In theory, employee ownership through an Employee Stock Ownership Plan (ESOP) is an almost perfect idea, since it benefits employees and businesses equally and simultaneously.
Shares are allocated to, rather than purchased by, the employees, which puts ownership within the grasp of many who might never own a business otherwise. Employees have a strong incentive to work hard and effectively, since they will reap the reward.
Thinking like an owner helps employees to understand how their business is run, and encourages them to innovate and improve both day-to-day and long-term operations. Although an ESOP is no more a democracy than a conventional corporation is, employees often have more opportunities to be involved in corporate-level discussions, if not actual decision-making. During tough times, these informed and empowered employee-owners have a strong interest in helping the company pull through, rather than jumping ship.
Annual share allocations, along with vesting rules, also promote employee retention and minimize costly turnover. And when an employee leaves, the company “repurchases” his or her shares at the current share value (through a distribution similar to that of other pre-tax retirement plans)—and those shares are then reallocated to current employees.
So far, so good. But the theory behind ESOPs makes one assumption that is often overlooked and can cause problems in even the most well-intentioned ESOP. That assumption is that, given the opportunity, all employees would like to be (part) owners of the firm they work for. The idea of ownership as an ultimate goal and good is deeply ingrained in American society. However, like most assumptions, it is worthwhile to revisit it occasionally.
Why might a person not want to be an owner? Perhaps the most obvious reason is that ownership comes with responsibilities as well as rights. It is reasonable to expect that many people — from highly-trained senior staff to entry-level employees — feel that their responsibility to their company extends to doing their job well, and no further.
They may consider opportunities to provide input into bigger-picture company issues as incursions on their time that take away from their primary job. Similarly they might feel that the time spent in ownership education — learning to read and understand the company’s financial report, for instance — would be better spent doing the work they were hired to do.
Another reason is that an employee — again, at any level — might feel that he or she lacks the training, experience, or expertise necessary to be an effective owner, and is either uninterested in acquiring the additional skills, or lacks confidence in the ability to do so.
Finally, group ownership may not seem like “real” ownership, since it generally doesn’t include individual control over decision-making. So, even a person who does aspire to own a business might not see employee-ownership as equivalent, or even as a stepping stone, to a more autonomous model of ownership.
As those experienced in employee ownership know, these (and other) barriers to employee ownership can be surmounted or accommodated, in most cases, by training and clear communication about expectations for employee involvement, both at the initial interview/hiring stage and on an ongoing basis. But in order for such training and communication to be effective, every employee-owned company needs to recognize that not all employees, or potential employees, are equally or automatically interested in ownership.
Keeping this possibility in mind will allow an ESOP to take whatever steps are needed to bring reluctant owners into full and productive partnership; simply assuming they are already on board may result in losing them altogether.
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. Frances Laskey, Hoffmire’s colleague at Progress Through Business, did the research for this article.