Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership

53 Pages Posted: 30 Dec 2009

See all articles by E. Han Kim

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Paige Ouimet

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2009

Abstract

How employee share ownership plans (ESOPs) affect employee compensation and shareholder value depends on the size. Small ESOPs, defined as those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) To form management-worker alliances ala Pagano and Volpin (2005), wherein management bribes workers to garner worker support in thwarting hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. The effects on firm valuation also depend on the strength of product market competition: When the competition is strong (weak), most of the productivity gains accrue to employees (shareholders). Competitive industry also implies greater job mobility within the industry, enabling workers to take a greater portion of productivity gains.

Keywords: ESOPs, Employee Incentives, Worker Wages and Compensation, Product Market

JEL Classification: G32, M52, J54, J33

Suggested Citation

Kim, E. Han and Ouimet, Paige, Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership (December 1, 2009). US Census Bureau Center for Economic Studies Paper No. CES-WP- 09-44. Available at SSRN: https://ssrn.com/abstract=1529631 or http://dx.doi.org/10.2139/ssrn.1529631

E. Han Kim

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Paige Ouimet (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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