Socialism: work through the 1/N problem, with team bonuses and a fair dismissal process

Co-Authored-By: Claude Opus 5.5 <[email protected]> Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx
2026-09-24 16:33:57 -06:00
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+---
+title: Does Sharing the Profit Mean Less Effort?
+section: The Co-op
+order: 21
+summary: In a big co-op, your extra effort barely moves your own profit share, so the model leans on what the evidence points to (small teams, open books, team bonuses the members design, trust) and sets a fair, fast process for the rare member who won't do the work, with protections so it can't be turned on the wrong people.
+---
+
+# Does Sharing the Profit Mean Less Effort?
+
+Here's the oldest objection to shared ownership. In a co-op of 1,000 members, if you work hard enough to add $1,000 to the profit, your own share goes up by about a dollar, less after the reserve. Everyone else's goes up by a dollar too, including anyone who didn't bother. So why work harder? Economists call it the free-rider problem, or the 1/N problem: with N members, you get 1/N of what you add.
+
+The founding plan's answer is culture and structure: co-ops hold members to their share of the work, and groups of co-ops keep each unit small enough that people notice. This page checks that against the evidence and turns it into rules.
+
+## What the evidence says
+
+**Workers can tell who isn't pulling their weight, and many act on it.** A large study surveyed workers at over 300 worksites in 14 companies with group incentive pay, like profit sharing or employee stock, and added questions to a national survey. These were conventional companies, not co-ops. Most workers said they could tell when a co-worker was shirking. Many said they would talk to that person or report it, and many said they had. Acting on it was more common where workers had a real stake in the results, in smaller workplaces, and where relations with management were good. Workplaces where more workers acted also reported that co-workers worked harder and the workplace worked better ([Freeman, Kruse and Blasi, 2008](https://www.nber.org/papers/w14227)). That's a link, not proof of cause: better-run workplaces may simply produce both.
+
+Three details matter for this model:
+
+- **Group incentives went with other things:** teams, training, varied work, light supervision and decent base pay. On their own, they did less.
+- **Size mattered, and so did trust.** The link was strongest in the smallest workplaces and weaker in the largest. But it held in larger companies where workers trusted management. The authors' reading: workers act to raise output only when they're confident they'll share in the gains.
+- **A small stake can backfire.** Where the profit-sharing bonus was small, eligible workers were *less* likely than others to act against a shirker. The authors think a shared bonus makes people fear co-workers will resent them for speaking up, and a small bonus isn't worth that. In a co-op of 1,000, everyone's slice of a single person's effort is small.
+
+**Ownership doesn't seem to hurt performance.** A review of 102 studies covering nearly 57,000 firms found employee ownership had a positive but very small link with firm performance (a correlation of 0.04), with no clear difference by firm size ([O'Boyle, Patel and Gonzalez-Mulé, 2016](https://doi.org/10.1111/1748-8583.12115), as summarized by [LEP](https://www.economicpossibility.org/sources/employee-ownership-and-firm-performance-a-meta-analysis)). That covers employee ownership in general, not co-ops specifically. In France, worker co-ops were as productive as conventional firms or more so ([Fakhfakh, Pérotin and Gago, 2012](https://ideas.repec.org/a/sae/ilrrev/v65y2012i4p847-879.html)), though that's co-ops that survived, under French law.
+
+**What the evidence can't settle.** None of it is an experiment, none of it studied co-ops of thousands of members governed one member, one vote, and there's no direct evidence on the dismissal process below. So these rules are a starting point, and the pilot measures whether they work.
+
+## Required, and up to each co-op
+
+Governance is up to each co-op ([Worker Ownership](worker-ownership.md)). So this page separates two things:
+
+- **Required** in every locked co-op's charter: the protections in the dismissal process, protections for disability, pregnancy and leave, the rules on bonuses, and the reporting.
+- **Standard bylaws,** which a co-op can change by vote: how teams are organized, how often the books are shared, and who hears a dismissal first.
+
+## Small teams, open books
+
+People notice what their co-workers do in teams, not in firms of thousands. The standard bylaws organize work in teams small enough that everyone knows what everyone else does, and give each team its own numbers: what it produced, what it cost, how much work had to be redone.
+
+Where a line of business gets big enough to be its own firm, it can become one, as Mondragon's co-ops did ([When Growing Means Sharing](growth.md)).
+
+The standard bylaws share results with every member every quarter, or every month once a co-op has more than 50 workers, and offer training in reading them. The [federation](federation.md) supplies templates and training, so small co-ops don't have to build their own.
+
+## Team bonuses the members design
+
+The profit share is split equally, and that doesn't change. But pay can include bonuses ([Who Sets the Pay](pay.md)), and a co-op can pay team bonuses tied to results the team can see and affect. The study found that the bigger the gain-sharing bonus, the more workers acted against shirking.
+
+The required rules keep bonuses from becoming a way to reward friends or push people too hard:
+
+- **Members approve the formula before the year starts,** in writing. Managers apply it. They don't pick who gets what.
+- **A team's bonus is split among its members by hours worked,** not by a manager's choice.
+- **The total is capped** at a share of profit set in the bylaws, and it's reported in the co-op's pay-gap figures by gender and race.
