Charles Duhigg, a student at Harvard’s Business School, reviews some disadvantages of employee stock ownership.

A 2000 study by economists at the University of South Alabama found that when the amount of stock held in an ESOP increases, ”management will likely behave in a risk-reducing manner and decrease its commitment to innovation.” More specifically, they’ll stop investing in research and development, the risky but crucial engine of growth. Unlike investors with diversified portfolios, managers and employees with most of their money tied up in one company are loathe to bet it all on a new product or business strategy.

There are two issues involved with employee stock ownership. One is the work vs. shirk incentive, with employee stock ownership presumably encouraging more work on the part of employees. The other is risk allocation, where economic theory says that individual company risk is more easily borne by a broad base of shareholders who can diversify risk with other holdings, rather than by employees who already have much of their human capital tied up in the firm.

For Discussion. What other mechanisms are available to companies to address the work vs. shirk incentive?