John Hoffmire: Why shouldn’t employees own more of the companies they work for?
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Dr. Steven Freeman of the University of Pennsylvania describes that granting ownership rights in corporations to employees has a profound effect on the employees´ commitment to the firms. A higher amount of employee commitment enables companies to perform better in critical areas. In many cases, the original owners’ shares can be worth more, even though they gave up part of the ownership, because employee-owners worked better than they did before receiving shares.
Employees who own shares of a company feel that they have more influence in the organization, especially when they are encouraged to participate more fully. This leads to higher organizational commitment. Professors Joseph Lampel, Ajay Bhalla and Pushkar Jha from City University in London report that those organizations that grant company shares to their employees obtain improved company performance in product development, market expansion and sales.
To increase employee commitment, businesses may choose from various strategies related to employee ownership plans. Among the options are: encouraging employees to purchase stock, giving it to them as a bonus or granting them stock through a profit-sharing plan. However, the most popular strategy in the United States for building employee ownership is called the Employee Stock Ownership Plan (ESOP).
Through this type of employee benefit plan, a business sets up a trust and puts in it shares of its stock (or cash to buy shares). All company contributions to the trust are tax-deductible, and selling shareholders often receive capital gains tax forgiveness. The shares are then allocated, over time, to individual employees, and within a short period an employee gradually obtains full vesting of the shares in his or her account. When employees leave the company, the firm buys back their shares at fair market value, providing extra retirement assets.
When employees are granted partial ownership of a company, many positive changes can occur. According to the National Center for Employee Ownership (NCEO), in the economic downturn that started in 2008, ESOP companies laid off employees at a rate less than 3 percent, while non-ESOP companies laid off employees at a rate higher than 12 percent. A study in Washington state found that employees at ESOP companies made 5 percent to 12 percent more in wages and earned nearly three times the amount of retirement assets of non-ESOP employees, calming possible apprehension about investing employees´ pensions in the same place where they are employed. A network of over 1,500 ESOP companies found that after implementing Employee Stock Ownership Plans, 84 percent of firms reported an increase in both employee motivation and productivity.
A number of well-known companies in the West and Midwest are ESOPs. These include popular companies such as WinCo Foods and Schreiber. According to the NCEO, both of these companies advertise the fact that they are ESOP companies. Proud to have an Employee Stock Ownership Plan, these corporations use their identity as ESOPs for positive marketing purposes. Lampel, Bhalla and Jha found that, if a company has an ESOP, the public’s view of that firm is positively influenced. In the study, ESOP companies reported that their firms have greater positive images than others. That positive public view comes directly from the fact of a company being an ESOP.
In his research, Freeman combines 29 different studies of ESOP companies. He reports that ownership plans often work best when they come along with increases in the regularity with which employees participate in decisions that influence their jobs. Freeman's review of the studies shows that, co-existent with this increased involvement in company decisions, employees reported a rise in job satisfaction, motivation and organizational commitment. Not a bad set of outcomes.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the School of Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Tom Steele, Hoffmire’s colleague at Progress Through Business, did the research for this article.