Employees work hard when they have a sense of ownership - so make them owners

By Nick Romeo

Corporations should share the wealth with those who help create it

People often work harder when they benefit from the results of that work.

The late economist Paul Samuelson's best-selling textbook, "Economics," published in 1948, defined the landscape for a generation of students who became politicians, parents, teachers, voters, taxpayers and businesspeople.

Samuelson also tried to shape public opinion. In 1975, speaking on the CBS television show "60 Minutes," Samuelson scornfully dismissed a new business-ownership model in which workers owned a significant share of the companies whose value they helped to create. Not only did he claim the model was as fanciful as the prospect of lollipops growing on trees, he even evoked the specter of the French revolution.

"It really has a Marie Antoinetteish ring to it: 'Let them own capital!'" Samuelson said. He implied that employee ownership is either impossible or a very bad idea.

Yet the economy has a way of disregarding the pronouncements of economists. Today, more than 14 million Americans are participants in ESOPs, or employee stock-ownership plans, the very model Samuelson considered so outlandish. According to data from the National Center for Employee Ownership, ESOPs paid out more than $175 billion to participants in 2021 alone.

These businesses exist in every U.S. state, span industries from construction to technology, and include both privately held and publicly traded firms. Lollipops, it seems, can grow on at least some trees. Nor has some ownership of capital among workers resulted in a reprise of the French Revolution; the heads of America's elite remain firmly attached to their shoulders. In fact, a more likely cause of revolution is not too much capital among working Americans, but too little.

Arguments in favor of employee ownership often fall into two broad categories. The first type emphasizes the business case for extending ownership to workers: Alignment of incentives boosts worker productivity, decreases quit rates and ultimately improves business performance. Myriad studies comparing companies with ESOPs to similar ones without ESOPs have found evidence for these sorts of benefits.

While it's hard to establish precise causation - whether the kind of business owners likely to convert to an ESOP simply run their businesses better, or if the ESOP itself creates these effects - the basic insight is simple: People often work harder when they benefit from the results of that work. And the best way to create a sense of ownership among workers is, in fact, to make them owners.

The second type of argument for employee ownership makes a moral and political case for its value. While the business benefits may be impressive, the deeper importance of extending capital ownership more broadly transcends business alone. By all standard measures of economic inequality, America has grown more unequal in recent decades. Not only is income inequality rising in America, it is higher than in any of the other G-7 countries.

Establishing precise causation is hard here, as well. It's difficult to know exactly how much of the political and cultural dysfunction of contemporary America ultimately derives from income inequality versus other factors. But the basic insight is quite plausible: Decreasing the economic hardships faced by working Americans is both valuable in its own right and likely to have wider political and cultural benefits.

Options for business owners

These two types of arguments are not mutually exclusive; many people find both persuasive. But these different sources of justification can create surprisingly bipartisan coalitions that support the expansion of employee ownership. The Employee Equity Investment Act, which would provide loan guarantees for investment funds that finance the sale of businesses to their own employees, was introduced last year with support from U.S. Senators Chris Van Hollen, a Maryland Democrat, and Marco Rubio, a Florida Republican, and U.S. Representatives Dean Phillips, a Minnesota Democrat, and Blake Moore, a Utah Republican.

It's important not to overstate the level of agreement about a broader societal vision. Conservatives who see employee ownership as a way to further dismantle what is left of the American social safety net differ sharply with progressives who see employee ownership as a supplement to this net, not a replacement for it. In the current U.S. political climate, however, it's also worth recognizing and expanding areas of agreement.

Just as there are meaningful differences among supporters of employee ownership, the various models that grant some level of ownership to workers also have important differences. Some worker-owned companies give workers a direct democratic say in crucial business decisions, while others share some level of equity with employees but give them no meaningful voice. Employee ownership trusts (EOTs) also vary widely; some stipulate a maximum compensation level for senior management, others require a stipulated percentage of annual profits to be donated to a particular nonprofit each year. Among ESOPs, some grant workers a much more generous ownership stake than others.

These are important differences, yet all of these models represent some degree of real improvement on the traditional structure of a corporation. Tens of millions of Americans work at businesses whose owners are approaching retirement age. Selling these businesses to their workers is more attractive than the other most likely scenarios: that they will either close or that the owners will accept offers from private-equity firms.

Employee ownership has already moved beyond the purgatory of impossibility to which Samuelson condemned it. It's now a genuine force in the U.S. economy. If we can break the stranglehold that economists like Samuelson have exercised on our political imagination, it's conceivable that employee ownership will one day be the default assumption. What will seem bizarre is an economy in which workers do not own a substantial share of the value they create.

Nick Romeo is the author of "The Alternative: How to Build a Just Economy" (PublicAffairs, 2024). He covers culture and ideas for the New Yorker magazine and teaches at the University of California, Berkeley.

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-Nick Romeo

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04-27-24 0953ET

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