ESOPs and Unions

Jesse Walker | June 21, 2006

Interesting comparison:

"Worker ownership of the means of production" used to be a hoary radical demand; today it is increasingly an accepted reality. Few realize that roughly 11,500 U.S. businesses are now wholly or substantially owned by their employees -- up from fewer than 300 a generation ago. The 10 million individuals involved in employee-owned firms include more people than the entire membership of private-sector labor unions.

That comes from Gar Alperovitz's contribution to the new journal Democracy, in which he sets out to sketch a leftist version of the "Ownership Society." His proposals are a mixed bag, to say the least, but they're also the sort of creative thinking the leading Dems seem incapable of even attempting these days.

Comments

|6.21.06 @ 12:21PM|#

The industry has been pointing this out for years to no avail. Unions have been steadfast in their insistence that only defined benefit traditional pension plans count. They deride ESOPs as a way to get people to invest in stock they shouldn't buy. Mostly, they realize that when employee wealth is directly tied to corporate performance, unions lose.

|6.21.06 @ 12:26PM|#

Reliance on any single stock is a relatively risky investment strategy. That said, I've certainly been more interested in betting on companies whose success I was contributing to than on ones where I had no particular control.

|6.21.06 @ 12:46PM|#

Alperovitz is the author of America Beyond Capitalism.

It's always made me upset that I've never slept with anyone named "Gar."

|6.21.06 @ 12:58PM|#

But why do employee owners so seldom act like owners - viz. airline pilots and mechanics?

|6.21.06 @ 1:24PM|#

Yeah, I was a member of one of the very first ESOPs. It puts all your investment eggs in one basket, which is foolish.

And the conceit that individual employees affect their company's success or failure - and hence the balance of the ESOP portfolio - is ridiculous. Sure, good people do good work. But the main company-steering decisions - Do we buy this subsidiary? Do we do business in this country? Do we take this job? - are made by upper management, just like any company. The worker bees whose main retirement funds are squirreled away in the company ESOP plan have no input in these decisions. If the company tanks, there goes the ESOP.

|6.21.06 @ 1:26PM|#

But why do employee owners so seldom act like owners - viz. airline pilots and mechanics?

I expect most employee-owned companies are not owned by the unions their employees are obliged to join.

Jesse Walker|6.21.06 @ 1:29PM|#

But the main company-steering decisions - Do we buy this subsidiary? Do we do business in this country? Do we take this job? - are made by upper management, just like any company.

That's something a lot of people don't get: Worker ownership doesn't necessarily mean self-management. And companies that experiment with self-management aren't always worker-owned. There is an overlap, though.

|6.21.06 @ 1:41PM|#

I can see some good incentives coming from ESOP, but let's not overstate those incentives. Also, remember when Enron went bust? Remember how the employees were crying that they put all their eggs in one basket?

Owning a little bit of stock in your employer may be a decent idea. But it should be only a tiny part of a portfolio. If your company is shedding people because it's in tough shape, owning too much company stock means you'll lose your job AND your investments on the same day. Ouch.

|6.21.06 @ 1:59PM|#

Oddly enough, the company I work at is both employee owned and unionized. I should also note that the company is wholly ineffective and losing money.

|6.21.06 @ 2:03PM|#

I used to work for UPS back in '99 or so. They had a deal where they would invest an amount of money in the company for their employees, and then you could elect to invest more of what you earned if you wanted to.

It was a really good deal, and people that had a lot invested in the company when it went public made out big time.

I always liked the idea. I always liked the way UPS was run. The company demanded a lot from the employees, but they paid well, and because a lot of employees had different amount of stock in the company they were very interested in running a good product (packages on time and unbroken).

I thought that UPS was a great example of capitalism.

|6.21.06 @ 2:11PM|#

The disadvantage employee owned companies have is that they're conflicted in what is, perhaps, the most important aspect of managing a business. ...managing labor.

...keeping labor costs low. ...eliminating overtime. ...capping the cost of benefits ...getting rid of deadwood. ...paying for performance and punishing non-performance. ...motivation. Employee owned companies have a huge disadvantage.

|6.21.06 @ 2:11PM|#

ESOPs are distinct from 401ks. Some 401ks may have ESOP buckets or features, but any company that offered ESOP as the only retirement or savings option missed the point. I don't know of any companies that did this.

|6.21.06 @ 2:33PM|#

I once spent a year and a half working for a company that gave employees a discount on stock. The deal was that you had to buy the stock before a certain date in the quarter and then you couldn't sell until after a certain date next quarter.

