1983 and at that point discussions were held in hopes of infusing the system with some flexibility. , gfigigS • O H M ! increase and COLA clause. Noranda also agreed to introduce a profit sharing plan which divided 10% of all future pre-tax operating profits equally amongst all employees.52 The profit sharing plan first introduced in 1985 was continued in the 1988-1991 collective agreement. In 1986 every full time employee received $716 from the profit sharing plan and in 1987, $5,886. In 1988, payment per employee was just over $10,000. The plan is called the employee Profit Participation Plan and is available to any em-loyee having worked 400 hours with Bell Mine.53 The profit share is calculated quarterly on 10% of the profits and is paid to any employee employed on the last day of the quarter.54 A Profit Sharing Committee comprising six plan 52The formula is outlined in a letter of agreement. It def ines operating profits as gross operating revenue minus operating, administration and general expenses; depreciation, amortization and provision of housing; all taxes; smelting and transportation charges. The total sum also excludes gains or losses on the disposal of assets and interest payments. Much of the information in this section of the paper was obtained from: Maurice Ethier and Arnold Laramie, "Performance Improvement at the Bell Mine," a paper presented to the Canadian Institute of Mining, Annual General Meeting, May-3, 1989. Also see: "Bell Mine Makes Aid Proposal," Vancouver Sun, 6 May 1985, B1 and Patrick Durrant, "Copper Miners Ring Up Winner," The Province, 7 March 1989, 21. ~ 53For the purpose of calculating working hours, holiday time, statutory holidays, jury duty, bereavement leave are • included. 54For employees who worked up to 400 hours per quarter, payment is as follows: Hours Worked up to 70% 1st Quarter ••• 84 employees, three of which must be bargaining unit members, assisted in the design of the plan. They are also responsible for ongoing monitoring of the plan's operation and in conjunction with the company are require to keep employees informed of new developments.55 But the company did not just rely on the concessions arranged by the Critical Industries Commissioner. During the period of reassessment, it decided that another management style was desirable and eventually committed itself to greater employee involvement and increased communications with employees. Improved productivity and employee morale have rewarded the company's efforts and from its perspective, the plan has been a success. Brenda_Mines Brenda Mines is another enterprise to receive the assistance of the Critical Industries Commissioner. The mine received a tax break and reduction in hydro rates worth nearly $7 million in 3 years.5& The interesting aspect of '400 . in each Quarter . X • 85%..' '2nd Quarter;- X 10% Profit - 250 '• ~ 90% 3rd Quarter Hours Worked up to 1600 Hours X 100% Year End X 10% Profit-Exact # of " " Full Shares - Prepayments 55Ethier and Laramie, "Performance Improvement at the Bell Mine," 11. 56Rod Nutt, "Breaks spur mine reopening," yj^puyer..Sun, 16 August 1985, Dl. Electricity rates were reduced, along with machinery and equipment taxes and property taxes. hU _ a - — • V •*•>- t^-fegfai o •85 the indirect government assistance in this case is that it was linked to low metal prices: once world prices on metals rose, the company promised to pay full tax and hydro rates. Commissioner Phillips was also instrumental in management getting an agreement with the union certified to the mine, the United Steelworkers of America, to freeze wage rates in exchange for a profit sharing plan.57 In the Brenda Mines Profit Sharing plan, an employee must work 400 hours in a year to qualify for a one quarter 'share' of the profit.58 Those working 800, 1200 and 1600 hours or more receive one half, three quarters and c full share respectively. Any employee leaving the company during the course of the year receives payment in accordance with the number of hours worked during the year.59 Payment is made after the end of the plan year. Employees;can receive their share either as a cash payment or as a contribution to a registered deferred profit sharing plan agreement.60 57"Union makes deal for mine reopening," Vancouverl.Sun> 25 May 1985, A2. • = • soBrenda Mines, "Brenda Mines Ltd. - Employee Profit Participation and Registered Deferred Profit Sharing Plans," Employee Handout. 59Beceased workers may designate a recipient for their share, or else the share is paid to their estate. 600ne of several investment options are available including a saving's fund, guaranteed investment certificate fund, equity fund, income fund or a mortgage fund. Administration fees are paid from the fund and no additional employee Although the plan paid out $5600 per employee in 1988, increased operating costs in the beginning of 1989 meant that no profit share would be paid in the first quarter. Management reported that this was followed by a drop in employee interest in published operating and financial results but not in productivity levels or employee morale. The collective agreement provides for an elected Advisory Committee comprising six members to assist management in the design of the plan. It is empowered to monitor the operation of the plan and to assist employees in understanding the plan. Although the company reserves the right to amend or terminate the plan, it must give 120 days notice and fully discuss the matter with the Advisory Committee. Manufacturing and Processing According .to the literature previewed in an earlier chapter, manufacturing is an area that was well served by the existing style labour relations. Indeed, it was the manufacturing sector that gave rise to the trade union movement in this continent. Nevertheless, the data gathered here suggests that even businesses that have done wel? under contributions are eligible. Members may withdraw all or part of their plan and the ful1 sum is payable upon the death, termination of employment, retirement of the employee or termination of the pi an. . > . 87 the traditional structure can benefit greatly from a variable compensation system. Glenayre Electronics Glenayre Electronics is a Vancouver-based company that manufactures paging terminals and other electronic equipment. Now controlled by TransCanada Terminals of Burnaby, the company has 550 employees in its Vancouver operation. One of the province's successful international competitors, the company has operations across the world and employs a total of 1500 employees. Glenayre has both a profit sharing plan and an employee ownership plan that were set up in the early 1980s.si The profit sharing plan annually divides a percentage of the corporation's net profits amongst all employees on a pro rata basis depending upon base salary. To qualify, an employee must be employed on September 1 of the year. Any employee not employed on that date is not eligible for a profit share for the twelve month period. A share option plan is available twice a year t o all employees with the company on April 1 and September 1. The'option price is based on a formula which places the share price at approximately 10% below market value. The company does not contribute to the cost of the shares, 6iColleen Hunter, Human Resources Department, Glenayre Electronics, interview by author, telephone, Vancouver, 't May 1990. ' . ' •88 although it assumes the brokerage fees. Only 50% of employees take advantage of the share scheme.62 The company president has requested middle managot-ent move away from profit sharing and employee ownership, toward management by objective. While the reasons for this move have not teen made clear, there are problems with both employee ownership and the profit share plan. Because of a general slump in the computer business, the value of company shares has dropped drastically from a high of $18 only a year ago to a current value of $3. Very few employees purchased shares v this year and many participating employees withdrew from the plan. As for the profit share, pay out this year has been very small this year, 2.75% compared to the previous three years and employee morale has suffered accordingly.63 llodatech Computer software development epitomizes the cutting edge in economic development and is an area whose needs 'are well served by variable compensation. Modatech, a Vancouver based company that develops and markets a software package designed to assist remote sales personnel, is one such 62Ms. Hunter was unable to provide an explanation for this rather low participation rate but speculated that shares listed on a public stock e x c h a n g e — G l e n a y r e is listed on the Toronto Stock Exchange — are not secure enough for most employees. 63Colleen Hunter, interview by author, telephone, 22 November 1990. , • . company.64 It was started in 1985 and is a publicly trading company with share listed on both the Vancouver Stock Exchange and NASDAQ65. In 1989, it established a stock purchase plan with a view to enhancing employee identification with the organization. The plan is seen by management as an important tool for retaining employees in an economic sector notorious for high employee: mobility and staff turnover. However, management claims that it is too early in the life of the plan to assess effectiveness. All employees are eligible for a maximum of 10,000 shares per quarter regardless of their seniority with the company and need not sell the shares when they leave. Payroll deduction is available to participating employees who must pay the full price of their shares set at 15% below market v a l u e — within three months. Approximately 25 of the company's 60 employees have taken advantage of the plan but the company is unable to describe the profile of a typical employee who purchases shares. Initial indications are that employees with more seniority tend to have a higher participation rate than newer employees. In March of 1990, ' f"»Doug Harvey, Director of Finance and Administration, Modatechi intervi ews by author, telephone, Vancouver, 11 and 18 May 1990; Modatech, Press Release, 15 December 1989 and Press Release 28 February 1990. 65NASDAQ- is an acronym for North American Securities Dealers Automated Quotation. 90 the company registered with the program under the Employee Investment Act.66 Monta 1co Montalco Cabinets is the fourth company to register under the !LmEloyej5__lQyestment Act, having registered as of March 1, 1990. All employees who have been with the company for 6 months or more are eligible in order of their seniority to participate in the plan which makes treasury shares available sale.67 It is a non-union operation that manufactures kitchen and bathroom cabinets. It employs 40 persons, 33 of which are in production. The other 7 are involved in management, sales or clerical work. There is no formal mechanism for employee participation in corporate decis ion making but apparently that is an option the company may look to in the future. The company also,has a profit sharing plan that takes 15% of the company's after tax profits and allocates it amongst all employees in proportion to their salary. The company president reported high employee satisfaction with the profit sharing plan, saying 66Province of British Columbia, Ministry of Regional and Economic Development, News Release, 5 March 1990. 