But that means employees cannot sell their stock, either. So if one of those millionaire employees retires and the company goes bankrupt one year later, the million is worthless all of a sudden.
I think the idea is that employees make most money from the profits paid to them as owners, instead of an increase in the stock price and then selling.
There is no difference for optimizing dividends vs. stock value increases due to reinvestment, as for any other company.
Employees that can sell shares at any time have the same financial interests as with any other corporation. As much reinvestment as grows value faster than the overall market is how much is best to reinvest.
Distribute the rest to owners to use/invest elsewhere.
It sounds like you just explained the opposite of what you said. If you can only get the dividends and can never sell your ownership outright, it makes sense to optimize for long term, sustainable growth and profits over short term profits. So, you don't care about stock value increase as you already own your shares. Actually, I'm thinking low share prices compared to dividends are good because it allows you to buy more and earn more.
It sounds like this is a much healthier concept overall?
Profits and operating cash flow are two different things. Only the latter matters in terms of meeting payroll. Very few companies of any kind cut pay or lay off employees just because they "had a bad quarter." Even when there is a bad year or two (such as during coronavirus pandemic), the government will usually step in and offer generous tax credits to try to keep employees working.
>> So if one of those millionaire employees retires and the company goes bankrupt one year later, the million is worthless all of a sudden.
Right, so everyone is interested in the long term health of the company.
It's a different model, one that may well be better than what most are doing. Of course most CEOs, private equity, and folks on Wall Street want you to think otherwise.
The problem is most employees don't have enough control to do anything about bankruptcy. Even if you see it coming you can do nothing about it from your position. seeing it coming is also hard as employees are rarely given that information - odds are a significant chunk of employees find out about the bankruptcy via the nightly news when it is too late. Once you have hindsight it is easy to look back at the financial statements and see it coming, but most people are not qualified to read those statements and so won't understand what they mean - or how a bankruptcy event looks different from normal ups and downs.
Everyone is certainly interested in the long term health of the company. But exogenous shifts like technological change, trade, COVID, etc. might cause the company to go under - or maybe you're just outnumbered by people who make poor decisions.
If this happens, people who have worked at the company for 15 years and have most of their "retirement" in the form of ESOP shares will a) lose their jobs and b) lose most of their retirement savings. On the same day.
Libertarians sometimes fantasize about how if we didn't have the FDA, people would be incentivized to do their own research on food and drug safety. Sure, sometimes dumb people would get it wrong and kill themselves! But that's just the price we (well, they) need to pay for everyone to have good incentives. This seems like the same category.
Nothing requires an ESOP to skip on a separate retirement fund for employees and expect them to retire from their share of the investment.
In the contrary, I expect the owners of an ESOP are very much in favor of having a well managed separate employee retirement fund. More so than in a publicly owned company.
But of course you are right that the risks factors of losing your income and losing your investment are pretty much 100% correlated for an ESOP. Some investment diversification is always a good idea.
But that means employees cannot sell their stock, either. So if one of those millionaire employees retires and the company goes bankrupt one year later, the million is worthless all of a sudden.