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?
READER COMMENTS
David Thomson
Mar 17 2003 at 6:56pm
One might also wish to ask whether employees who are overly invested in their own companies are more inclined to break the law. I’m specifically thinking of the Enron mess. A major airline currently in desperate financial shape most certainly wasn’t helped much by its employee owners. Why didn’t these folks think twice before further jeopardizing their way of earning a living? Alas, it seems that in both instances greed hindered their ability to realize that they were endangering themselves.
Should we pass laws limiting stock ownership by employees? Absolutely not! The private sector will resolve this issue.
Patrick R. Sullivan
Mar 17 2003 at 7:41pm
Answering the discussion question: profit (or revenue) sharing, performance bonuses, and the old fashioned; firing incompetents.
But I really like the implications of Marxian exploitation in employee ownership of the means of production.
Stephen W. Stanton
Mar 18 2003 at 3:08pm
ESOPs are a terrible idea. Your entire career PLUS the bulk of your assets all depend on the fortunes of a particular company in a particular industry. Think of all the undiversified Enron blokes…. Unemployed AND penniless.
Stock incentives are good… But once they vest, employees should diversify out. Companies just need to pay more attention to performance metrics, aligning worker expectations with company goals… rewarding good stuff.
Mark Dalton
Mar 20 2003 at 5:26pm
A radical, new way to view the work vs shirk issue, is appeal to an employee’s sense of self efficacy in their job. If an employee feels that their job is postively affecting the way in which a business is run, I would assert that employees will then be more prone to take risks. I believe this is goes from the top all the way to the bottom of an organization.
While I do not believe that ESOPs are the best way to incent creative and innovative work from employees, I do not believe that ESOPs should be entirely eliminated. I think companies should encourage their employees to have a diverse set of holdings. The organization should make it incumment upon itself to educate all of its employees about the nature of equity ownership. This is a major task, but if an employee has the impression that their work is valuable and the organization expresses its interest in the financial success of the employee, then the employee is incented to work in two ways. 1). The employee’s work adds values to the company and is recognized as adding value 2). The employee realizes that the company desires to see its employees succeed personally.
That seems to me to be a poweful combinantion.
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