67Brian Horneyer, Company President, Montalco Cabinets, . interview by author, telephone, Vancouver, 4 May 1990. The company set investment maximums geared to length of service in 5 year" increments; an employee with 6 months to 5 years experience is limited to $10,000 per year; employees'with 6-10 years experience $20,000 and so on. that the only danger was that employees come to expect the profit share. Its benefits are more immediate and tangible than those of the ownership plan: the employees receive a profit share every quarter, but the employee shareholders do not receive regular dividends. The president noted that this is a common problem in a private company. He also preferred the profit sharing plan from an administrative point of view, noting that the ownership plan involved more paper work than originally anticipated. He was also somewhat critical of the constraints placed on the plan by the Employee Investment Act. It is too soon to tell what the reaction of the employees will be to the ownership plan, said the president, but he expected a lower participation rate from younger employees.68 Finni ng_Ltd._ Finning Ltd. sells, services and finances heavy equipment in B.C., the Yukon and half of the United Kingdom. It was founded in Vancouver in 1933 as a family business and was run privately until 1969 when it was listed on the Toronto Stock Exchange. It is a large company with sale's nearing $800 million in 1988 and approximately 1600 employees. Because the business is service-based, employee attitude and performance are seen by management as the key . 68Mr. Homeyer was unsure about the impact the participation differential would have on the younger employees. . to the company's ongoing success. To this end, the company decided to create an environment where local managers were autonomous and more accountable for their operations. Management's approach also included financial rewards and other measures of good performance, such as promotions; successful branch managers received raises and promotions while successful salesmen were rewarded by a commission system. Local bonus plans were in place for mechanics performing service work. In 1981, Finning hoped to achieve 'participatory management' through the introduction of an employee ownership plan for AO management staff members. In order to protect employees against falling share prices, the ESOP used convertible preferred shares with a guaranteed par value and convertible at 15% above current share price.69 More shares were issued in 1982 to management and again in 1983, but in 1986, the plan expanded to all 5 year employees. In the first offering. 660 out of an eligible 1100 employees purchased shares; in 1989, in the second general offering, 630 out of 1010 eligible employees participated.70 "Ministry of Regional Development and Touche Ross, oloyee Equity Investment Conference, Vancouver, September 2- 1989, p. 2-7 - 2-11; address of Peter von d-sr Porten, Corpo, ate Treasurer, Finning Ltd. rounder the current plan, employees are issued class D shares that are convertible after two years to class B non-The company is very happy with the plan and sees several positive things about it, including increased employee identification with the company and its financial success. The ESOP gives employees pride in the company and the five year requirement for participation in the plan provides additional incentive to stay with the company. It is also thought to be an effective recruitment tool, despite the waiting period. The downside of the plan is minimal from the company's perspective as employee ownership does not seem to affect the organizational structure or the management style of the company. Moreover, it does not seem to have an impact on voting patterns at annual general meetings and does not materially affect wage demands of either union or non-union employees. voting shares which sell on the public stock exchange. Dividends are paid quarterly on the class D shares in an amount, after calculation of income tax liability, almost equal to interest charges charged by the bank on the sum necessary to purchase the shares in the first place so that the holding cost of the shares is virtually nil. (Finning recommends that its employees use the Toronto Dominion Bank for these loans and has an arrangement with the TD.) The conversion price is fixed at the date of issue so that an employee can sell the shares on the open market and profit from the difference between the conversion price and the current market value. Any increase in value is taxable as a capital gain. Peter von der Porten, "Practical Considerations: Finning Ltd.," paper delivered at the Employee Equity Participation Conference, September 26, 1989, 2-9 - 2-3. 7iFinning Ltd., "Series D Preferred Shares," Internal Memo, Lyle Norlander to All Series D Preferred ShareholdersMay 27, 1988. •94 From Finning's point of view, the biggest problem with an ESOP is the possibility of an economic downturn and a drop in the price of the shares, and thus causing morale problems. This was the case in 1982 when the recession of that period caused the price of Finning shares to drop on the TSE. Despite the fact that the convertible feature of the shares was designed to protect employees in just such circumstances, few employees actually sold their shares during that period. Merfin . Merfin Hygienic Products of Delta manufactures paper products and dispenses them for industrial and commercial use.72 Listed on the Toronto and Vancouver stock exchanges, the company employs approximately 95 employees all of whom are eligible for share ownership. Another of the companies now covered by the provincial Employee_l_nve^tment_Act, Merfin has had an ESOP in place since 1988. Initially, only those employees who had worked for the company for a full •7 2 Michael Paine, Manager, Personnel, Merf in Hygienic Products, interview with author, telephone, Vancouver, 4 May 1990. The company uses an 'air laid' process which uses dry rather than wet pulp in the manufacture of its products. An environmentally safer process than the traditional pulp process, it also produces stronger paper, albeit at a higher . price. Merfin Hygienic is the parent company of three divisions: Merfin Canada Tissue which manufactures the paper; Merfin Converted Products which makes paper towels and toilet-paper; and Merfin Plastics which makes the dispensers for the paper products. . year were eligible for the plan; it is now necessary to work for only 6 months. The plan takes the form of a group BRSP whereby each employee contributes money and the company matches the employee contribution by shares. (To illustrate, an employee purchasing $3750 worth of shares would receive the equivalent amount in shares from the company.) The employee can purchase shares via payroll deduction or annual lump sum contribution. The share purchased by employees can be sold at any time but the matching shares provided by the company are restricted from sale for two years. Employee participation in the plan is still relatively low; the company speculates that this is because the plan is relatively new. The company also speculates that many of the younger employees with other financial priorities such as housing and family expenses are less likely to participate than older employees near retirement. At the time of writing the company is looking at the possibility of profit sharing or gainsharing to meet the needs of the other employees. Vanderpql's Eggs A company that combines profit sharing with employee ownership is Vanderpol's Eggs Ltd. of Surrey.73 An egg 73Rick Stiksma, Comptroller, Vanderpol's Eggs, interview with author, telephone, Vancouver, 20 Apri1 1990. ••:.•:.. •96 processing operation with 85 to 90 employee/owners'i, the company was wholly owned by the Vanderpol family. In 1978, the family introduced a profit sharing plan and in 1984, the company's founder sold the operating part of the business to the employees.75 The reasons for this transfer went back to the owner's philosophical commitment to employee participation in the business combined with the realization that the business was simply too large to pass on to one of his children.76 The profit sharing pi an is available to any employee who has worked in the operation for. more than a year. At that point, an employee becomes eligible for a half s h a r e ; after two years, that amount increases to a whole share. A sum equal to 11% of the employee wages is paid annually into 7<tThe Ontario part of the operation, which has 10-30 employees on a seasonal basis, was acquired in 1984/85 by a combination of the Vanderpol family and the company. It has no employee ownership. According to Rick Stiksma, company comptroller, the Ontario legislation which provides assistance to a maximum of $300 per employee per year and available only for ESOPs is not sufficiently attractive-to be an incentive. The company has hopes of expanding ownership to the Ontario employees, but plans were not firm at the time of the interview on April 20, 1990. 'i2Assets such as the equipment were retained by the Vanderpol company and leased back to the employee who wholly owned the operations part of .the business. 76Only one of the Vanderpol children currently works in the operation. •.• ••••.•.,•.• ...•.•••• .: •97 a profit sharing account.77 Until recently, the employees could not withdraw any money from the account for 5 years although terminated employees were permitted to withdraw $2,000 per year in the first year and $5,000 annually thereafter. The rule was necessary because of the company's asset position but an improved financial position has lead it to relax the rule. In 1984 when the employees purchased 60% of shares ths company, their profit share accounts were eligible for conversion into shares. Although ownership was not a condition of employment, almost all employees took advantage of the opportunity. As of March 1, 1990, the company is an Employee Venture Capital Corporation as defined in the _Invej_tmenj^Act and has rearranged its affairs to comply with the legislation. Amongst other things, share ownership must be made available to every employee on a pro rata basis in accordance with seniority. The profit sharing plan has no formal employee participation component; rather,: management seeks employee opinion on a regular basis, although ultimate responsibility " for decision making clearly rests with management. In the opinion of the comptroller, the profit sharing component of, 77This amount is determined by a complex formula that has before tax profits as its base, adjusted for payment to shareholders and adjusted as a percentage of assets and wages. ' • .