+- **Measure quality and safety, not just speed:** work that had to be redone, waste, injuries. Customer ratings can't be used unless they're checked every year for bias by race, gender, age and disability, because customers can rate some workers lower for the same work.
+- **Measured per hour, with protected leave left out.** A teammate's parental leave, medical leave or accommodated schedule can't lower the team's numbers.
+- **How work and costs are split between teams is published,** and a team can challenge its numbers.
+
+Bonuses still stay within the approved pay bands and count toward the pay ratio. Bonuses that push pay above the going rate give the reserve its share ([Investing for the Long Run](the-long-run.md)).
+
+Managers need a reason to deal with problems too. The board can tie part of managers' pay, within their bands, to how their units do, and the board, not the teams they manage, reviews them.
+
+## When a member won't do the work
+
+Holding members to their share of the work has to mean something specific. Otherwise it means nothing, or it means removing whoever a majority dislikes. So every co-op's charter includes this process.
+
+**Help first.** Before any warning about performance, the co-op checks for a cause it has to accommodate, like a disability, pregnancy or caregiving leave, and offers a reasonable change. Performance is judged against the accommodated schedule. Then comes a written plan to improve, with training or a move to other work if that fits. These protections apply however small the co-op is, even below the size where federal discrimination law starts.
+
+**Then a fair, fast decision.**
+
+- **Written charges and the evidence,** at least 10 days before the hearing.
+- **A hearing** before a panel of members drawn by lot, not including the person's own team, or, in a co-op of fewer than 15 members, before all the members except the person and whoever raised the complaint. The person can bring a co-worker or union representative.
+- **Just cause, proved by the co-op.** The co-op has to show it's more likely than not.
+- **A written decision within 30 days** of the charges.
+- **An outside arbitrator on request,** from a list the federation keeps, on appeal. If the dismissal is overturned, the person gets their job back with back pay.
+- **Serious misconduct,** like theft or violence, allows suspension with pay while the hearing happens.
+
+Co-ops that hire managers can let them dismiss members directly. The member can still take it to the hearing and the arbitrator, and gets their job back with back pay if it's overturned.
+
+**Protections that can't be waived.**
+
+- **No retaliation.** If a member is dismissed within 12 months of organizing, filing a complaint, reporting a safety problem, running for the board or leading opposition in a vote, the co-op has to prove the dismissal had nothing to do with it.
+- **Quitting under pressure counts.** A member who quits within 60 days after a transfer, a cut in hours or pay, or being left out of a bonus can ask for a hearing, and the quit is treated as a dismissal. That's the same test [When People Don't Stay Long](high-turnover.md#no-pushing-people-out-before-theyd-join) uses for workers on probation.
+- **Probation isn't a loophole.** Workers on probation get a shorter version of the same hearing. Dismissing them for performance still counts in the test against pushing people out before they'd join. Only the narrow reasons listed there, like a client's safety, are excluded.
+- **The savings are safe.** A dismissed member's [capital account](capital-accounts.md) is fixed on the day they leave, they get a share of that year's profit for the months they worked, and it's paid on the normal schedule. Nothing can be taken out of it without a court or arbitrator's ruling.
+
+**Published.** Every year the co-op reports warnings, hearings and dismissals by gender, race, age and disability, along with the results of an anonymous survey on workload and bullying.
+
+## Where the share is small anyway
+
+In low-margin co-ops, like home care, a full profit share is worth a couple of thousand dollars a year, on top of the pay, schedules and say in the work that members get. There, the study's warning applies: a small shared stake may not motivate anyone. So those co-ops can't count on the profit share to do the work. Pay, schedules, training and a real say in how the work is done matter more.
+
+## Measuring it
+
+The pilot publishes value added per hour worked (what a firm's work adds, after the cost of materials and services it buys, before wages and profit are split), compared with matched conventional firms ([The Pilot, in Numbers](pilot-spec.md#what-gets-measured)). It follows each co-op over time as it grows, in size bands set in advance, and accounts for how much equipment each firm uses per hour. Spin-offs are counted with their parent, and co-ops that close stay in the results. Injuries and overtime are published alongside, so output bought with worn-out workers doesn't count as success.
+
+If co-ops fall behind as they grow, that's evidence the 1/N problem is real, and it gets reported that way.
+
+## What this doesn't solve
+
+- **Big co-ops are still harder.** People hold each other to account best in small places. Teams and spin-offs help. A co-op of 10,000 will still feel more distant than one of 30.
+- **Everyday pressure doesn't reach a hearing.** Co-workers who hold each other to account can also pick on people who are different. The protections, the published figures and the anonymous survey make that visible. They can't stop all of it.
+- **The process takes time.** A month from charges to decision is fast for a fair process and slow for a small business with a problem. That's the trade.
+- **Team bonuses can pit teams against each other.** Members choose what to reward, and some will choose badly.
+- **The evidence is thin.** The best study asks workers what they'd do and what they've done, in conventional firms. The pilot is the first real test of these rules in co-ops.
@@ -38,6 +38,8 @@ A member near retirement comes out ahead either way. A member with twenty years

