The motivational effect of employee ownership springs from two different sources. On one hand you have the obvious economic benefit each employee receives from return on investments and asset growth. On the other hand we have the motivational effect coming from wielding decision power over the company. Unfortunately not both of these sources of motivation change for the better as the company grows to maturity. Economic motivation may increase as the company grows and yield economic benefits for the employees. However, motivation from owner influence may decrease as employees’ shares are diluted, thereby reducing the effectiveness of their vote. Less decision power naturally yield less motivation.
In addition to the change in motivation factors we can expect to see a decrease in loyalty as the company grows and shares are diluted. Employees may feel less inclined to protect the companies’ assets. With share dilution one might see a tendency of more spending and waste of resources, in addition failing to reduce risk. This would impose a substantial, but avoidable, economical cost on the organization in general. If you’re only spending a fraction of your own money why not spend more – preferably on yourself? This of course is a cynical view and only a caricature of real employees’ morality. Never the less, in order to make enlightened decisions we need to reduce our problem to its constituent parts and look at what levers we have available in order to solve our problems.
Thus far we have uncovered both positive and negative effects on motivation and loyalty as share dilution progresses. In order to mitigate these negative effects springing from growth and share dilution I propose an ownership structure that shifts the perceived and legal ownership to the employees’ own environment. The structure aims to promote local innovation and the feeling of ownership while preventing suboptimization at the expense of the larger organization. The following three points sum up the ownership structure:
- The governing corporation must own a controlling majority of each daughter company.
- All employees own an equal share of this governing corporation.
- The remaining minority ownership in each daughter company is owned by their constituent employees.
This approach assumes that employees own common stock with voting rights at stockholders’ meetings at both corporate and company levels. You might ask why we can’t go one step further and let everything be owned locally. Well, such a collection of autonomous small businesses will soon fall in to disarray as their individual goals eventually diverge. Even worse, they could be facing criminal charges under federal law if they actually tried to cooperate. In order to formally keep the daughter companies under one roof and reap the benefits of coordination and economies of scale we need a functional governing corporation. This focal corporation will give a collective sense of direction and the authority needed to fight the right fight.
The structure also assumes a corporate structure comprised of homogeneous divisions or daughter companies with a high degree of horizontal independence. This type of compartmentalization allows for segmentation of up to half of the overall stock in less diluted portions. However, that is not to say that the average employee now own less of the overall organization. Rather now each employee’s ownership has shifted towards the daughter company they actually work at, but still retaining the majority of their stock in the corporation in general. This ownership structure reaps the same benefits as any other employee owned company, but also retains a local autonomy and responsibility through a shift towards local ownership.
There are also many beneficial economic properties and incentives that may surface. Firstly, the employees now have a greater economic incentive to protect resources and assets at their disposal. Secondly, ownership in both a large corporation and a smaller constituent company makes for a desirable hedged investment profile. Thirdly, the employees are now incentivized and empowered to do their best in order to increase profits and reduce the risk they are exposed to in their own company – a recipe for success.