-•;•  • •, • •98 the operation would not work without a participative management style. It is interesting to note that employee ownership has no participation component, except for the usual input sought from shareholders at meetings such as the annual general meeting.78 Po int Hope Shipyard In 1985, Seaspan International (a division Of Genstar) decided to centralize all of its west coast operations in Vancouver and shut down its Vancouver Island site.79 Thirty of the one hundred employees who would be put out of work approached Seaspan with a proposal to purchase. After negotiations, they purchased the yard equipment and the lease and formed Point Hope Shipyards. Involved in ship repair and maintenance, the company is a resounding success. At the outset, the employees, in exchange for an initial investment of $5,000, hoped to provide employment for themselves and possibly others for at least 6 months of the year and to extend their employment for a short period of time until some of the more senior employees could retire. As of October 31, 1989, the company did an annual ' 7 8The comptroller noted that employee attendance at the shareholders meetings is not .very high. 79Donna Hall, Controller, Point Hope Shipyards, interview with author, telephone, Vancouver, 30 April 1990. • : • 99 sales of $6.9 million, up dramatically from the $1 million in the first year. The company now has 34 shareholders, all but one of which are employees. Share ownership in the company is not contingent upon employment but all except one of the current 34 shareholders are employees. (The non-employee owner is retired.) Any employee wishing to buy may do so after being with the company for 6 months and the existing shareholders retain the right to veto any purchase by a non-employee. Shares may not be sold for 5 years. Service Sector Aside from the shift towards jobs in 'high tech' industry, the North American economy of the future will place greater emphasis on jobs in the service sector. Thus the case studies in this part of the chapter are particularly interesting because they identify the issues that unique to a growing sector of the economy. Keen Engineering Keen Engineering is a mechanical engineering consulting company that is completely owned by 17 employees.no The firm has approximately 110 employees in its Vancouver, 80Sieglinde Rielinger, Associate and Accountant, Keen • Engineering, interview with author, telephone, Vancouver, 4 May 1990; Thomas E. Johnston,.President, Keen Engineering, address, Government of British Columbia, Ministry of Economic and Regional Development, Employee Equity Participation Conference, Vancouver, 26 September 1898. ~n 7T'n I f j f r i rrilWI/j U U U U 0 U U b 'O ' iV . •• 100 Toronto, Victoria and Edmonton offices. It began with Jim Keen who practiced engineering as a sole practitioner; but as the firm grew, additional 'partners' were added. Today there are 17 partners — 13 principals and 4 associates. There are two classes of shares, class A and class B. Class A shares, held exclusively by three of the principalsBi, are the voting shares which are bound by a shareholders' agreement and are subject to voluntary sale by those shareholders. Class B shares are non voting shares which the company agrees to buy back (at book value) from any associate who leaves the firm.02 The latter protects the shareholders and the company from outside attempts to gain control of the stock and the company. A problem foreseen by the company president is the development of an orderly transition of share ownership transfer from the older employees, who are about to retire and to the younger employees who wish to become owners. There is a natural conflict between the selling employee who wishes to wait as long as possible to sell in order to maximize the gain and the buying employee who wishes to buy as soon as possible in order to buy as cheaply as possible eiTwo of the principals have retired. Only one remains with the firm. One of the principals owns 60% of the class A shares..:.. B2The value is now over $50.00. It started at $1.00. • * ry -v s riiiif7fTrfnmi 'I'U U'U'J.U u and to maximize dividend returns. Buyout problems are exacerbated in times of economic recession, as in the early 1980s, when companies laid off employee shareholders who were entitled to receive a large, fixed amount, based on a book value of bad accounts receivable or inventory. To avoid this pitfall, the president suggests a careful valuation formula that will take into account both times of economic prosperity and slowdowns. Another problem is the expectation by many employees that they should not have to pay for their shares, since they helped to create the firm. This is due largely to the fact that the employees do not understand the economics of the operation, according to President Johnston. A « recommended solution is hiring an outsider to set up the plan. That person will be seen as more objective than existing management and wi11 be able to make proposals more palatable to the prospective owners. Finally, the company recommends that all agreements and documents be kept as simple as possible to minimize communications difficulties with the employees. A simplified summary is advised by the president. . • Isadora 's ' '; .V. Isadora's Restaurant at Granville Island is an example of emplo.yee ownership and profit sharing which has not worked as well as many other plans. Isadora's is a . '102 consumer's cooperative that was formed in 1983 in response to a need for high quality restaurant food for families visiting Granville Island. In fact, the federal government, the landlord at the Island, gives the co-op rent at a reduced rate in order to ensure the operation caters to the needs of visiting families. All of the coop members are required to volunteer at the restaurant and employees are eligible to purchase a coop share; however, none of the employees have done so. The profit share scheme also proved unsatisfactory when it failed to make any payments for a number of years and eventually was replaced by fixed wages in a collective agreement negotiated on behalf of the employees by their bargaining agent, CAIMAW.83 Ocean City Realty An unusual combination of employee ownership and entrepreneurship can be found at Ocean City Realty, a real estate company started 11 years ago in Victoria.8't The company is designed to pay out all of its profits to employees whether they are owners or not, keeping only what is necessary to maintain day to day operations and to pay an ' occasional small dividend to the shareholders. Only 17 of as'jacques Khouri, Past President, Isadora's Coop, interview with author, telephone, Vancouver, 13 March 1990. B'tBi 11 Fife, General Manager, Ocean City Realty, interview with author, telephone, Vancouver, 5 April 1990. > / •103 55 employees are owners. General manager Bill Fife maintains that employee owners are more productive and more loyal than non-owners, even when they do not receive compensation in recognition of their status as owners, as is the case in that company. Employee participation in the day; to day operations of the company is indirect: each year, the shareholders elected 5 members to the Board of Directors and they are responsible for the day to day maintenance and running of Ocean City."5 Noha wk_ _ Oi 1 Mohawk Oil is a wholly employee owned gas distribution firm. With 700 employees and 300 gas stations across Canada, the company has had several forms of variable compensation since 1962. The company founder Hugh Sutherland was personally committed to employee ownership and profit sharing as a means of enhancing employee productivity and loyalty.86 Today, over thirty years later the company has continued this commitment with both employee ownership and profit sharing. 85The company is not interested in participation in the provincial employee investment program: the shares are only $40 each and only 3,500 have been issued to date. It,says • that start up costs were low enough that the grant available does not justify the paperwork necessary for the grant. v 06Fred Gi'ngel 1, co-founder, Mohawk Oil, interview with : author, telephone, Vancouver, 12 May 1990. • -The profit sharing plan has a long, complex history, beginning in 1962 when Mohawk was created. At that time, 20% of the corporation's pre-tax profits were distributed amongst all employees at the discretion of the Board of Directors. This proved to be too time consuming and unwieldy so the Board of Directors agreed to a distribution formula based on wages, years of service and job responsibility level. An employee had to be employed as of September 30 of that year in order to receive the payment that was made once a year, just before Christmas. In 1979, the profit sharing plan changed. The sum for distribution was reduced from 20% to 15% of the . corporation's profits, with the other 5% being diverted into an ESOP. It was a matching plan whereby employees who purchased a share received an additional share from the share pool purchased with the sum formerly distributed in the profit sharing program. Employees were limited to 5% of their salary.87 The other 15% was distributed amongst the employees in accordance with the company's economic performance. sVThe excess in the pool was retained from year to year and there was never a year in which demand from the employees exceeded the number of shares in the pool so that the plan never had to face the issue of apportionment amongst . participating employees. .•• • 1 0 5 In 1986, the plan began to run into difficulties because the shares purchased by employees were retractable. T h a t is t o say, t h e employees could, at their discretion, require the company to buy back the shares at a value calculated on the basis of the company's financial statement. Specifically, the problems arose because the high .interest rates of the day were encouraging employees to cash in their shares in order to pay off personal debts and mortgages. T h i s put the company in a two way squeeze: it was faced with high interest rates in its operations and had t o purchase shares at a time when it was leapt able to. The strain underscored the need for another form of ESOP. The details of the new plan are included here because they illustrate how sophisticated and detailed a plan can become after it has been in place for some time.88 The operation of the plan is managed by the Share Allocation Committ ee of the Board of Directors and is administered by the Corporate Secretary's office. An employee must be with the company for two years before participating in the plan and must sell the shares upon leaving the company.89 The 3 8The Mohawk plan cannot qualify for the Employee Investment Act. tax credit since the shares distributed are noVtreasury shares. 