Employees Share Ownership Scheme for Democratization of Wealth and Finance

In the democratization of finance and wealth, ownership of shares by many in the society may help, especially in easing the tension between haves and have nots as it also helps bridge the wealth gap between the rich and poor. But, understandably despite many benefits that may be brought by a company accessing fairly priced capital from the public and hence allow for democratization of ownership, access to finance and wealth, most companies owned by individuals and families prefer not to allow strangers to part own their companies or to stand the scrutiny of the market. Hence, many companies would not pursue efforts to access capital via Initial Public Offering (commonly known as IPO) and/or thereafter list their companies to the stock exchange.
However, the key issue to contemplate and which is the topic for today’s article is that, we can somehow understand the idea and sentiments that it is difficult to share benefits and secrets of the company with strangers and outsiders, yes – even if we need that capital. But then, why is it that owners of companies do not consider giving access to ownership of their companies even to those who are not strangers and probably are closest to the company? i.e. employees –these are generally not outsiders or strangers.
And just in case, one would want to pursue this idea, how can it be implemented and why? I will explain.
The easiest way to allow employees into the ownership of the company is by way of Employee Share Option Plans, popularly known as ESOPs. This is a concept used by companies as a scheme of selling shares to the employees by which they become a shareholder in the company and thus hold a certain small level in the ownership of the company.
ESOPs are generally awarded to employees based either on performance or tenure of the employee with the company thus, it serves a two-fold purpose for both the company and the employees.
First of all, for employees it acts as a tool of motivation for a basic reason that once they own shares to the company that they serve, they therefore will feel even more responsible for the good performance of the company, which then determine the value of the shares of the company. If the company performs well, the value of the shares rises and vice-versa.
Second, it helps the employer to still retain the company but also being assured of a good level of performance from employees who are also co-owners of the company and who knows they direct benefit from the company not only in the form of salaries and wages, but also in sharing company’s profits. This will under normal circumstances enhance their efficiency and that of the company
So, in addition to ESOP being a tool that is commonly used by employers to either reward employees or as an exit mechanism from business ownership, what are other direct benefits? (i) it helps in aligning the interest of employees with those of the owners of the company; (ii) it is a non-cash compensation tool that helps the company to compete for the best human resources and attracting good talent to the company while also serving as a talent management mechanism; (iii) it gives an opportunity for corporates to pay its employees without necessarily reducing its book bottom line/profits; (iv) it provides a sense of ownership and belongingness amongst the employees; and hence (v) it significantly help in boosting the morale of employees and their commitment to the company. Further to these benefits ESOPs. as I indicated at the beginning, helps also in bridging the wealth gap and in democratization of finance and wealth.
In his research paper titled: “Employee Ownership, ESOPs, Wealth and Wages” of 2016, Jared Bernstein (the Chief Economist under Vice President Joe Biden), concludes that ESOPs do have the potential to equalize wealth and wage distribution. He further demonstrates that minimum wages, though a useful policy to reduce the gap between low and middle wages for the high-end inequalities it is found to be a n inadequate means. By this Jared suggests that ESOPs hold the potential to bridge the wealth gap.
He points the following key reasons in arguing for his proposal: (1) ESOPs have shown to reduce income inequality, he argues that since ESOPs transfer capital ownership to employees who in normal circumstances are less likely to own businesses via capital contributions; (2) companies in ESOPs appear uniquely resilient in recessions relative to companies that does not operate ESOPs schemes, Jared essentially argues that companies that do not operate ESOPs schemes its employees progress appears to be trapped in ways that may or may not improve the companies output and efficiency especially in the long run, and (3) he says – since wealth inequality is considerably less equitably distributed than wage inequality, ESOPs present the opportunity to less the overall inequality.
And when the company opts an ESOPs schemes it is recommended that it goes hand in hand with listing of the company to the stock market, even if it is by the way of introduction (i.e. listing shares in the stock exchange without IPO) which then provide a market, fair valuation and pricing for those shares issued to employees via ESOPs scheme.

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