The Effectiveness of Employee Stock Ownership Plans - Essay Example

The Effectiveness of Employee Stock Ownership Plans An employee stock ownership plan (ESOP) refers to themethod that allows a company’s employees participating in ownership of the company’s assets (Gimein). Companies provide these opportunities for their workforce without any additional costs for employees. Shares are considered as being one of the forms of the total employees’ remuneration. Shares are allocated to all employees and may be sold only specific employees leave their job. The current paper deals with the assessment of effectiveness of such plans. First of all, it is necessary to assess all potential advantages and disadvantages of such plans. Employees do not have to pay taxes on the contributions when they work in a company. Only when they leave their job, they have to make all payments. It means that employees have a strong motivation to increase their productivity and generate higher revenues for the company in general not only because it increases their personal wage but also because they are the co-owners of the company. Thus, the effect on employees’ motivation is highly positive. Another important aspect is that employees are interested in the successful implementation of job functions of their colleagues while in the absence of this plan, they are primarily neutral. If other employees work more efficiently, it will lead to a higher gross output, and the market value of the company will increase. Consequently, the given employee may receive higher revenues even if his/her personal productivity has not increased. Thus, it may be expected that the corporate culture within such organizations will be better than in other companies. ESOP encourages the development of non-material assets in the company. However, ESOP also has some disadvantages for employees. I particular, it concentrates all employees’ shares in one company. It leads to over-concentration of risks that is generally considered as being highly negative. Therefore, employees tend to become too dependent over the dynamics of market prices of the company. In some situations, this dynamics does not correspond to their productivity. For example, during economic recessions, stock prices usually fall dramatically that may decrease the revenues of employees even if their productivity keeps rising. Another problematic aspect is that ESOP does not always result in a higher productivity of employees. It means that motivation alone is not sufficient for higher output and better overall economic results. Moreover, some employees may hope to receive a higher remuneration in an indirect way (due to higher productivity of their colleagues and higher prices in the stock market). At the same time, this criticism may be addressed by pointing out that ESOP may lead to the emergence of the synergic effect where the total economic results of production are higher than merely an arithmetic sum of individual contributions. Thus, even if individual productivity of employees is constant, the company can still enjoy better competitive positions. It seems that higher productivity is closely related to motivation either directly (through the rise of individual productivity) or indirectly (through the synergic effect). ESOP may also lead to the situation when earlier employees are benefited disproportionately higher than late-comers because they have a higher amount of shares in their possession. However, as under ESOP, employees become co-owners of their company, the same logic may apply to earlier owners or founders of the company. This system of capitalist distribution of wealth does not seem to be unreasonable or unjust because all economic agents act under the conditions of uncertainty, and those people who decided to be employed in a given company where it was not highly developed, demonstrated a better insight in comparison with those employees who entered the company when it became one of market leaders and should correspondingly benefited. The general effectiveness of ESOP may be determined by comparing the company’s total productivity before the introduction of these plans and after their implementation. If the general productivity increases (either due to higher individual productivity or due to the synergic effect), then the introduction of ESOP is reasonable, and it increases the general economic potential of the company. The problem with the precise evaluation of the effectiveness of ESOP refers to the fact that the external business environment of any company is subject to change (Rosen, Case, and Staubus, 224). Therefore, the dynamics of the company’s productivity may be partially explained by the changes in the external conditions rather than the impact of ESOP. Thus, it may be rational to have independent auditors that may assess all the components of the ever-changing business environment and make relevant conclusions about the net effect of ESOP (Stumpff and Stein, 2). It should be stressed that the comparative effectiveness of ESOP is typically not constant over time. It may generate significant revenues and profits during some periods of time and do not have a substantial impact on others. Therefore, the close monitoring of the situation is necessary. It may help to adjust the company’s policy accordingly. If a company determines that the use of ESOP may be beneficial, it is necessary to organize all other complementary factors in such a way that may help to increase the effect of ESOP. In this respect, the effect of inter-personal conflicts within the company is crucial. If numerous conflicts between the company’ managers or employees emerge, it decreases the overall productivity and has a negative influence of the company’s reputation. If the property rights regarding the distribution of future revenues and assets are not strictly determined, a number of conflicts may emerge. Different managers may consider that their role in future revenues should be higher, and if the company does not have a clear and objective system of dispute resolution, it may lead to serious problems. Therefore, the property right should be strictly specified, and each manager or employee should understand what amount of remuneration, bonuses, premiums, etc. he/she may receive under different scenarios. The system should also encourage a more productive work and permanent innovations. The introduction of ESOP by the company may stress that the human capital is its most valuable asset. It is often highly appreciated by employees, and their motivation for a more productive work tends to increase. Although ESOP cannot generate substantial positive effects with corresponding reforms and innovations in other spheres, a higher motivation is a significant aspect of any long-term changes. Thus, employees should understand that the increase in the market capitalization of the company directly affects their monetary income. It may be concluded that ESOP constitutes an efficient system of balancing the interests of the company’s managers and employees. Employees participate in the ownership of the company and increase their productivity in order to receive higher remuneration. Moreover, they are interested in the synergic effect and success of their colleagues. It is very beneficial for the company’s managers, as well, because the company’s competitive positions may substantially increase. In order to evaluate the comparative effectiveness of such plans, the marginal productivity of labor before and after the implementation of the plan should be compared. If EPOC contributes to a higher productivity, it should be adopted. IN addition, it is necessary to neutralize the influence of other external economic factors in the process of analysis. In the majority of cases, the implementation of EPOC may be reasonable for the company from the long-term perspective. Works Cited Gimein, Mark. “The Bottom Line on Options”. 2006. Business Week. Web. 20 July 2014. Rosen, Charles, Case, John, and Staubus, Mark. “Equity: Why Employee Ownership Is Good for America”. 2005. Harvard Business School Press. Print. Stumpff, Andrew and Stein, Norman. “Repeal Tax Incentives for ESOPS”. 2009. 125 Tax Notes 337. Print. Read More