09In addition to the common shares owned by the employees, ' there are three classes of shares that can be purchased by employees. Class 'A' Preference shares are those which belonged to persons at the time of the 1986 reorganization and reflect the value of the company at that time. When a •106 sha re committee d e t e r m i n e s t h e number of common s h a r e s t h a t can be owned by any i n d i v i d u a l , in acco rdance with t h a t i n d i v i d u a l ' s e f f o r t and c o n t r i b u t i o n t o Mohawk. Any employee s h a r e s a l e must go t h r o u g h t h e committee which w i l l a r r a n g e f o r p u r c h a s e i n accordance w i t h p r i o r i t i e s e s t a b l i s h e d in t h e p l a n . For example, s a l e of s h a r e s from t h e e s t a t e of deceased employees t a k e s p r ecedence over s h a r e p u r c h a s e s from employees who have l e f t t h e company. Those s a l e s , in t u r n , t a k e p r i o r i t y over s h a r e r e q u e s t s from p e r s o n s who c o n t i n u e t o work f o r Mohawk. Sha res no t so ld w i t h i n 18 months of t h e s a l e s r e q u e s t a r e p u r c h a s e d by t h e company.90 The 15% go ing t o t h e p r o f i t s h a r i n g p l a n i s d i s t r i b u t e d by a fo rmula t h a t f a v o r s lower l e v e l amployoes . Management f e l t t h a t the ESOP f a v o r e d upper management, who has t h e a d d i t i o n a l income n e c e s s a r y f o r t h e long term inves tmen t and pe r son l e aves Mohawk, any C la s s 'A' s h a r e s au toma t l c i " i ' l 7 conve r t t o C l a s s *R' p r e f e r e n c e s h a r e s which have a s h o r t e r redempt ion p e r i o d and r e c e i v e s p r e f e r e n t i a l d i v i d e n d s F i n a l l y , t h e r e a r e c l a s s B P r e f e r e n c e s h a r e s which a re owned by M r . - S u t h e r l a n d , Mohawk's f o u n d e r . See Pamphlet t o Employees, May 1990, "The Mohawk Share Ownership P l a n . " 90The Mohawk p l a n p e r m i t s f a m i l y members t o ho ld s h a r e s in t h e ESOP, t h u s a l l o w i n g f o r t a x p l a n n i n g by t h e employees; however, f a m i l y members cannot buy a d d i t i o n a l s h a r e s , bu t ' r a t h e r on ly t h o s e s h a r e s which f a l l into t h e e n t i t l e m e n t by t h e employee. Ownership by f a m i l y members i s a l s o c o n t i n g e n t upon c o n t i n u i n g s t a t u s as an employee f o r t h e i n d i v i d u a l so t h a t upon t e r m i n a t i o n of employment, a l l s h a r e s h e l d by t h e f a m i l y must be sold back t o t h e company. •107 that it would be;fair to have the profit sharing plan favor lower level employees who required the additional income on a shorter term basis-Company co-founder Fred Gingell has a sophisticated appreciation for the advantages and disadvantages of each type of plan and advocates both, but for different reasons. Employee ownership requires a different frame of mind. Management must adjust i t s a t t i t u d e . t o deal w i t h employees who are also shareholders: a more open management style is required, as is greater consultation with the employees. The questions and concerns of an employee shareholder must be dealt with on a day to day basis. This contrasts with the approach necessary to deal with workers who are non-owneis since they are less concerned with various aspects of the business. There is a very low participation rate amongst Mohawk employees in the share ownership plan. It is Mr. Gingell's belief that the biggest difficulty with the employee ownership scheme is the level of employee understanding of plan details. This is true despite continuing management efforts to simplify plan literature and distribute it amongst employees in order to improve understanding (and consequently participation rates). Management believes that-" Mohawk employees do not appreciate the excellent financial opportunity presented by the ownership plan but fears' of an action in negligent misrepresentation by a disgruntled employee precludes a company campaign to explain the financial advantages of the plan.91 Employee fear about uncertainty in the gasoline marketing industry also works against high participation rates: the rather volatile nature of the business supports>a perception of financial risk to ownership in the company. Nevertheless, Mohawk management believes that company success is contingent upon ecployee interest and participation and to that end implemented the "Bright Ideas" campaign. Although the campaign does not link profit sharing and employee ownership with individual production, individual initiative is rewarded with cash and merchandise. Any employee with a suggestion for is encouraged to send it to a committee who processes the ideas and forwards them to President Hugh Sutherland. One final note is in order from the comments of Fred Gingell. Although an unfaltering supporter of variable compensation, Mr. Gingel1 is not blind to the problems which can arise. His advice is to persevere and if the first plan runs into difficulties — h i g h l y probable in his v i e w — 9iThe company provides interest free loans for employees wishing to purchase shares in the plan. Repayment must take place over 36 months and can be arranged by way of payrol1 deduction...''"'.'':.'''. . .' . •..:•.••••••• • • •' • changes should be made until it suits the needs of the particular business. The Port of Vancouver In 1987, in response to yet another labour dispute that disrupted the Port of Vancouver, the federal government appointed an Industrial Inquiry Commission to fix the terms and conditions of the collective agreement between the International Longshoremen and Warehousemen's Union-Canadian Area (ILWU) and the British Columbia Maritime Employers' Association (BCMEA). Under Commissioner Dalton Larson, all the terms and conditions of the collective agreement were fixed except one, the infamous 'Container Clause' that was sent to a separate commission, under Joseph Weiler, the Port of Vancouver Container Traffic Commission under the ^ilitejianc^j)J_Po r ts_0pe^at„Lqnc t,_ J.986 , S. C, 1986 , c. 4 6. The container clause required longshoremen to be employed for stuffing and destuffing certain cargo containers in the Vancouver harbour before the cargo could be shipped to its ultimate destination. This contrasted with the practice in other American and Canadian west coast ports where containers could be transferred without stuffing and destuffing.92 The practical effect of the clause was to 92This included Export Containers stuffed within the Vancouver Local Area or Prince Rupert Port area by other than the'beneficial owners of'the cargo or with cargo from more than one shipper. Similar restrictions applied-to Import Containers— those shipped by anyone other than the preserve work for the Longshoremen; but it was also thought to impede the growth of container traffic in Vancouver. It was the task of the Weiler commission to assess the impact of the clause and to make appropriate recommendations. Reduced to its essentials, the report's recommendations included work guarantees in the form of a payment to compensate for work lost in the Port due to removal of the container clause and a gain sharing plan that distributed the benefits of the growth in port business anticipated from removal of the clause. Article 26.051 of the collective agreement incorporated the report's recommendations on an employment guarantee and provided payments to individual longshoremen who lost work when the container clause was removed. The BCMEA was required to make payment into the Guarantee Trust Fund administered by the Union for a five year period ending December 31, 1992. A gainshare portion of the compensation was outlined in ;Article 26.052 and was a payment made in recognition of the increase in volume of container traffic created by the removal of the container handling provision. The Commission predicted a 48,OGVI : increase in the number of containers passing through the port in the year immediately after the clause was removed . and recommended that the longshoremen benefit from this . beneficial owner of the cargo, or one containing cargo for more than one consignee.: • • increase. The BCMEA was required to pay an assessment or $10 per container handled in the port, in excess of a base rate established in the report. Seventy-five percent of that sum went into the Container Gainshare Fund, that was administered by the union for payment to 'active' members of the union. The other twenty-five per cent went into the Waterfront Industry Productivity Fund for 'productivity-related' projects approved by a Joint Productivity Committee comprising both Union and management representatives. More than three years after the report, the parties have yet to implement any of its recommendations. Funds from the gainshare and profit share are being held in a trust fund, while the local union attempts to resolve the problem of the fund's distribution. The union claims that the report placed it in an untenable position by requiring it to decide which of its members benefit and which do not, saying that for internal political reasons it would have preferred the report to spell out entitlement.93 (In fact, an earlier draft of the report included specific payout 93 Interview, ILWU, Barry Campbel1, Treasure, Local 500, Denny Allan, President, Local 500 and Gordon Westrand, First Vice-President, Canadian Area, interview, Vancouver, 1 June 1990. Any time a union must, distribute money amongst its ' membership, obvious difficulties arise. For example, some members 'are bound to think that they have been under-paid while other members have been over paid. • instructions, but representatives,of the union asked that it be left to the discretion of union leadership. 9'i) The union was particularly unhappy about "the sums '•..•••.•;••' available for distribution amongst its membership. While there was almost $2 million dollars available for distribution, it was intended to compensate some 2300 members who believed: that they lost income when the clause was abolished. The union says that the report created other political problems for it. It claims that empty warehouses, formerly used to store goods after being unloaded from the containers but before going to their ultimate destination, are a constant reminder to the membership of the container clause and of their loss of income. According to the union, its membership lost $1.3 million in 1987 and $1.8 in 1988, amounts not offset by either the gain share or the profit share. The Union argues that these figures vindicate the position it consistently took on the container clause, that the clause was not the sole cause of the Port's problems. It felt that other factors such as the poor railway network linking Vancouver to the markets of Eastern Canada and the relatively small size of the Canadian market were more ' 9iJoseph M. P. Weiler, Professor of Law and Commissioner in the container clause inquiry, interview with author, . Vancouver, June 19, 1990. •113 important to the port's decline than the clause.S3 The union claims that it is not opposed to the concept of a gain share or profit share, but claims it could not support the form of those programs implemented by the report. On October 3, 1990, the Union held a vote of its membership to determine what to do with the money: The alternatives included payment into the pension fund or individual RRSP's or distribution to individual members or to individual locals. The results were released on November 6, 1990 and favoured paying the money into an RRSP.9 6 The money will bo held in trust and paid out for the benefit of all retirees, at a date to be chosen by the trustees.97 The employer took the position that distribution of the funds is an internal trade union matter and as long as it did not affect the Port's productivity—and apparently it has not to d a t e — it is not concerned. From the employer's 9 5By contrast to the poor railway link in Canada, stands the sophisticated network in the United States which makes shipping the goods inland more efficient and less expensive. For example, American railway cars are now equipped to handle not two but four containers. They are 'double stacked"' unlike their Canadian counterparts that can simply handle two containers on a car. 9&Alex Tunner, BC Research, interview with author, Vancouver, 3 October 3 1990; Nicholas Glass, legal counsel to II,WU, interview with author, telephone, Vancouver, 4 October 1990. Mr. Glass represents ILWU in an attack of the legislation under which the Larson report was ordered. 