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The Employee Ownership Update

Corey Rosen

March 28, 2008

(Corey Rosen)

Bear Stearns and Employee Ownership

One of the motifs running through the Bear Stearns implosion stories has been that employees owned 30% of the company, creating echoes of another Enron. The story is more complicated, and we have been at some pains (largely successful) to help reporters understand the differences. Bear Stearns does have an ESOP, which owned somewhat less than 3% of the stock in 2007. The ESOP was one of three retirement plans and, at the end of last year, accounted for about 22% of all retirement assets held in the plans. The remaining assets were in diversified investments. Beyond that, another estimated 27% of the stock was held by individual employees, primarily through one of three "key" employee award programs. In just the last two years, over $500 million in awards were issued just to the top five executives at the company, and the CEO at one point had over $1 billion in equity. There is no way to know just know many other employees were defined as "key" or how much ownership they had, but it is safe to say few of these people will be in the situation of many Enron workers who were left unable to retire even in modest circumstances. So while the situation is indeed very painful for Bear Stearns employees, it is quite different from the numerous "stock-drop" problems that left workers with severely depleted 401(k) accounts.

Why Sharing Ownership Could Be More Painful to You then Valuable to Participants

The dollar you give to employees in ownership usually feels like a lost dollar to you. Unfortunately, it probably does not seem like a gained dollar to your employees. That asymmetry has been the cause of a lot of hand-wringing among companies that share ownership, as well as a lot of mismatched expectations about how employees will (and should) react. Understanding why this asymmetry exists, however, can help make plans more effective.

Classical economics-what most of us learned in school-is premised on the notion that people make economically rational decisions. For instance, if I offered you a guaranteed 15% return on an investment over a one-year period, you'd be irrational not to take it unless you could make more money doing something else. The assumption makes for a lot of very elegant formulas, and has helped us understand how markets work. But in recent years, the notion has been challenged by behavioral economics, which says that people are complicated and often make decisions based on non-economic considerations, some rational, some not.

Two of the things behavioral economists have found of special relevance to employee ownership are that 1) people value the risk of loss more than an economically equivalent risk of gain, and 2) people excessively discount the time value of money. For instance, researchers found that people were more willing to take a double or nothing bet if they had lost $100 than if they had won $100. Most people would also rather have $5 now than $10 next week.

Translate these concerns to stock. Employees routinely can buy stock in public companies at a discount through employee stock purchase plans (ESPPs) and turn around and sell it right away. All they have to do is set money aside over a several-month period. But only a minority do because they value current income too highly (albeit those who are living paycheck-to-paycheck can't). When a company grants a stock option that won't vest for several years, and, if it is a private company, has no specific way to become liquid, employees will discount the present value of the option by well over half of what an accountant would say the present value is. When employers set up an ESOP that also vests over time and does not pay out until some time after termination, employees may not see it as real money.

So what can companies do? Part of the answer is to understand that people are not just being dense. They are just being people and probably responding in much the same way that business owners would if they were in a similar situation. Sharing ownership still can be a very valuable tool; just don't expect employees to view it the same way a someone who is sharing the ownership will. Second, spend a lot of time educating people about issues like the risk/reward ratio, the time value of money, and what kinds of guarantees are in place for their ownership to be liquid. Finally, get people who have benefited from you plan (or another plan if yours is too young) to come talk about what they did with the money, making the ownership more concrete.

Nominate Your Company for the Fortune 100 Best Companies to Work For List

Employee ownership companies again comprised over half the stock corporations on the the Fortune 100 Best Companies to Work For list, including the No. 1 company, Google, which has a variety of broad-based plans, and nine ESOP companies. Nominations will close April 9 for the next list. It is open to companies with 1,000 employees or more.

The list is the product of the Great Place to Work Institute. I am on the board of the Institute but have no input into the selection process. However, having seen in detail how the selection process works, I know that many of our members would be prime candidates. The initial application process just takes five minutes. From there, a sample of employees would fill out a survey and there would be a culture audit. There is no charge to apply, and all companies get a summary report of how they stack up against the best companies based on the survey results. So it is a worthwhile process, even if you don't win.

To apply, go here.

Great Game of Business Conference April 30-May 2

Employee ownership and the Great Game of Business are natural partners. The NCEO has been working with the Great Game of Business since the early 1980s, and we strongly encourage anyone interested in making open-book management effective to attend this meeting April 30-May 2 in Saint Louis. The day before the meeting, we will be holding a workshop on effective ESOP communications. For details on the Great Game meeting, go to

Author biography and other columns in this series

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