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04/08/2007

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Corey

I worked as an engineer for seven years before attending law school, in four companies of various sizes which all had extensive ESOPs. I find your contentions run counter to my anecdotal experiences. I'll try not to be too "emotional" though.

You noted that comparatice studies on productivity under ESOPs are "limited in number and scope." Then right after that you make your most powerful argument about lack of market adoption. Well, even the invisible hand needs comparative information about business practices in order to chose between them. If the effect of ESOPs is just a little bit contingent on other variables, perhaps enough so that it is hard to produce many broad studies about it, then companies might not know what ESOPs cuold do for them.

Maybe, just maybe, other considerations pull against adoption of ESOPs in industries which do not have strong need to retain highly fungible employees. (i.e. computer engineering) How about the profit motive? Maybe self-regarding CEOs don't want to share their option pool with Sharon in Accounting. They will if Sharon was hard to hire though.

Your understanding of the motivations of the average ESOP employee doesn't match mine. When I worked, the choice was between $80K at one company or $75K plus 20,000 shares at another. I actually decided to make less for the shot at more. However, no one was offering a diversified stock portfolio as a bonus, and that extra $5K would have gone to consumer goods anyway.

However, owning stock did make me more loyal to the company, thanks to 4 year vesting plans (that sadly outlasted the bubble). People don't sit around and think about what percentage of their extra work is recoverable by others. People appreciate having a stake in the collective success, and are happier. The people at Enron were loving their ESOP, and then when they got fired, they thought "easy come, easy go." They would have HAD no other wealth if not for the ESOP. Again, no one is offering unrestricted stock grants to Sharon in Accounting.

Both the startups and the Fortune 500 company that I worked for pulled 60-80 hour weeks out of their ESOP-loving engineering staff. When the last one fell, I went into the same 6 months of unemployment and the same bankruptcy as I would have had if only the CEO got stock options. My underwater, unvested stock options turned out to be the biggest con I ever fell for, since I only ever received token sums from my ESOP. But here I am still defending them.

Employee stakeholding in the enterprise is great. It builds loyalty, encourages organization-centered thinking over self-regarding, and can attract top talent to risky new ventures.

Anonymous

"When I worked, the choice was between $80K at one company or $75K plus 20,000 shares at another. I actually decided to make less for the shot at more."

So, you're saying each share was worth less than 25 cents? Or did I miss something?

Jack

Corey...... good job for not judging a policy by a "bubble" and good luck with starting over....... been there after the mid-80's R/E and oil crash.

Anonymous: The "worth" of any stock is always in question. Today........ the worth of the "diversified" Dow or SP are also in question.

Jack

n.e.hat

Anon., That's startups for you. Little value, big dreams and lack of startup capital. The reality is, approx. 90% or more crash and burn in the first five years. Corey found that reality out the hard way. There is the ongoing issue in economic circles about booms and busts occuring in the economic order due to unregulated or unrestrained free market principles at work. Free Trade? Just another coat of paint on a tired old horse called the "Free Market". Corn anyone?

Larry

My anecdodal experience also makes me look favorably on fairly wide employee stock ownership. You cannot base your judgment on the results at United Airlines or some former Soviet steel mill, because in both cases you are talking about ESOPs as rescue operations for economically failing enterprises with bad future prospects. In the case of U.S. airlines, of course, the suffocating debt loads and union work rules and union pay scales made what might be a business with profit potential look more like a race horse carrying too much weight... What I have seen working well is a company where most of the equity was owned by the founders, including top officers, but an important share, around 15%, had been "earned" by various managers making various quotas, and stock bonuses were distriubted annually. (Not to all employees, however, but to someone every employee could reasonably aspire to replace). In the situations where everyone is winning--the founders, the arms-length stockholders and the supervisory employee stockholders--because the business is thriving and growing, there is no better management tool than a judicious scheme of making key people rich by paying them extra for good performance-- with stock which is coveted because it has been appreciating dynamically. But nobody wants stock in a business which has been seized by a bankruptcy judge. And there is a tendency not to part with ANY equity by owners of most businesses which are flourishing. But the wise CEO knows successful businesses will do even better when middle and even lower-rung managers are generously incentivized at capital gains tax rates.

