What Types of Firm Use Minority Employee Share Ownership Plans, and Why Do They Do so?

Topics: Capital, Capital accumulation, Stock market Pages: 5 (1761 words) Published: May 16, 2012
If a firm uses a minority share ownership plan, external shareholders own it with a minority of employee owners, usually no more than 5% of the firm. Management or the board of directors exercises control of the firm and there is limited employee participation. While a significant number of employees may own shares in the firms they work for, almost all of this stock is in firms that are only minority employee-owned. In this essay I intend to explore the causes and consequences of firms choosing to use minority employee share ownership plans.

Firms using minority share ownership plans tend to be larger and have high levels of employment, greater levels of sales and are capital intensive. These firms all have complex tasks in industries such as finance, retail and communication. This leads onto the first reason employee share ownership plans are used. Agency theory (Jensen & Meckling 1976) implies that firms that have a sole owner will have the lowest agency costs. The opportunity for agency costs to incur arise because there is not a sole owner and individuals become agents. The person who delegates work in the firm is called the principal and the person to whom work is assigned is called the agent. Firms use minority share ownership plans because the risk preferences by the agents differ to those of the principals’ and that leads to inefficient decisions being made. Agency theorists explain the use of minority employee share ownership plans as a way of delaying compensation to motivate employees and limit the risk of employees shirking their responsibilities. The primary source of agency costs is the “separation of ownership and control” (Berle & Means, 1991), which becomes more apparent as the ownership of firm’s shares is wide spread and this is generally the case in large firms. To eliminate the agency costs and the agency problems, firms use minority share ownership plans as a way of monitoring because this reduces the gap between principal and agent (Tosi & Gomez-Mejia, 1994). This is perhaps one of the most important reasons why firms use share ownership plans, to create an identity of interests between the firm and employee. Employees who are participants of share ownership plans will not act in self-interest because decisions they make affect the value of firm, in which they have invested, so this aligns their goals with those of the firm. However, within the organisation it is very hard to monitor groups of employees (Alchian & Demsetz, 1972), since there are information asymmetries or behaviour that is unobservable. This may lead to moral hazard. Empirical evidence continually shows a correlation between employee ownership and higher productivity however theorists face difficulty explaining the relationship due to the “free rider” or “1/N problem.” Firms use minority employee share ownership plans because in regards to employees, it shows that they are committing to their human capital. Becker (1964) put forward the argument of human capital theory. For the firm, it helps to retain its most valuable employees so that the benefits in the long run of being a part of the share ownership plan can be realised. It distinguishes between specialise and generic human capital. Specialised human capital is not transferable as it is only of value to that firm. On the other hand, generic human capital is productive elsewhere and therefore more easily transferable between firms. Firms providing professional services are human capital intensive. Evidence from human capital variables suggests that participation rates in employee owned firms are likely to increase where it takes time to acquire the skills needed. If the majority of employees receive additional training, especially in developed markets where the creation of wealth has become a product of knowledge instead of resources. Furthermore, there are opportunity costs to employees because they could have invested their human capital in more remunerative ways elsewhere....
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • WHY do business internationalise Essay
  • Why Do Firms Grow. Essay
  • Why Do Managers Plan? Essay
  • Altruism And Why We Do What We Do Essay
  • Why Do Firms Go Global Essay
  • Do what? Essay
  • Why I Do What I Do Essay
  • Why Do People Use Drugs Essay

Become a StudyMode Member

Sign Up - It's Free