9"Barry Campbell, interview with author, Vancouver, 26 . November i990. • ' ry^^S:'/^ •114 perspective other aspects of the report were more problematic. In the first place, the $10.00 per container payable to the fund penalizes the users of the Port. It also places additional paper work responsibility on the employers in the Port who are required to gather the statistics necessary to calculate 1iabi1ity for payment of the fee. More importantly, the report and has created done nothing to improve labour relations climate in the Port. As for the productivity committee recommended in the report, it has not been successful. The employer sees no point in participating in the committee since the parties have a variety of productivity measures that have been implemented outside the terms recommended in the report. This is also the view of the union. Alex Tunner of BC Research who has worked with both the BCMEA and the ILWU on matters relating to the container clause believes that the profit share and gain share plan did not work because the predicted increase in traffic did not materialize. Tunner was amongst those who believed that the container clause worked against the Port's development and growth and that removal of it would benefit all the parties because traffic through the port would increase. Even though subsequent events have not borne out Tunner's • (and the Report's) predictions, Tunner nevertheless believes that the situation would be even worse if the container clause had remained in the collective agreement. Loss of container traffic occurred because of competition from American ports that are linked to a sophisticated railway system that can take goods to the Eastern United States and then up to markets in Canada.90 The other reason that the plans failed, in Tunner's estimation, was the sour labour relations climate. Any plan that depended on the good will of the p a r t i e s — this is clearly true of these plans — w a s doomed to failure from the outset. Neither the ILWU or BCMEA believe that recommendations of the Weiler report had any lasting impact on labour relations in the port. They hold this belief even though the 1990 negotiations ended in a collective agreement without third party or government intervention for the first time. In the late 1970s, the parties were able to agree on two, one year agreements but they did so within the guidelines of the Anti-Inflation Program imposed-by the federal government.99 Of course, it was probably the spectre of third party intervention after the 1987 experience rather than the specifics of the report that 98The system is "dedicated". That is to say, the number of cars to a train is fixed. After the cars necessary to pay for the train are full , the remaining space can be sold at greatly reduced prices. This siphons off cargo from Vancouver. . • 9 9 Bob Wilds, President, British Columbia Maritime Employers' Association, interview with author, Vancouver, 24 May-1990. encouraged voluntary settlement of the most recent v collective agreement. Nevertheless, the report was followed by the first voluntarily agreed to collective agreement. If there is any lesson to be learned from the experience of BCMEA and ILWU, it is that profit share and gain share plans •— indeed any type of variable compensation — cannot be successful without the co-operation or at least acquiescence of the affected parties.; What occurred here was quite the opposite: a variable compensation program was imposed by a third party on parties whose relationship was fraught with a history of;animosity. Finally, this case study emphasizes the importance of a plan that is seen to produce positive economic results for the parties since the only real complaint that the union seems to have with the plan is that it has not compensated its members for what they lost.; The fact that the whole port might have been even more negatively affected if the clause remained in ; place is lost on the union in this case. Privatized Emplpyee Companies No study of flexible compensation schemes in British Columbia would be complete without a discussion of the employee owned operations that resulted the provincial government's privatization program announced in October of , 1987. Privatization occurred in several areas including road building and maintenance, and was seen as a way to deliver services more inexpensively and effectively.100 While it is not the purpose of this study to address the policy considerations that lead to the privatization policy, a brief discussion is helpful to an analysis of these employee owned operations. It was the intention of the •• government not just to reduce the size of government and the costs to the taxpayer, but also to enhance regional development and employee ownership.101 The policy objective of employee ownership lead the government to extend preferential treatment to groups of employees proposing to purchase a particular operation. Not only were employee owned proposals given first consideration, but they had a 5% preference where the contract went to public tender. Finally, the government agreed to extend employee benefits packages for 6 months following the change of ownership; One note about the case studies in this section is in order. Given the similarity of most of the privatized companies, not much time will be devoted to repetitive details. An attempt will be made to highlight only significant or interesting aspects of each. 100Government of British Columbia, Government-Restructuring: Statement of ._Principles (Victoria: Queen's Printer", 1988) " io'Nancy K. Grendal, "Privatization and Highways Maintenance," Unpublished paper, 24 April 1990, University of British Columbia. The information in that paper was obtained from an interview with Peter Clark, Assistant Deputy Minister, Ministry of Government Management Services.-. II oa d Main to nan cf The government divided the province into 28 road building and maintenance areas each of which had separate crews and equipment. All these operations were privatized in 1987 and each maintenance and building area became a highways contract area. Twenty-two separate companies bid on and received the contracts for road maintenance.102 of these all but four remained certified to the British Columbia Government Employees Union either through successorship„:;or voluntary recognition and 8 are employee owned. Only the employee owned operations are relevant to i02Area_#l^_Saanich _-_Victoria Highways Maintenance; Area #2 - Nana 1105rZP.rt._Alberni__Island Highway Service #2; Area ft?.. ~„.P^^tenay _r__Is_!^ and' Highway Service #3; : Area #4 -Gibsons -^Edco_ Construction Company; Area #5 - North Y.anjLquy_er.......Jdcp_ Construction Company; Area #6 - New Westminster - Mainland_Construction; Area #7 - Chi 11 iwack -Gateway Highway Maintenance Ltd.; Area #8 - Penticton-Kelowna -.- Midvalley- Highways•'Maintenance-'.In^.V'.-Are'a'^Q -Grand Forks - Ross land - Bel Maintenance; Area #10 - Nelson, ?r„e§ton, New_D Area #11 - Cranbrook - Fernie Trendline Industries Ltd.; Area #12 - Revelstoke Go l d e n . S a l m o n Arm - Vernon -VSA Highways Maintenance; • Area ^Merritt./- ^ m'con; Area #15 - Kamloops - Interior RoadArea.;,#.16_' -"Too" Mile House-Lillooet - Interior Road; Area #17""~- WiT1iams Lake - Cariboo Road Services; Area #18 - Quesnel - Northland Road Services Ltd. (Quesnel); Area#19 ^Prince" George - Yellowhead (Prince George) Ltd. ; Area #20 - McBride"""- Yel lowhead (Robson) Ltd. ; : Area.;.#21 ..- Dawson Creek — Peace Country Maintenance Ltd. ; Area #22 - Ft. St. John - Northland Road Services Ltd.; Area #23.-.Burns .-Lake-- Lakes District Management; Area #25 -Rmithers - Nechako Northcoast Construction Services (Venture 141187); Area #26 - Terrace — North Coast ;Road Maintenance; Area.#27_-.PrinceRupert- 0'Brien; Area #28 - Pease Lake -Norroadco 'Enterprises. • • ~ • v^':••'•>)• the task undertaken here. Thej' will not be discussed at length however; fairly typical of the employee owned road construction firms is Nechako North Coast Construction Services which is the focus of this section of the chapter. Nechako covers Area 25, around Smithers and offers road and bridge maintenance, engineering services, equipment repair services and vehicle inspection services. It is an employee owned operation with 61 shareholder-employees and 80 to 100 seasonal employees. It started out in 1987 as an employee cooperative but subsequently became a corporation in 1988. The British Columbia Government Employees Union was voluntarily rocognized in November of 1988 but aLout a month later was decertified.103 share ownership is not a condition of employment but several offerings have been made to all employees and now there are 6,000 outstanding 1 shares.104 The company is philosophically committed to employee ownership for all of its full time staff; however it does not require employees to sell back their shares at the end of their employment.105 According to the President I03john Ryan, President, Nechako Northcoast Construction Services, interview with author, telephone, Vancouver, 4 April 1990: apparently the employees felt that the BCGEU was not behind their bid to operate the company. i04Employees are not required to sell their shares back to the company at the end of the employment period. Shares are not available to seasonal employees. losThe Company sold its latest offering at $150.00 per share but, sharer sold for $100.00 each at the outset. 