I never took them up on it. It seemed safe enough on one level, since the only way to get burned would be if the drop during that period (a month or so? I forget exactly) was greater than my discount. But newspapers kept reporting weird things about the company, and nobody at work could give me straight answers. The share price apparently weathered those storms, but I just got an itchy feeling about it.

I like to think that my refusal to purchase company stock is what helped them weather that storm: Had I purchased any, I am quite confident that a major scandal would have broken and the stock would have tanked.

Grateful shareholders can show their gratitude if they like. I accept PayPal.

|6.21.06 @ 3:43PM|#

ESOPs are grand if the stock is halfway decent. I joined the Washington Mutual program when I paid off my car. I was only buying 2-3 shares a month, but I came out ahead with all of my purchases because of the 15% discount (and the lack of fees). WM hasn't gone up much in recent years, but it hasn't gone down, either.

All of that said, I'd put minimal cash (if any) into a stock I wasn't comfortable with. Diversify as much as possible, and invest as much as you can in Roth IRAs and 401(k)s (taking care not to get crazy in the underlying investments in your retirement portfolio--risk and diversity matter there, too). Index funds are a good idea, too. They have minimal fees, and they track the general growth of the market. Vanguard's S&P 500 Index Fund comes to mind, though it costs some significant change to get into. An alternative to index funds are the Exchange-Traded Funds (ETFs), which allow you to buy smaller increments of index funds.

Naturally, consult your investment adviser and don't make investments based on some nonsense you read on a blog :)

victor aspengren|6.21.06 @ 3:49PM|#

ESOPs have the potential for success and failure. The key lies in the leadership of the company - specifically the CEO and the Board of Directors. They can choose to fund the repurchase obligation that the ESOP presents. I was a CEO of a company that funded our ESOP obligation at 40%. If you had $10,000, then there was $4,000 all ready funded.

I know that everyone felt more comfortable that we were taking care of this debt right from the start. One tatic to limit the eggs in on nest, is to allow ESOP participants a chance to redeem a portion of their shares when the company has the financial resources to do so. Of course haveing a 401k match does not hurt either.

|6.21.06 @ 4:08PM|#

Given that labor unions are at a rather low ebb today, how significant is it that there are just as many employee owners? I also wonder whether the quoted stats include public employee unions?

|6.21.06 @ 4:13PM|#

Never mind the second question...I see it includes private sector unions only.

Paul|6.21.06 @ 6:25PM|#

"Worker ownership of the means of production" used to be a hoary radical demand; today it is increasingly an accepted reality. Few realize that roughly 11,500 U.S. businesses are now wholly or substantially owned by their employees -- up from fewer than 300 a generation ago.

Where have these people been? This is news so old it's crusty.

|6.21.06 @ 7:12PM|#

ESOPs are really a horrible idea. Most employees' performance has little bearing on the outcome of the company. I knew a guy who worked for a large company that cut all their employees' wages significantly in exchange for an ESOP. A few years later the company went bankrupt and was offering to repurchase the shares for something like $0.10 each (they had been worth as much as $200).

Stock options for upper management are a much better idea. But I've seen companies change the strike price of the options after the stock as fallen. If your option is going to be worth money even if you drive your company into the ground, it doesn't provide much incentive to perform well.

|6.21.06 @ 7:13PM|#

I have a theory I'd like to see worked somewhere. I'd like to see a company where the workers were made significant owners, and their pay was treated as a percentage of income. Let's say a business might have labor costs of 40% of revenues and 10% net profit margins. Instead, they could treat it as 50% profit margins, which are split 20/80 between owners & labor. (80% of labor's pay could be set as base salary, with the rest treated as a bonus, which would rise or fall with profit margins).

One of the problems labor has is that if the company fails to make that last 10%, the whole operation is at risk, and the worker may lose his entire income. Under this plan, instead of potentially losing their jobs, employees would just see a reduction in the bonus, which might be painful, but at least wouldn't be traumatic. In the end, I think everyone in the organization would benefit because employees would be motivated to cut unnecessary jobs, work efficiently, etc.

Kevin Carson|6.21.06 @ 7:23PM|#

Clean Hands and Bee,

Worker-ownership is probably more risky when the enterprise is so large and hierarchically structured that workers have little direct input in increasing the efficiency of the production process. But then again, the Mondragon system is pretty large and hierarchical, and it does pretty well.

Jason and Lumpy,

Whether there's a need for adversarial unions probably depends on the size of the enterprise. After all, the political system is supposedly controlled by voter "owners," but people still need a defense attorney when they're hassled by the cops.

|6.21.06 @ 7:59PM|#

"But the main company-steering decisions - Do we buy this subsidiary? Do we do business in this country? Do we take this job? - are made by upper management, just like any company.

