Observations on Employee Ownership
At Chrysler and GM, It's Not Employee Ownership
May 2009As part of their efforts to recover, General Motors and Chrysler both are pursuing agreements with the UAW to provide the union with company stock to help fund retiree health-care trusts. There have been a number of articles in the press saying that as a result, the employees will now be owners of General Motors and Chrysler. In fact, what is being proposed is not really employee ownership in any meaningful sense.
Chrysler had agreed with the UAW to give shares to the union health fund trust valued at 55% of the company and a promissory note for $4.59 billion to be paid with interest in installments. But if the shares can be sold for more than the price at which they were contributed, the U.S. Treasury gets the difference. It is still possible, if unlikely, that Chrysler's bankruptcy negotiations will undo this arrangement. GM is negotiating for a similar deal to fund half of its $20.4 billion obligation, leaving the UAW with 17% of the company.
A VEBA (voluntary employee benefit association) will hold the shares. United Auto Workers President Ron Gettelfinger told NPR Friday that "We do not have the ability [to hold a long-term stake] because of the cash needed in the VEBA." He said the VEBA will start selling the shares as soon as possible.
So how does this compare to conventional employee ownership through an employee stock ownership plan (ESOP), broadly distributed stock options, or similar arrangements? Unlike participants in such plans, employees involved in one of these VEBA arrangements do not see personal gains or losses from the share price other than to the extent that if the shares do go down enough, the VEBA may not have sufficient funds for retiree health care programs. Many, and perhaps most, current employees may never benefit from these programs, which very well could be reduced or eliminated in the future if the companies do not recover quickly. If the stock does perform at all well, it will be sold as soon as it meets the VEBA obligation, providing no potential upside.
Second, in actual employee ownership plans, employees individually have ownership attributed to them; here, the ownership is held on a short-term basis by a trust associated with the UAW.
Finally, employee ownership is very rarely used in troubled companies, despite all the media attention to companies such as the Tribune Company and United Airlines. Well under one percent of all employee ownership plans are used this way. Plans are typically set up in healthy businesses as a way to provide an equity stake to employees and, in the case of ESOPs, very often to transfer ownership over time to employees in a way that does not require them to use their own money to buy shares.
Details on how employee ownership actually works and is used can be found elsewhere on our Web site.