120 • • • —r of the operation, who is elected by the Board of Directors, the impact of the ownership on employees is negligible, although the employees seem keen to receive more shares. There is an employee committee, comprising 5 elected employees, to deal with employee concerns; however, it does not become involved in production or management suggestions. The latter are usually left to the individual teams —- there are eighteen of them working on roads, machinery, bridge construction and warehousing. Crown Publications The privatization plans also included the sale of the Queen's Printer operation to a group of six employees. Financially successful and stable, the operation has not been without its problems. Most notable was the termination of two employee owners on December 30, 1988. One of the employees Bob Maher had eighteen years seniority with the provincial government; eventually his dismissal was the subject of a settlement which included the right for him to retain his shares in the operation. Although Maher was prevented from speaking out by the settlement agreement, his wife has commented publicly:1 "I didn't know that if you were a share-holder and an employee you could be fired by your own members. That, was something that wasn't brought up (when privatization was first discussed)".106 The other dismissed employee continues to litigate his dismissal. 107 Trans Sign Shop The Trans Sign Shop is another of the companies result from the government's privatization policy. Fifteen employees of the previous governmental organization, the Langford Sign ,Shop, purchased the shop's assets to form a company which now manufactures al1 road signs for the provincial government as well as displays and decals for private industry and municipalities. At the time of privatization, fifteen employees each purchased 150 class A voting shares. As every employee is not required to be a shareholder and every employee who leaves the company is not required to sell the shares back to the company, there has been a change in the share ownership and employee composition so that today only 10 of the fifteen employees are also shareholders. Although the company has first call on shares for sale, it has not exercised this right to date. The reason for this is two fold, .s'irst, since no problems have arisen from ownership by non-employees, there is little incentive to incur the expense of a purchase. Second, there 106"'Our 1ives have changed so much. We couldn't believe this could happen,'" The - Provincial'..-.September-j -. 1989-,' 1. 1 0 " Interview, Peter Burton, Legal Counsel, British Columbia Government Employees' union, i'nterv jew with author, Burnaby, 6 April 1990. is little market for shares since current employees who are not shareholders have not yet insisted on a share purchase.100 It is the transition from the public sector to the private sector that has caused this company its only source of concern.109 in the context of this operation, all of the shareholders were employees in a branch of a large government department and therefore were unfamiliar with the demands made on a private corporation. This was especially true of management from the public sector which did not adapt well to the private sector. Finally, it is interesting to note the composition of the Board of Director. Its members are selected from among the 15 employees. At one time the Board selected the General Manager from among its numbersr but this lead to a confusion about the appropriate role of each. The solution was to bring in an external candidate to fill the position of General Manager.no loocal Lee, Manager, Trans Sign Shop, interview with author, telephone, Vancouver, 13 July 1990. i09Cal Lee, interview with author, 13 July 1990. 11o Cal Lea, interview with author, 13 July 1990. •123 Pacific Regeneration Inc. Pacific Regeneration is another company that resulted from the government's privatization policy.m Formerly the part of the government to grow seedlings for reforestation programs by the provincial government and private companies, it continues that function in the private sector along with forestry consulting and horticultural production and services.112 Doing a business of $12million annually, the operation currently employs about 60 permanent employees and 40 casuaT employees. 113 Eighty-five employees from the old operation hold shares in the new venture. Share ownership is not a condition of employment (although it is encouraged). Indeed, since shareholders are not required to sell their shares back to the company when they leave the compan3''s employ, there are few shares available for purchase by incoming employees. There are no transfer limitations on share so that an employee is free to set,I inThe operation comprises two corporate entities: the first is Pacific Regeneration Technologies Inc., the day to day operating company, avid Pacific Regeneration Employees' Holding Company, the holding company for the assets. Charles Johnson, President, Pacific Regeneration Technologies Inc., interview with author, telephone, Vancouver, 24 July 1990. ii2This includes flower and boston fern production, alc®g with a variety of micropropagaticn techniques. H 3 A total -of 100-145 different' individuals work in the . ; company eachyear, "^ V. ","•' • ..-,0.-1 V1:' them t o non-employees . However, t h e company has t h e f i r s t o p t i o n t o buy , i n t h e s h a r e h o l d e r s ' ag reement . Day t o day o p e r a t i n g r e s p o n s i b i l i t y r e s t s wi th t h e e x e c u t i v e committee which r e p o r t s t o t h e Board oi D i r e c t o r s A p p a r e n t l y SOme d i f f i c u l t i e s have a r i s e n w i t h employee-s h a r e h o l d e r i n t e r f e r e n c e in t h e d a i l y o p e r a t i n g d e c i s i o n s . In more s p e c i f i c t e r m s , d i s p u t e - have a r i s e n due t o t h e d e c i s i o n t o r e i n v e s t c a p i t a l i n t o t h e company r a t h e r t h a n pay d i v i d e n d s . The s h o r t term d e s i r e of s h a r e h o l d e r s t o maximize p r o f i t s has c l a s h e d w i t h t h e judgment of management c o n c e r n i n g t h e long term need f o r r e i n v e s t m e n t of c a p i t a l . The company a l s o r e l i e s on a p r o f i t s h a r i n g program t o encourage i n d i v i d u a l c o n t r i b u t i o n t o t h e o p e r a t i o n . The P l a n , which i s not p r o h i b i t e d by t h e c o l l e c t i v e agreement , d e d i c a t e s up t o 20% of t h e c o r p o r a t e p r o f i t s t o t h i s program, f o r d i s t r i b u t i o n amongst employees a t a l l l e v e l s of the c o r p o r a t i o n . The p l a n i s unusua l in t h a t i t i s c o m p l e t e l y d i s c r e t i o n a r y . E m p l o y e e s d o n o t ^ ^ ^ whether t h e y w i l l o r w i l l no t q u a l i f y f o r p r o f i t sha r e . p a y m e n t T h e Board of D i r e c t o r s , on t h e recommendation of t h e e x e c u t i v e g roup , f i x e s t h e amount of money a v a i l a b l e f o r d i s t r i b u t i o n i n t h i s way and t h e p r o p o r t i o n a v a i l a b l e t o manager . The manager of each s e c t i o n , in t u r n , d i s t r i b u t e s t h e sum among employees . Each manager i s a b l e t o d i s t r i b u t e t h e money as he o r she s e e s f i t . C h a r l e s ' Johnson, president of t h e company, acknowledges the difficulties which arise where discretion plays a key factor in the distribution of compensation among employees, but claims that the benefits that result from the recognition of individual initiative outweigh the difficulties. He believes that employees support this method of distribution as well, since there have been no complaints from individual employees or their bargaining agent, the BCGEU. If there is any advice to be passed on by Pacific Regeneration to other companies about employe ownership it concerns control over the day to day operations and employee understanding of financial matters and financial statements. First of all, the president, contrary to our understanding of successful Plans, maintains that it is critical for management to retain control over day to day operations and decision-making since employee/shareholders do not necessarily make decisions in the long term best interests of the company. It is also important for management to explain the financial details of the operations to employees, and to ensure that employees are able to comprehend the financial consequences of their decisions. Fiim__Haking • • • The film making industry is an example of flexible employee-compensation that creates jobs in a developing •126 sector of the economy. Often, a film cannot be made if everyone is paid their ordinary wage rate; it is thus necessary for a promoter or producer to secure wage concessions from the bargaining agent in order to stay within budget restrictions.^ F o r the employees bargaining unit members, it often means they do not work at all unless they are prepared to reduce or at least restructure their compensation package. In other words, a wage concession may mean ;;he difference between employment and unemployment. Rather than simply cutting back on wage rates, the employees will take production points, or the rights to a share in the film's profits in place of a percentage of their regular salary. In theory such a plan gives employees the best of both worlds: they have a job and if the film makes a profit, they receive a share. In fact, this does not happen: practically there are enforcement difficulties so that few employees ever receive payment above their reduced salary.ll5 iMDon_Rimsden7PrMident Local 891, Motion Picture Studio Production Technicians (IATSE), interview with author, -Burnaby, B.C., 18 May 1990. +thS ? b ? f n c e industrial and economic tools such as a right to strike or picket, two types of difficulties arise. Ihe first arise in any type of transaction with a t ^ P S i 0 n S°,l!1-t \ L i S ° £I u e s t i o n °f Properly securing the debt m relation to other financial obligations of the • corporation. The seccnd type of difficulty arises in transactions with foreign producers. Because of the peculiar nature of the debt obligation, the court order cannot be enrorced in a foreign jurisdiction and if •127 The structure of these concessions in some of the IATSE collective agreements is interesting. In the making of the film "Kootenai Brown" for example 11 1/2% of salary that would normally go toward fringe benefits was exchanged for 6 Producer's points.Hi As profits are recouped by the producers, the appropriate percentage is to be paid to an organization called the Joint Council, which includes the British Columbia Directors' Guild, Teamsters Local 155, Association of Canadian Television and Radio Artists 1 (ACTRA), IATSE Local 669 and IATSE Local 891. In turn this organization distributes the correct sum to the employees. The 1atter responsibi1ity is also problematic: since payout can theoretically take place in perpetuity, detailed books must be kept and bargaining unit member addresses must be kept up to date. Shares owing to deceased members or those enforcement was possible, it is often difficuitor" " impossible to track town the profits in the maze of corporate layers that typifies transactions in this industry. With Canadian producers, or foreign producers who wish to return to this jurisdiction, the possibility of future wage concessions often is enough to induce compliance with past agreements, iiftA Producer's Point is a percentage of the distribution rights that normally belongs to the producer. A film's distribution rights can be categorized as follows: Canadian, American and World-Wide. Within each of those categories there are subcategories Including theatre rights,' airline rights, home video rights and