Re: ESOPs, state capitalism, compensation for labor

[Dellerman@worldbank.org]

These remarks of Dan Bell on the dilution+tax break argument are quite
consistent.  The argument assumes there is no direct wage concession quid pro
quo and no productivity improvement between the ESOP and non-ESOP case.  One
must only be careful when making statements about the ESOP contribution being "a
fair exchange
of a retirement benefit for labor -- pure and simple".  I am not sure what the
labor is that would not be delivered in the non-ESOP case.   A "gift" may also
be part of a long-term trust and relationship building exercise in which case it
is more of a subtle exhange than a gift (like a gift to a stranger).   Thus
there are two cases.  There is no long or short term giveback from labor in
which case it really is a gift "pure and simple" and it really is "dilution"
which by another name smells just as sweet for the workers.  If it is part of a
subtle quid pro quo, then  it violates my assumption about there being no wage
concessions or productiivty increases that result from the ESOP contribution.
Either way it is consistent with my analysis.





Dan Bell <dbell@kent.edu> on 10/19/99 09:29:22 PM

Please respond to ownership@cog.kent.edu


To:   Ownership@Cog.Kent.Edu
cc:

Subject:  ESOPs, state capitalism, compensation for labor



Regarding David Ellerman's discussion of companies paying twice
for ESOP equity, first in the form of shares second by repaying
the ESOPs loan, one important fact is forgotten:

The contribution to the ESOP is a form of compensation to the
employee for labor given to the company. It is not a gift. It is
not a donation. It is not a form of altruism. It is a fair exchange
of a retirement benefit for labor -- pure and simple.

If the company increases an employees wage by 25% in the form of
an ESOP contribution, after taxes, this cost to the company is
really 15%. One alternative is for the employee to take a cut in
some other portion of compensation in exchange for this 15% increase.
This is often the case in distressed buyouts where employees make
significant wage investments (ie, concessions) to rescue their
source of livelihood. Leveraged buyouts are those situations
where the 25% cap is often met to make it possible to repay the
loan.

On the other hand, in most healthy companies which set up ESOPs for
any number of good reasons, employees are usually not asked to
exchange anything. The increase is just that, an increase. In
these cases, the contributions range closer to 10% of payroll, or
6% after taxes. Now, the real breakeven analysis question is:
Does employee ownership lead to at least a 6% increase in
productivity? Where the ESOP is the only change, clearly not.
Where ownership education and employee involvement is introduced,
such that employees begin to act as owners, research suggests
that productivity does improve.

Plain and simple, ESOPs make good business sense.

Regarding Charles Upton's mistaken remark:
"4.  Remember, the Soviet system was, in theory, 100% ESOP'ed"

It is easy to confuse the rhetoric of a worker state with the
practice of worker ownership. Socialism is simply another
word for state capitalism. As Jeffrey Gates would put it, what
is needed is "up close" capitalism. Where ownership is concentrated
in the hands of a few, whether they be individual billionaires, or
trustees of institutions (and the state is just one very large
institution), the principal-agent problem intensifies. No one
up close is monitoring the capital on behalf of the owners.

Employee ownership decreases the principal-agent problem because
the owners are close enough to the capital to hold managers
accountable. Furthermore, if self-monitoring reduces the
overall monitoring costs, then the company will be more
efficient. Even the self-monitoring dental hygienist adds
additional value to the bottom line.

Granted, the contribution of the hygienist is of lesser economic
value than that of the dentist; but both of them impact the
bottom line. Most ESOPs allocate shares based on W2 earnings.
Since the skills of the dentist draw a higher W2, the dentist
will gain a larger share of the pie, perhaps commensurate with
her larger contribution; however giving the hygienist his fair
share of the pie has a positive impact as well (again assuming
ownership education and employee involvement).

Dan Bell
International Program Coordinator
Ohio Employee Ownership Center
Kent State University





      _______________________________
      David Ellerman
      Economic Advisor to the Chief Economist
      World Bank, Room MC4-335
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