That's something a lot of people don't get: Worker ownership doesn't necessarily mean self-management. And companies that experiment with self-management aren't always worker-owned. There is an overlap, though."

And if the upper management screws up, there is little that the rank and file can do. You can make the best SUVs in the world, with the greates work ethic and all, but when the price of gas goes up, then those wonderfully built SUVs are unsaleable... All that work ethic and effort to build somehting that no one wants...

|6.21.06 @ 9:50PM|#

Kevin,

I'm not actually anti union or organized labor, I just think that at least the version we have in the states has been woefully inept. At almost every turn, they have taken the position in a dynamic economy that a particular job at a particular wage is inviolate - unless you want to pay more of course. Their adamant insistence that the company's gain is their loss doesn't help either. They favor pension plans that no rational person believes anyone can afford.

I know of a union relationship that tells their rank and file not to participate in their 401k, even at the expense of the match, just so highly compensated employees of the compant can't contribute as much. They have failed to evolve and have no notion of what their role should be.

Here's a thought: Form insurance purchase groups to get better rates independent of company offerings. How about becoming the keystone in transitional education for your memberhship so they don't stay unemployed forever?

They can't think like that. It is in the DNA of organized labor in the US that wages are arbitrary. Making your membership more valuable is just crazy talk to them. And so, they continue to fail.

|6.21.06 @ 10:03PM|#

UPS has employee ownership; Fedex does not. I've used both extensively for a least a decade. UPS is crap compared to Fedex. I know it's anecdotal, but that's my experience.

|6.22.06 @ 4:30AM|#

You libertarians, always imagining that owning stock in a corporation makes one a capitalist. You people actually think that we live in some sort of Adam Smith fairy tale wonderland.

First of all, people are right when they say that ESOP lacks diversity and is a high risk. Also you forget to mention that goofy tax laws mean that someone who accepts a restricted stock grant before a crash has to pay taxes on the full price of it, even if they aren't allowed to sell it. I suppose you'll just sing happy songs about someday there will be no income tax, because you are Libertarians and that's what you do.

But what really, really matters is that ownership of stocks is not ownership of anything real. You don't own a piece of the company, not really. You pretend you do, but you don't. The vast majority of major-company stock is "growth stock" which means that even if the company makes any profit, the shareholders don't get any of it! Everyone says that this is good, that it shows that the company has confidence that it can reinvest the profits and make itself worth more and more and more ....

Yet the profits NEVER make it to the shareholders. There is a myth that a "growth stock" company will become 'mature' and begin paying oodles of money to shareholders once it owns the world. This NEVER happens. Even Microsoft doesn't pay very big dividends. Like nickel and dime stuff. And I can't think of a single other example.

Truth is that stock only has a value based on the expectation of the probability that some rich guy wants to buy a controlling stake in the company. ESOP is more of a takeover defense than anything.

And why would 'rich guy' want the controlling share? I will explain.

The profits of a corporation are generally not paid to the 'owners', the shareholders. They are usually 'reinvested' which in practice means giving a huge slice of the profits to upper management as presents, basically. For no economic reason. It is not at all rare or newsworthy for a CEO or other members of upper management to take so much out of a company in a particular year that an otherwise profitable annual report shows a loss instead.

Stock is a certificate and if someone gets enough of them, they get to decide which rich guy or group of rich guys will arbitrarily be awarded the profits (or even operating capital if they get greedy) of a particular corporation. It is not ownership in any real sense. The small stockholder can only hope that there is a greater fool to buy the stock from him, who hopes for a greater fool, who hopes for another - and the eventual prospect of someone rich coming by to take all of it off their hands.

You might as well invest in magic cards. Stocks might make you money but they are not ownership.

Anybody want to buy my car? I still keep it. I still get to drive it. But you 'own' it! If I ever sell it, I'll give you the money! Less administrative expenses of course. And feel free to trade your 'ownership' with anyone else that you like. While the car does have value to me, it allows me to work and make money, I won't give you any of that money. Instead I will use that money to keep my car in good condition, this shows you that I have total confidence in your investment and that your money is in good hands. Any takers?

Libertarian Fukiyama Fukipolyanna Bullcrap.

|6.22.06 @ 9:38AM|#

troll,

You are a nimrod. You are telling me that Berkshire Hathaway share holders don't see a dime of return since Buffett never declares dividends? Further, you are saying that the person on the buy end of any stock position is always a fool. I hope you enjoy your cat food in retirement while you beg for more social security payments. You'll sure show us moronic investors a thing or two.

Stocks are ownership. An employee owned company by definition has controlling interest through stock ownership. Does 1 share allow you to dictate the destiny of the company? No, but maybe that doesn't make any sense.