ESOPs fables hide risky ends

Employee ownership of companies is a rallying point for businesses and policymakers because of its potential to redistribute wealth. A wide body of research suggests that employee stock ownership plans (Esops) align company and worker interests and deliver outsized rewards to both. Lawmakers have seized on this evidence to support efforts to slow rising inequality. The acceptance of Esops spans the political spectrum, as tying ownership to effort can appear to be a magic pill - but only when it works. There is growing evidence that not all Esops are created equal, and employee ownership may not be ideal, especially as corporate life expectancy declines rapidly.

Bringing business owners and workers closer can have unintended consequences for motivation. Companies may use Esops to shield themselves from management underperformance and takeovers. Employee productivity can fall due to labour immobility. Esops may also extend the life of unviable businesses by helping them conserve cash, while exposing workers' savings to high concentration risk. Small Esops often do improve productivity, but policymakers must watch for owners offloading excessive business risk onto workers. Stories of using friendly shareholders to rescue failing businesses are illuminating.

Technology companies - big champions of Esops - have created employee millionaires rapidly. Yet, these firms face greater risk, especially those that fail to scale with innovation. Startups, where Esops are most popular, also have high failure rates. AI-driven disruption further complicates the model by threatening widespread job loss. Other ways to increase worker ownership exist - it doesn't always have to be in the business they work for.