 **Co-ops are steadier, and slower to hire.** A study of Italian firms from 1982 to 1994, in the market economy with the most worker co-ops, found co-ops paid about 14% less on average. Their pay moved more with good and bad times, and their employment moved less, in both directions. When business picked up, co-ops added fewer workers than conventional firms. The co-ops in that data were larger on average than conventional firms, not smaller, though that comparison doesn't account for which industries they're in ([Pencavel, Pistaferri and Schivardi, 2006](https://docs.iza.org/dp2188.pdf)). A study of every co-op and conventional firm in Uruguay's social security records from 1996 to 2005 found the same pattern: co-op pay responds more to shocks, and employment less ([Burdín and Dean, 2009](https://doi.org/10.1016/j.jce.2009.08.001), as summarized by [Pencavel, 2012](https://docs.iza.org/dp6932.pdf)).

+In France, a comparison across many industries found worker co-ops grew as fast as conventional firms or faster ([Fakhfakh, Pérotin and Gago, 2012](https://ideas.repec.org/a/sae/ilrrev/v65y2012i4p847-879.html)).
+
 Ward's starkest prediction, that co-ops would *cut* jobs when prices rise, doesn't show up. What shows up is slower hiring and steadier jobs. The steadiness that protects members in bad years is the same thing that makes them slow to hire in good ones.

 One caution: co-ops in Italy and Uruguay can hire non-members. Co-ops under this model mostly can't (below). So that evidence probably understates the problem here.
@@ -13,7 +13,7 @@ summary: A working model for building an economy where the people who do the wor

 This model doesn't buy, seize or convert anyone's company. Instead it builds new worker-owned companies alongside existing ones, then lets customers and workers choose between them.

- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally. Salaries still exist, and hard jobs still pay more. Part of each year's profit builds up in a personal account that's paid out when you leave, and part goes into a permanent reserve that keeps the business investing. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. [Worker Ownership](worker-ownership.md), [When People Don't Stay Long](high-turnover.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [Protecting Members' Savings](savings-guarantee.md) and [Investing for the Long Run](the-long-run.md)
+- **Workers own their company.** Every member gets one vote. A share of the profits grows with tenure until long-time members split them equally. Salaries still exist, and hard jobs still pay more. Part of each year's profit builds up in a personal account that's paid out when you leave, and part goes into a permanent reserve that keeps the business investing. An insurance pool the co-ops pay for protects workers' last paychecks and part of their savings if the co-op fails. A fair, fast process deals with members who won't do the work, with protections so it can't be turned on the wrong people. Membership comes automatically after a short probation, so co-ops in high-turnover work like home care don't end up run by the few who stay. Equal shares give members a reason to turn down growth into lower-paying work, so co-ops can grow by starting new co-ops they invest in instead. [Worker Ownership](worker-ownership.md), [Does Sharing the Profit Mean Less Effort?](free-riding.md), [When People Don't Stay Long](high-turnover.md), [When Growing Means Sharing](growth.md), [Member Capital Accounts](capital-accounts.md), [Protecting Members' Savings](savings-guarantee.md) and [Investing for the Long Run](the-long-run.md)
 - **A small public bank lends to worker co-ops.** It charges market rates, so it only succeeds if co-ops can really compete. Its whole job is to be willing to lend to a kind of company other banks won't. Spain, Italy and the US have all tried versions of this, and the pilot is built around what went right and wrong. [The Bank](the-bank.md) and [Has This Been Tried?](precedents.md)
 - **Owners who want to sell to their workers can.** The bank lends for these sales on a separate track, with its own $100 million and its own test. Only healthy firms qualify, there's no new tax break, the price is capped at an independent appraisal, the seller shares the risk, and the whole workforce votes. [When an Owner Wants to Sell to the Workers](buyouts.md)
 - **Co-ops funded this way stay co-ops forever.** They can't be sold to conventional owners, and members can't vote to cash out what earlier members built. An independent lock-holder can veto any attempt, including selling the business off piece by piece. [The Lock](the-lock.md)
@@ -25,7 +25,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.

 8. **Who decides which sectors are "essential"?** *(Partly answered.)* Subsidy authority is price-setting power over a large chunk of the labor market, and every low-margin industry will suddenly discover it is Essential. [Who Decides What's Essential](essential-work.md) takes the choice away from people. A fixed formula decides: work qualifies only if public programs already pay for most of it and it pays badly. The money goes to workers by the hour, measured from records like Medicaid's visit logs, and states whose rates fall behind inflation lose federal Medicaid money in step. Still open: work mostly paid for by families, possibly including much child care, doesn't qualify; employers and owners may still capture some of the money; and it plausibly costs tens of billions of dollars a year.

-9. **The 1/N problem.** *(Mostly answered.)* Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them.
+9. **The 1/N problem.** *(Mostly answered.)* Peer monitoring works at 30 people; at 10,000 your extra effort raises the pool by a rounding error. The answer is culture and structure: co-ops really do push out free riders, and the federation model keeps units small enough for monitoring to bite while pooling risk above them. [Does Sharing the Profit Mean Less Effort?](free-riding.md) turns that into rules: small teams with their own numbers, team bonuses whose formula members set in advance, and a fair, fast dismissal process with protections against retaliation and discrimination. Still open: the evidence comes from conventional firms with profit sharing, not co-ops, and a small shared stake may even make people less willing to speak up; the pilot tracks value added per hour as co-ops grow to find out.