pay television rights It is the profits from these rights that are referred to as' 'points'. Among point holders, there are two tiers of payback, with these concessions normally falling into tbe second tier. , " " •128 who cannot be located pose obvious difficulties for the fund's administrators. A rival organization to IATSE is ACFC, the Association of Canadian Film Craftspeople. Established in Toronto in 1978, it represents members from technical categories necessary for film and TV production such as make-up, camera and props to name a few. Promotional literature sent from the B.C. Regional Office emphasizes a flexible approach to contract negotiation: "We provide financial savings to producers, based on a straightforward contract which is highly flexible, has no seniority or night premium and a shooting week of any five out of seven days."H7 Part of the flexibility is derived from the group's willingness to participate in deferred compensation plans where employee/members agree to take a cut in pay at the time of production in exchange for a percentage of the film's profits. It is the union's intention to encourage growth in the indigenous Canadian film industry in this way by sharing the risk of production with Canadian producers. While several films have been made using the deferred compensation plan, to date, no ACFC member has ever received payment from the deferred compensation scheme. While the Union does not intend to alter its practice, it is exploring the possibility of an EVCC under the British Columbia 117ACFC, "ACFC is Your Guarantee of Excellence". Employee Investment Act which would provide its members with a tax credit of 20% of the value of the compensation deferral.118 ACFC's efforts in this area are part of a nation-wide agreement called the Canadian Production Agreement (CPA). The agreement specifically states that it is agreed to by the parties "with the object of supporting and encouraging the production of fully Canadian Feature films in a climate where insufficient private funding is available to make them properly."119 other signatories include ACTRA (Alliance of Canadian Cinema, Television and Radio Artists), CAMERA (the Canadian Association of Motion Pictures and Electronic Recording Artists) and the DGC (Directors' Guild of Canada). The agreement provides producers with a deferral of 20-40% of a film's budget. Employee members of the various participating organizations forgo varying sums of compensation: for example, writers will delay payment of advance money and half the normal script fee while ACFC, CAMERA and non-director DGC cast members defer 20% of their ii°Brenda Collins, Business Agent, ACFC, British Columbia Regional Office, interview with author, telephone, Vancouver, 29 March 1990. ii9Memorandum of Agreement between the Alliance of Canadian Cinema, Television and Radio Artists, Association of Canadian Film Craftspeople, Directors Guild of Canada (Ontario District Council) and the Canadian Association of Motion Picture and Electronic Recording Artists, Article 1. usual fee. Any producer who expects his or her employees to defer their wages is expected to do likewise: the agreement limits total remuneration to the producer and requires deferral of 50%. The production company is limited in what it can charge for overhead costs.120 ; Each agreement with a producer is negotiated and controlled by a committee comprising one representative from each union or guild. Terms are subject to the unanimous agreement of the parties, although the terms of the CPA are paramount and will override any contrary term in an individual agreement. Attempts are made in the CPA to protect members' rights to deferred compensation by., for example, requiring a producer to incorporate spare companies for each feature film. This is done "for the purpose of simplifying and segregating the production accounting."121 Nor is a producer permitted to "cross collateralize the costs and revenues of any feature film produced hereunder with any other motion picture production or project."122 Other terms of the agreement fix the formula for distribution of profits among participating employee members 120CPA," Artie 1 e T l T 121CPA, Article 7. 122CPA, Article 7. . ' , • '.''31 and attempt to protect them where the film has exceeded the budget in the agreement.i23 The transitory nature of the film industry exaggerates the difficulties inherent in deferred compensation plans which generally are difficult to administer because of the time lag between earnings and payout. Often, a film continues to make money years after it was made. Thus anyone administering the profit share plan must keep accurate records on the status and whereabout of employees entitled to payment. Additional problems arise because sales outside the jurisdiction of Canadian courts are not enforceable; thus payment from foreign earnings is strictly voluntary. While Canadian producers who want to take advantage of the CPA in the future may voluntarily agree to contribute from foreign earnings, there is ro such inducement for foreign producers who do not intend to work in Canada again. Summary The cases studied here do not provide a statistically reliable cross section of variable compensation plans in British Columbia; nevertheless they provide valuable insight into the problems and issues that can attend the development 123The agreement refers to a 'Verifiable Budget' which is ' the budget proposal that must be submitted to the committee by the producer when the request for deferred compensation is made. Article 10 stipulates specific items that can be .included in the budget. • 132 of these plans. They demonstrate the problems that have arisen for small businesses with simple plans and relatively uncomplicated operations, such as Ocean City Realty, and for larger operations with a sophisticated plan and intricate producti on problems, such as McMillan Bloedel in its Northwest Bay Logging Division. While it is difficult to set out any hard and fast rules on the basis of such data, certain observations and comments are possible. The forestry industry has an interesting cross section of plans whose lessons can be transferred to other sectors of the economy. Northwest Bay Logging is a 'textbook' variable compensation plan. Not only does it significantly enhance the salary of participating employees, it has lead management to report both monetary and non-monetary benefits. Logs are being used more efficiently and supervisory personnel say they have more time to devote to strategic and long term considerations since those on the shop floor take a more active interest in the operation. While IWA-Canada points to legitimate concerns about the complexity of the gain share formula and the fact that it is not linked to outside economic factors, nevertheless, the plan must be considered amongst the most successful included-here. The key to success seems to be commitment and ongoing, participation and involvement of the employees. Lamford is an example of how well employee ownership can work, even where the company has to shut its doors after only four years. For the period of operation, employee owners were able to continue working, at almost full compensation. This was particularly important for older workers who needed only a few more years to retire with full pension benefits. Ultimately, it was outside economic factors rather than anything inherent in employee ownership that was at the root of Lamford's demise. The experience of the employees at Point Hope Shipyards reminds us that the economics of an operation at the outset are not always definitive: what appears to be a relatively short-lived operation at t h e beginning may provide unexpected long term benefits. The often conflicting interests of senior and junior employees are also highlighted by the Lamford experience. The short-lived success war, much more important to the senior employees than the younger ones. This tension also arose in Victoria Plywood where older employees want to maximize their profits rather than re-invest in the operation; this contrasted with the desires of younger employees, who with their own long term interests in mind, prefer to use the profits to improve the business for the -long term.. Finally, Merfin Hygienic Products noted that participation in their share plan was more difficult 'for . ' r .6 1- • S -134 younger employers who had greater personal obligations than older employees. To date, the company did not find a way to reconcile the interests of these two groups. Victoria Plywood, the only employee-owned cooperative studies here Isadora's is a consumers' cooperative — demonstrates the basic similarities in corporate and cooperative structures, except as far as voting rights are concerned and the fact that it is much more difficult for an outside to take over a cooperative than an ordinary corporation. That aside, Victoria did not see a particular advantage or disadvantage in the cooperative structure. Kent Avenue, along with Vanderpol' s Eggs, is an excellent illustration of orderly transition from a conventional corporate structure to employee ownership. In the case of Kent Avenue, employees took advantage of an offer initiated by management and undertook, with the assistance of their union, feasibility studies before they proceeded with the purchase. Kent Avenue provides the only example of an agreement between employees and the company to cover operation in the transition period. Vanderpol's Eggs ' shows how employee ownership can be used to the advantage of all parties where the company's founder wishes to take a less active role in the business but does not wish to sel1 . it to outsiders. -..