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The Boom in Employee Ownership

Inc. gets the scoop on the effects of stock options from Corey Rosen, cofounder of the National Center for Employee Ownership.

By Bo Burlingham |  @boburlingham   | 
 

Face to Face

More than 15% of the private-sector workforce is now covered by one ownership plan or another, and that figure is growing. It may get an additional boost from a new study on the effects of stock options

Employee ownership is a hot issue these days. Headlines tout the pros and cons of stock options in a volatile market. On Capitol Hill a congressional subcommittee considers legislation creating "super stock options" that would reduce the taxes employees pay on the options they exercise. The measure would no doubt promote the already explosive growth of stock options as a tool for attracting and keeping employees in a tight labor market. Meanwhile, a newly released study addresses the concerns that a growing number of shareholder groups have raised about the cost of the stock-option boom -- and the price that shareholders may be paying for it.

Few people know more about these issues than Corey Rosen does. Employee ownership is a subject he's been interested in since 1978, when as a legislative aide on Capitol Hill he got involved in drafting some of the legislation on employee stock ownership plans, or ESOPs.

Two years later he decided there was a need for some kind of resource center on employee ownership. Not many people knew about ESOPs, and the companies that had the plans had no way of finding out what it took to make them work. Rosen tried to persuade various people to set up such a resource center, but there were no takers. So, in 1981, he cofounded the National Center for Employee Ownership (NCEO), which remains the single best source of information on employee ownership anywhere in the world.

Rosen spoke with editor-at-large Bo Burlingham from the NCEO offices, in Oakland, Calif.

Inc.: Employee ownership has always been sort of a nice idea but a marginal business phenomenon. How important is it in the economy as a whole?

Rosen: It's becoming very important. As near as we can tell, between 16.5 million and 18.5 million people are currently involved in either an ESOP or what we call a broad-based stock-option plan. By that I mean a plan in which more than 50% of a company's full-time employees receive options.

Inc.: Is 18 million a significant number of people?

Rosen: It's more than 15% of the private-sector workforce, and the numbers are rising fast. Over the past decade, we've seen an explosion in the use of broad-based stock options as a form of compensation for employees, from about 1 million people in 1990 to between 8 million and 10 million today, and there's no sign that the trend is abating. The number of employees covered by ESOPs is growing, too, but more slowly. It's up to about 8.5 million people now.

People have figured out that you need to be an owner to accumulate wealth, so increasingly they're asking for equity.

Inc.: So what's going on? Do you think it's a response to the tight labor market?

Rosen: That's a factor, for sure, and probably the most important one, but I think there are at least three other things going on at the same time. To begin with, employees have decided that they want stock. Since 1973, median household income has remained virtually unchanged, while the Dow has gone from three digits to five. People have figured out that you need to be an owner to accumulate wealth, and so increasingly they're asking for equity.

Then there's the continuing evolution of management philosophies. Business literacy, open-book management, work teams -- they all used to be radical ideas; now they're commonplace. People are constantly being urged to think and act like owners. Well, if you don't make them owners, they're going to feel manipulated. Then again, if you do, you gain legitimacy as a manager. You have a stronger case in talking to people about all of these things you want them to care about.

Finally, there's the change in the nature of ownership itself. It used to be that a company's assets were primarily physical and financial. Now they're increasingly intellectual -- brands, patents, reputation, and so on. In fact, according to some brokers, intellectual capital accounts for more than half the value in the stock market today.

Inc.: How would that influence a company's decision to share equity?

Rosen: Who owns the company's future intellectual capital? Who's going to come up with the ideas that will allow you to create the next innovation, the next product, the next service? Employees have the enterprise-specific knowledge a company needs to keep changing and growing and creating value. That's as true for NCEO as it is for Microsoft. If the staff left here tomorrow, I couldn't replace them. We'd be out of business. So it makes sense to compensate people for the intellectual capital they're contributing, just as you'd compensate people for contributing financial capital.

Inc.: OK, but what about the stories we've heard regarding the negative effects of stock options, particularly in places like Silicon Valley? People say that employees become more interested in the value of their options than in building the company. So you get a type of behavior that's the opposite of what you're looking for.

Rosen: To a limited degree, that's undoubtedly true. You're dealing with human nature, after all. At Dell Computer, they talk about employees who "call in rich," meaning that their options are worth so much, they don't have to work anymore. And sure, there are some employees who jump around from start-up to start-up, looking for the best deal on stock options. I don't think it's a very widespread problem, however. In fact, most companies will tell you that stock options dramatically reduce turnover. And remember, if you added up all the employees in all the technology start-ups, you wouldn't get the total number of people in one large company.

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    • Bo Burlingham

    Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.


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