The Psychology of Employee Ownership

By Sunny Cai and Ben Durwood

Beyster Institute Interns

Beyster interns (left to right) Ben Durwood, 2011 Rady MBA graduate;
and Sunny Cai, Rady MBA candidate 2012

Employee ownership has many well-documented financial benefits for both owners and employees. Employee stock ownership plans (ESOPs) provide owners with an attractive exit strategy and in some cases the deferral of all associated capital gains taxes. Employees at employee-owned companies, meanwhile, receive an additional retirement plan, allowing them to save an average of 2.6 times as much as employees at non-employee-owned companies. However, these financial benefits are only one aspect of the rewards offered by employee ownership. Equally as important, employee ownership offers favorable psychological effects.

An Ownership Culture

Employees in most companies don't have a complete picture of what the company does or what their future looks like. Management often doesn't provide adequate financial and business information, and many employees aren't seriously invested in the success of the company. Employee ownership plans create a link between employees' personal savings and the company's performance, transforming employees into employee owners. Once they have a say in the company's development and a stake in the outcome, employees will proactively seek opportunities to expand the business, reduce costs and generate innovative ideas.

Internal Oversight

Once employees are directly invested in the future of the company, they will be more mindful of decisions made by management. In a way, this increased interest on behalf of employees creates an additional layer of checks and balances. Employee owners are more involved in company decisions and want to ensure that management makes prudent strategic choices. Employee ownership, therefore, can transform employees into a sort of board of supervisors, following (and at times questioning) decisions made by management.

The Free Rider Effect

One problem facing many companies is the free rider effect. That is, some employees who are not supervised closely may make minimal contributions and exert negligible effort, while continuing to receive a paycheck. As a result, companies either overpay certain employees or spend money trying to monitor and correct the problem. Interestingly, some employee-owned companies have reported that the free rider problem will resolve itself. Imagine a company staffed by 50 employee owners, all but three of whom are hard working and genuinely interested in contributing to the company's growth and prosperity. Those three, meanwhile, are satisfied sitting back and allowing other employees to drive the company's growth, while continuing to receive a paycheck and an allocation of ESOP shares. The remaining 47 employees realize that if the free riders were more productive, everyone would experience a material increase in the value of their ESOP shares. At employee-owned companies, employees are more likely to confront free riders and hold them accountable for their lack of productivity.

A Sense of Community

By tying each employee's savings to their company's performance, ESOPs often create tighter-knit communities. The hard work of employees at employee-owned companies benefits not only the workers themselves and their families but their co-workers, friends and co-workers families. It decreases internal competitiveness and increases competitiveness between companies, improving company performance, decreasing internal conflict and enhancing communication between employees.

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