•••••• 135 None of the businesses reported inordinate difficulty with the mechanics of any particular program, with the possible exception of Mohawk which had difficulties w i t h earlier plans that left too much in the discretion of management. These problems were addressed in subsequent versions of the plans and demonstrate that management should not be surprised or discouraged if a plan is not immediately successful. Other companies warned about the importance of share valuation and of problems which develop down the road when the price of shares drop. Where Glenayre employees rejected share ownership in rough economic times, Finning employees continued to participate. At the present time, Glenayre is contemplating a return to the more traditional structure of 'management by objective' whereas Finning continues t o see employee ownership and participation as critical components of their management approach. The role that variable compensation can play in marginal operations is demonstrated by Richmond Plywood, the mining operations included earlier and, most clearly in the film industry. Whether or not it is generally desirable to support such operations through employee concessions is really a question to be determined in accordance with the peculiar circumstances of each case. But the plans referred to above..are instances where the business has been able to continue ana employees have been able to make a living wage. '136 Unions in the film industry experience unique enforcement problems. This is not just because of the transitory nature of the work. More often, it is because of the profits are earned outside the jurisdiction of the Canadian courts. Unions with hiring hall systems need not stay away on the strength of IATSE's and ACFC's experience. These are unique to the film industry and should not be taken as indicative of enforcement possibilities. The variable compensation plans which resulted from federal government intervention in the Port of Vancouver 1987 labour dispute shows that any kind of variable compensation plan cannot be imposed by a third party. It is more appropriately the product of cooperation between the parties. A mediator may be able to work out an agreement between the parties that includes a flexible w a g e — t h e Critical Industries Commissioner was often able to include a profit share plan as a component of his bailout p a c k a g e s — but it is not a feasible alternative in a climate of labour relations hostility such as exists after a prolonged strike. Finally, it is not within the scope of this study to see how well t h e government's privatization programme has worked. Rather, it focuses on the employee ownership aspect of the larger schemes as one of the government's objectives ; was the encouragement of employee ownership. With the exception of the problem to have arisen in the dismissal of the Crown Printing employee/owners none of the employee-owned operations have run into particular difficulties. While some of them report problems in making the transition from public to private sector, they continue to provide important services to the public and to operate successfully. '138 CHAPTER 5 - SUMMARY AND CONCLUSIONS From the literature reviewed at the outset, it is clear that economic development in North America will be possible only when industry here is equipped to handle the challenges posed by the new economic order. This must be preceded by changes to the industrial and economic structure that will enable industry to compete in the global marketplace. Industry must get away from long production runs of standardized goods, which can now be more cheaply produced in developing economies, toward more sophisticated products dependent upon advanced technology. Such development requires not just a shift away from the current industrial structure but also constant change and adaptation in order to compete in the worldwide market. Any business that is restrained by artificial work rules or a rigid price and cost structure will be less able to compete than those who retain the freedom and flexibility to adapt their organization in a constantly changing environment. A variable compensation system is just one part of this new competitive order. What, then are the elements of a successful variable compensation plan? While the success of a plan is often a combination of unique circumstances, some general observations and conclusions are possible. '139 Management must identify its business objectives and tailor the plan accordingly, but not without consultation with employees or where applicable their bargaining agent. If the case studies here tell us anything, it is that the plan has hoth management and employee support and that it provides for ongoing consultation with employees. A mechanism to educate and advise employees about the details of the plan and the needs of the organization is also essential- Management will have to change its day to day approach, away from control toward more participation. This may mean having to deal with new demands from employees. For example, they may require access to accounting records and product ion information and may ask for employee or trade union representation on the Board of Directors or other managing committee. Where an ESOP or share ownership is the answer, careful evaluation 0f shares, by an outside evaluator is critical. The downside must also be considered: what happens to employee morale when the plan no longer pays them? Where profit share or gain share is selected, the formula must" measure the appropriate indicia of production and must fairly compensate employees for their efforts. Because each program has distinct results, care must be taken to select • that most, appropriate for management, goals and the enterprise in question. As for employees contemplating ownership or another form of variable compensation, there are several things to consider. Most obviously, this includes items such as economic viability, availability of financing and security of markets. Employees involved in variable compensation plans must face the possibility that they will not get paid when the company is not doing wel1. This will be particularly stressful for those employees with family obligations and indeed may be the drawback that leads an employee to work elsewhere. Personal factors are also important. For long term employees near retirement, ownership in the place of work is a different proposition than it is for younger employees. For the employee whose retirement is imminent, the long term economic prospects are less important than they are to an employee who is early in his or her career. Security of income is more important to an employee with personal obligations and typically the bulk of such obligations fall on younger employees with young families. They will also have less equity to invest than an older employee. Finally, those employees who do not have"a bargaining agent or who have a bargaining agent opposed to employee ownership, outside advisers are critical to identify potential problems or to properly evaluate the assets. Some unionized employees may have to consider '141 decertification where the union actively opposes the ownership plans, contrary to the wishes of their membership. Trade unions must also adapt to the new economic climate. Failure to do so means that they will not be able to function in the workplace of the future and will eventually be supplanted by other mechanisms to protect employee interests. Any measure to increase workplace flexibility should be high on the list of any union hoping to make the transition from the old economy to the new. Employers who must work around inflexible workplace structures, unable to cope with a new economic order, will be forced out of business or will support (if not actively encourage) decertification attempts by their employees. Those employers not yet certified can be expected to take extraordinary measures to avoid unionization of their workplace. The new economic order may call on trade unions to rethink their collective bargaining strategies and adherence to the single wage principle. If variable compensation is the only way to make a business economically viable or there are other reasons to maintain the enterprise, the unions may have to reexamine the blanket policies of opposition. As for bargaining strategies, umbrella bargaining will not work unless it makes provision for. local conditions. Where employees are owners, the distinction between management and : 142 employee is blurred so that confrontational bargaining tactics may no longer be appropriate. Even the question of employee dismissal will require examination in a workplace operated by employee/owners. Finally, the union will have to address the divergent interests of junior and senior employees in the bargaining unit. What is in the best interest of one is not necessarily in the best interests of the other and any union representing the entire unit will have to strike a balance. This is not to say that unions should embrace variable compensation without question or reservation. Opposition to such measures is not without foundation particularly when bargaining unit members are asked to give up wages and benefits in exchange for either ownership or some type of incentive pay, or face layoff. Where the compensation proposal simply extends the life of an otherwise uneconomic business and there are no non-economic reasons to support continued operation, variable compensation is probably an ill-advised move. In such circumstances, opposition is not only understandable, it is probably the only responsible position for the union to take. Moreover, care must be taken by unions looking south of the border for lessons on flexible compensation. Because of differences in the legal, framework., the outcome would not necessarily be the same in both jurisdictions. (For example, in the United States, an employer is under a duty to bargain over reorganization measures that are introduced during the currency of a collective agreement. No such obligation exists in Canada.) Examples abound of unscrupulous employers eager to take advantage of employees who agree to a salary package that includes a variable component. Thus union scepticism is easily understood. But only a union that is aware of such dangers can build into the plan safeguards that are necessary to protect employees in the unit. As for government, any policies aimed at the creation of a flexible workplace must be sensitive to the importance of a system that is carefully designed to meet the needs of that particular enterprise. Thus, it would be counter-productive for legislation to impose specific requirements. The legislation must balance the interests of management and workers and at the same time provide broad leeway for the creative measures necessary to keep pace with changing competition and technology. Programs intended to encourage variable compensation should, at most, specify minimum conditions, such as reporting requirements for deferred profit sharing plans, but it must not artificially restrict the range of alternatives available to make the business . more efficient and competitive. As for measures to encourage employee participation or control over the enterprise, education is probably the best route arid in this regard, the B.C. program has done well. Insisting on employee participation together with employee ownership creates a climate that virtually assures the failure of the flexible wage scheme. Many of the plans included in Chapter 4 experienced problems with financing through conventional sources. Thus, any government serious about employee ownership and other forms of variable compensation must ensure that financing is available. The education and training of employees who are participating in variable compensation plans, either out of choice or by necessity, should be another government priority. This is particularly important where the employees are not represented by a bargaining agent since they are most easily targeted by ignorant or unfair employers. Moreover, employee ownership has repercussions for labour law that should be examined by government. For example, a bargaining unit comprising owners with an active role in management challenges our current understanding of the proper composition of the bargaining unit. Dismissal of an owner entitled to dividends from the operation involves compensation issues that do not arise in an ordinary dismissal case. 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