MS S

I reside in one of East Asia country and I am not a U.S. citizen, but I studied in U.S. for the improvement of my country. And most of the system and problem in U.S. is same in my country. So I may be qualified to say something.

I agree with Mr. Becker in some points. ESOP is not a panacea to every problem. Like MBO's failure to the management alignment in 8o's, it doesn't fully align interest of employee to the corporate interests. From its origin, ESOP was a kind of political and historical intrument to protect corporate management to block market pressures. Much of its support comes from incumbent managing group and not from market. Also it has support from Wall Street for its role of conduiting new inputs to the market force. It also deepen the firm specific human capital problem to block the diversification. And it is also very vulnerable to the unfaithful corporate managers, as we already saw in Enron Case.

However, it could be a only hope to the employees's voice to the corporate future. 80's Contituency statute fails in most of cases. Voice of employee is ignored and disregarded. Communication system is very important for the longterm growth for the corporation as we see easily from the Toyoda. It could be obtained some heroic or talented manager. But it also could be instituted by ESOP or similar system. I concede most of current ESOP is not working in this way. Much of time, it is just a incentive system or silent complier to the management's will. But Vigilint ESOP role could works as a way of constant communication.

Andrew

I agree with Becker because I simply do not see what is so special about ESOPs that merits favorable tax treatment.

Also, too much of it can be a bad thing. I remember reading an article awhile ago that detailed how Enron's policy of having its employees' compensation tied directly to its stock price helped create a short sighted "meet the numbers no matter what" attitude--which clearly lead to a few problems.

Jack

Andrew: "Also, too much of it can be a bad thing. I remember reading an article awhile ago that detailed how (any of 100 corp's) policy of having its (CEO and vested upper management bonuses) tied directly to its stock price helped create a short sighted "meet the numbers no matter what" attitude--which clearly lead to a few problems.

............. Indeed. And the tax break is obviously some misguided effort to sweeten the pot a bit and spread stock ownership down below the normal owner class. Those favoring an ever steeper wage/wealth pyramid should avoid it like the plague. What's that Musketeers slogan? All for one and all for one and all fore one?

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Corey

"I remember reading an article awhile ago that detailed how Enron's policy of having its employees' compensation tied directly to its stock price helped create a short sighted "meet the numbers no matter what" attitude--which clearly lead to a few problems."

That attitude and the incentives that produce it exist for management decisionmakers regardless of whether they have an ESOP. There is a strong tendency displayed here to try and create a policy result by associating ESOPs with failures at large companies (United, Enron) that may not have actually had anything to do with low level employees.

At me last engineering job, I consistently supported long term thinking, suggesting acquisitions (which happened) and proposing nw products to give the talent something to do. My CEO promised a revenue number to Wall Street that the sales and marketing numbers couldn't support. Rather than miss his revenue "promise" by seven million and further endanger his stock price, he chose to lay off 50 engineers, book their compensation as a cost savings, and meet his number that he had originally pulled from the air.

The 50 employees who were fired were all hard-working and forward-looking engineers (including myself). Earlier layoffs had already trimmed the fat so to speak. It didn't matter one bit whether I had ESOP shares or options, my long term thinking got overruled by the short term numbers play of those who could most benefit from it. (Incidentally, the CEO told us that this was the reason we were let go.)

So lets not talk about "the profit motive" as if it was worse at Enron or United because they had ESOPs. In fact, ESOPs and option grants to workers empowers a class with potential voting power. If the workers vote/act how the CEO would, then nothing is changed. But it is possible that suitably empowered workers could check some of the excesses of plundering that occurs when times go bad at corporations. (Or, maybe not, as my story suggests)

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