ESOPs

notes from

Kruse, Douglas L., Richard B. Freeman, and Joseph R. Blasi, eds. Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-Based Stock Options. (Chicago, London: University of Chicago Press, 2010).

And, just as a refresher, here’s Kruse et al.’s definition of an ESOP:

In the US one major form for employee ownership is the Employee Stock Ownership Plan (ESOP), which federal legislation established to allow companies to contribute money to a trust to buy worker shares or to borrow money to fund worker ownership and then repay in installments from company revenues. Under this approach, workers gain an ownership stake without investing their own money to buy the stock.

The benefits associated with ESOPs are

  • increased effort due to better incentives/higher motivation and thus increased productivity
  • better employee relationship with management, greater willingness to share information,
  • increased loyalty and pride in company, lower rates of turnover and absenteeism
  • innovation — employees more invested, more likely to make suggestions for improvement
  • less opportunity for corruption from higher levels?
  • greater job satisfaction and wealth for employees involved

The major concerns around ESOPs are

  • the free rider argument, which says that people are more likely to shirk and accept the products of others’ hard work in a group incentive pay scenario
  • increased economic risk by linking both the employees’ jobs and their wealth/financial security to the performance of their employer

Kruse et al. address these concerns, saying that in fact employee ownership increases co-monitoring, so there is less opportunity to shirk as well as more incentive to approach someone who’s not working or report them. They also recommend that ESOPs include a limit on how many shares can be owned or even counseling in order to diversify the holdings of shareholder employees.

Their most important point made in the book is that an employee ownership scenario, like an ESOP, has negligible benefits on its own — it needs to be enacted along with other employee-involvement tactics in order to have the positive benefits it’s been shown to have. For example, the introduction of an employee involvement committee along with an ESOP increases participation in decisionmaking more than either one of  those things would have on their own.

Kruse et al. emphasize the important link between shared capitalism and shared decisionmaking: “while shared capitalism provides the incentive to improve performance, increased involvement in decision making can provide the means to do so.”

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Comments
2 Responses to “ESOPs”
  1. dem says:

    So maybe something to include would be a conversation about Mondragon-style employee involvement in decision-making which can lead to a version of that or our company along the lines of the employee involvement committee mentioned above? Basically having that conversation about how the ESOP alone isn’t enough, Mondragon cooperatives can be an example of that sort of greater involvement, etc.

    I love the part about shared capitalism and shared decision-making.

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  1. […] (previously) An employee stock ownership plan (ESOP) is a retirement plan in which the company contributes its […]



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