Social legislation and social activity

by American Academy of Political and Social Science

As an outline for a plan for the proposed adjustment in a concern already established, the proposition is that a binding agreement shall be entered into, which shall provide for the payment of the regular standard of cash wages to all employees of the concern, including the officials and management—and shall likewise name a definite amount which shall be determined to be a just and fair annual return to capital for its simple use; not, however, exceeding say 60 per cent of the average established net earnings; that the agreed amount shall be paid annually (in quarterly or half-yearly instalments) as a dividend upon the common stock of the corporation cumulatively; that it shall be especially understood that the company by a two-thirds vote of its common stockholders may issue for needed additional capital preferred stock; that the prior right to subscribe to such preferred stock shall be pro-rated one-half of the issue to the holders of common stock, and the other one-half to the holders of the debenture books (hereinafter particularly set forth) in proportion to the par value of the respective holdings; that wages shall be a first claim upon the assets, and that the dividends to capital stock shall have the first claim upon the net earnings, and that they shall be cumulative at a rate fixed by agreement; that after the payment of such dividends as a first charge upon the net profits of the business, 20 per cent of the net profits then remaining shall be set aside in a contingent fund (to be hereafter specifically referred to) and that the balance of the annual net profits still remaining shall be held in the business—but, one-half thereof for the benefit of the stockholders and the other one-half for the employees (under certain restrictions and agreements to be explained presently).

It will be readily seen that the above treatment of the annual net profits would continue the accumulation in the business of the surplus earnings in excess of the regular cash dividends, and so increase, as now, the security of the original investment and (as hereinafter shown) in no way diminish or endanger the present power of the stockholders to control the management of the concern.

To accomplish this, it is proposed that after the regular cash dividends have been paid to capital and the said percentage set aside for the contingent fund, annual stock dividends shall be declared covering the amount of the surplus earnings which are to be held in the business; that the certificates issued therefor shall be in the nature of deferred stock debentures which shall have no voting power and shall be subordinate in every respect to the common (and preferred) stock of the concern, both as to dividends and principal, so that said deferred stock debentures shall not be entitled to any dividend or interest whatsoever except when earned during the then current year, and not until after the dividends upon any preferred stock shall have been paid or set aside, nor until the said agreed sum (equal to 60 per centum of the established average net earnings) shall have been paid out, or set aside for the dividends upon the common stock and said contribution made to the contingent fund; that the said deferred stock debentures shall receive dividends at a rate not exceeding 6 per cent per annum when earned in the then current year, and in no sense shall said dividends be cumulative; that in the event of liquidation or dissolution, the common (and preferred) stock shall be paid in full before any payment shall be made upon the said deferred stock debentures, but said deferred stock debentures shall then receive all of the assets remaining after the payment in full of the preferred and common stock and of all outstanding indebtedness; and that the said deferred stock debentures shall always be subordinate to the general creditors of the company.[^[3]]

These deferred stock debentures shall all be issued to a trustee—one-half thereof to be held in trust for the benefit of the common stockholders, and the other one-half shall be considered as extra wages and shall be held by said trustee for the benefit of the employees. Cash dividends on all deferred stock debentures, when declared, shall be paid to said trustee, who shall disburse the same—one-half thereof to the holders of the common stock pro rata, and the other one-half to the employees in proportion to the respective amounts standing to their credit on their debenture books (hereinafter described).

That is to say, for illustration, that if the capital of the concern is $1,000,000 and the net earnings for the past several years have averaged $200,000 per annum,—60 per cent of such earnings, or $120,000, would be the amount agreed upon as the annual cash dividend to capital represented by the common stock,—that 20 per cent of the balance of such earnings, or say $16,000, would be the amount to be paid into the contingent fund, and that at the end of the first year of the operation of the plan the balance, or sum of say $64,000, would be held in the business, but that deferred stock debentures to cover said amount would be issued to the trustee—$32,000 to be held for the use of the stockholders, and $32,000 as extra wages to be held for the employees. At the end of the second year after the payment of the dividends to common stock and the percentage to contingent fund, a dividend would then be declared upon $64,000 of deferred stock debentures, and for the balance of the net profits still remaining another issue of deferred stock debentures would be made to said trustee; and so on from year to year.

The effect of the above arrangement being that after the payment of all cash dividends to common (and preferred) stock, and the setting aside of the said percentage to the contingent fund, the surplus earnings then remaining—representing the surplus assets of the company—would be capitalized in the form of deferred stock debentures and held in trust for the joint interests of the original owners (or their assigns) and the employees—it being especially provided that should the company at any time or times prefer to pay the amount of surplus earnings in cash directly to the stockholders and the holders of the debenture books instead of issuing the deferred stock debentures therefor, it shall have the right and option of so doing.

Each year the amount of the deferred stock debentures to be issued to the trustee as wages shall be calculated as above outlined, and the percentage thereof in which each individual employee is interested shall be determined by the proportion that his wages for the year shall bear to the whole salary list for that period. This amount then shall be set down in his debenture book, and upon this sum he will be entitled to receive through the trustee (when earned) dividends not exceeding 6 per cent per annum, non-cumulatively and subject to certain limitations set forth in and made a part of his debenture book as hereinafter particularly set forth. The fees of the trustee for the above and all other services to be charged to the general expense account of the concern. The said trustee shall be entitled to full statements of the condition of the company at any time, and at all times shall have access to the general books of the concern.

A debenture book shall be issued to each employee, and shall contain a full statement of the conditions upon which the same is issued, and shall be signed by each of the respective holders thereof in evidence of his understanding thereof and agreement thereto. Each debenture book shall be numbered, and the age, nationality, sex, etc., of the employee shall be stated therein. It shall provide among other things:

(a) That no employee shall be entitled to participate in these extra wages until he shall have been for one year in the continuous employ of the company.

(b) That the debenture book may be redeemed by the company at its option, at any time upon the payment of the total principal sum or sums therein set forth.