Worker-Owned Firms

by Reihan Salam

Recently, Moira Herbst wrote a short article in The Guardian extolling the virtues of worker-owned firms in the U.S. She framed the spread of employee ownership as a vehicle of social justice, but I was somewhat more interested in the possibility that employee ownership might mitigate extractive behavior on the part of workers and managers, including shirking. In an essay in Shared Capitalism at Work, a collection that takes a broadly positive view of worker-owned firms, Richard Freeman, Douglas Kruse, and Joseph Blasi explore the impact of group incentive systems on free-riding behavior. The following are observations drawn from the paper:

1. Most workers believe that they can readily detect shirking by fellow employees.

2. Workers are most likely to take action against shirkers in workplaces where employees are paid by some form of “shared capitalism”—by which we mean profit sharing, gain sharing, stock options, or other forms of ownership—and they participate in decisions or work in team settings.

3. Responses to these forms of group incentive pay are largest when they trust management and have good employee management relations, and when the fi rm adopts high- performance human resource policies, low levels of supervision, and pays fi xed wages at or above market levels along with the incentive pay.

4. Consistent with the theory of free riding, anti- shirking behavior is greater in smaller fi rms and is particularly strong in small fi rms with shared capitalist pay.

5. Workers in workplaces where there is more anti- shirking behavior report that co- workers work harder and encourage other workers more, and that their workplace facility.

In another essay, on the role of employee ownership on workplace performance, Freeman, Kruse, and Blasi, joined by Christopher Mackin, report that shared capitalism has a positive impact across many dimensions:

Shared capitalism is linked to lower turnover and greater loyalty and willingness to work hard, particularly when combined with high- performance policies, low levels of supervision, and fi xed pay at or above market levels. Workplaces where workers average more shared capitalist compensation report greater employee effort along several dimensions. The only outcome with which shared capitalist compensation is adversely related is absenteeism, but this result largely disappears when controlling for interactions with high performance policies and closeness of supervision. 

Looking at particular programs, the strongest effects of shared capitalism are for profit sharing and employee ownership. The largely positive results are corroborated by worker views: most workers report that cash incentives, stock options, ESOP stock, and ESPP participation motivate them to work harder. The less risky forms of shared capitalist programs—profit sharing, gain sharing, stock options, and ESOPs—have greater effects than the riskier programs in line with concerns about workers being averse to risking their own capital.

The authors acknowledge, however, “corporate culture” as a latent variable might be doing much of the work in improving workplace outcomes. The question is whether or not shared capitalism is likely to encourage the use of high performance policies.

One of the issues I’m eager to explore further is whether or not shared capitalism makes it more likely that employees will embrace organizational discipline. That is, if the business cycle goes south or if the larger competitive environment changes and the firm has to reduce costs, are employees in shared capitalist firms more likely to make concessions than they might be under a different ownership structure?

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.