 10. **The pilot's own weak points.** [The pilot](pilot-spec.md) puts the burden of proof on the co-ops, which means roughly a 1-in-10 chance of shutting down a pilot that was actually working. It tests individual co-ops, not the [federation](federation.md) support network Mondragon relied on. Its lotteries test help after the loan and, since the pre-launch lottery was added, help before it ([Help Before the First Loan](before-launch.md)), but only among groups that come forward, not outreach to workers who never think of starting a co-op. Founders now put in a small stake they can pay in unpaid work, but founders who can't afford months of unpaid work still face a barrier. Its comparison group (small businesses with government-backed loans) is biased in directions that partly cancel out, by amounts nobody knows. And market-rate lending based on collateral may mostly reach founders who already have some wealth. Approval rates by race, gender and wealth are published so that shows up, but publishing a gap doesn't close it.

@@ -115,7 +115,7 @@ All of this is written down and filed in a public study registry before the firs

 A useful yardstick: among the SBA's mature loan groups from 1992 to 2004, loans making up about 6% to 10% of the money lent eventually defaulted, and about 37% of the defaulted amount was later recovered ([GAO-20-618](https://www.gao.gov/products/gao-20-618)). A lender charging market rates with losses in that range covers them from interest.

-**Measures that are published but don't decide:** jobs created (with growth compared with matched firms, spin-offs, and expansions members voted down; see [When Growing Means Sharing](growth.md#5-measuring-it)), wages at the bottom and top and the gap between them, the share of pay above the going rate, how often higher-paid members leave, pay gaps by gender and race within the same job ([Who Sets the Pay](pay.md)), revenue per worker (a rough measure of productivity), how long members stay, injury rates, and the bank's default and recovery rates. Also:
+**Measures that are published but don't decide:** jobs created (with growth compared with matched firms, spin-offs, and expansions members voted down; see [When Growing Means Sharing](growth.md#5-measuring-it)), wages at the bottom and top and the gap between them, the share of pay above the going rate, how often higher-paid members leave, pay gaps by gender and race within the same job ([Who Sets the Pay](pay.md)), revenue per worker (a rough measure of productivity) and value added per hour worked, followed as co-ops grow ([Does Sharing the Profit Mean Less Effort?](free-riding.md#measuring-it)), how long members stay, injury rates, and the bank's default and recovery rates. Also:

 - **Who got loans.** Approval rates and loan terms by the founders' race, gender and personal wealth. If collateral-based lending quietly shuts out the people co-ops mostly serve, it should show.
 - **Who gets the profits inside each co-op.** Profit shares, founding shares and membership approvals by race and gender, so that an in-group of early members can't quietly take most of the pool.
@@ -24,6 +24,6 @@ Where does the profit share actually go? Part is paid in cash each year, and par
 Why the cap: uncapped tenure weighting builds a gerontocracy of shares and chains people to their first employer. Capped at a career-fraction, people can change companies, move cities, start over, and still reach a full share with plenty of career left.

 - **Base salaries still exist**, set by the company. A brain surgeon won't work somewhere without a high salary, and shouldn't have to. Hard jobs and in-demand jobs still pay more. The incentive to do difficult work survives intact. Pay isn't capped, but raising salaries doesn't let members skip the co-op's reserve: it takes its share of pay above the going rate too ([Investing for the Long Run](the-long-run.md)). How pay gets set, in the open and by the right people, is in [Who Sets the Pay](pay.md).
- **Governance is up to each company.** Workers pass bylaws deciding what requires a vote and what doesn't. Some will use direct democracy, some representative systems, some will delegate almost everything to management they hire and can fire. "Workers vote on every decision" is a strawman and always was.
+- **Governance is up to each company.** Workers pass bylaws deciding what requires a vote and what doesn't. Some will use direct democracy, some representative systems, some will delegate almost everything to management they hire and can fire. "Workers vote on every decision" is a strawman and always was. Why anyone works hard when the profit is split so many ways, and what happens when someone doesn't, is in [Does Sharing the Profit Mean Less Effort?](free-riding.md).

 The concrete case: the average employee where I work generates roughly $150,000/year in profit after all costs. That money currently flows upward to private equity. A firm with those economics, built as a co-op, sends it to the people who made it. The numbers, using public figures, are in [What If Conservice Had Been a Co-op?](conservice.md).