The article is arguing for ESOPs, basically stock options for employees. The examples cited are actually quite tame by tech industry standards: "During Central States’ worst year, employees earned the equivalent of 6 percent of their pay in stock, during their best they earned 26 percent." By contrast, FANG employees routinely make >50% of their compensation in stock, and it can be up to 80% in good years.
As for how these get started, it's the same as any tech startup. The founding team owns the whole company at formation, and then they progressively give it away to increase the overall valuation of the company. You can do that through giving away stock in exchange for funding from a VC that you can use to pay employees, or you can give away stock directly in exchange for services rendered.
And yes, this looks bad during a down year. Tech companies have this problem all the time - employees are demotivated when the stock price goes down, which can have further negative effects on the stock price.
ESOPs are common in the civil engineer world. I have mixed feelings about it. Private company stock valuations look like a magic show to my untrained eyes. Employee-only buying can lead to weird cash-flow schemes, like your ESOP contribution being held, unbeknownst to you, in a zero-interest slush fund until stock frees up.
What gets me most is that rank and file employees in the ESOP almost never have directly exercisable rights as shareholders to vote or have any say in the business. You don’t get to say no to a merger. You don’t get to fire the CEO when his big idea is a flop. The ESOP vote is wrapped up in a trust or some abstraction controlled by an advisor or a board probably appointed by the real board of the company. Ultimately the executive staff and hand-picked insiders will have all the real authority of ownership. Employee stock thus is not much more than a complex pension program for almost everyone. Regular employees will not be real owners in any meaningful sense unless they get into the small trust network of existing owners.
If you’re an early arrival to an ESOP with good growth potential, you will do way better than someone with a little 401K match. They also get great tax breaks. Overall they’re good for employees, but the messaging is usually misleading.
Getting some of your salary in stock options isn't really an employee owned company. How many % of total Google shares are owned by employees (excluding the founding employees)? 0,0000000001%? At least 50% would be required for it to be viewed as an employee owned company.
I don't know about Google specifically, but I know that it's way more than 0.0000000001% because I personally have been paid more than 0.0001% of Google in stock compensation. A typical Series A startup reserves 20% of the company for the option pool, and then there are follow-on refresh grants.
Note that if you run the math on the company in the article, they're considerably less generous than that. They say they have 1500 employees, $1B in revenue, and the average employee makes about 8-26% of their earnings. Figure that's maybe $20K/employee * 1500 employees = $30M in stock compensation on $1B in revenue, so they spend 3% of their revenue on stock compensation. If you figure the company is valued at $4B, they're giving away like 0.75% of the company per year, a bit less than Google and way less than a tech startup.
This is probably a PR hit for Central States Manufacturing anyway, to help their recruitment efforts.
Google spent $22 billion on stock-based compensation in 2023 [1]. That's over 1% of the stock of the company transferred to employees in one year.
Now, many people probably sell that stock as soon as they can, so the employee ownership isn't cumulative over the years. But it would be quite hostile to employees to stop them from doing this in an effort to make the company more employee-owned.
Indeed, employees often effectively sell their stock to existing owners via share buybacks.
This seems entirely rational to me - I've bet a significant part of my career on the success of the company I work for, why should I also bet my savings? Diversification has real value, and going all-in on one company is just a bad bet.
At the end of the day, an employee is just a special class of vendor -- scrape away all of the normative cruft that gets injected into these discussions, and you have a fee-for-service relationship between a customer and a supplier.
And lots of people would rather just be that supplier, who gets paid a specified amount of money for a specified provision of service, and not be forced to bear short-term risk or to hold out for a long-term upside that depends on lots of stuff they have no control over working out for the best.
Well, they're different in that they're vendors and also vendees. The theory behind employee ownership is that it makes them better vendees on top of maybe making them better vendors.
nit: With a buyback, the buyer is the corporation itself, and the cash comes from the corporate treasury. Transitively this is "selling to existing owners", but it's not like their shares are transferred to other shareholders. Rather, the shares cease to exist and the value of all other shares increases to reflect the reduced number of shares outstanding.
Mechanically it's pretty similar to if the company had just paid out cash as salaries (cash leaves the corporate treasury and enters the employee's brokerage account at market values), but the market is the intermediary, and the tax and accounting treatment is pretty different.
Also it's generally unwise to hold onto your employer's stocks that you were granted as single stock ownership is inherently risky. There's no reason to believe your employer's shares are going to beat the market.
Also, the majority of employees in a company other than small startups do not have the ability to shift their company's success materially to make it a worthy incentive to own and hold employer issued stock.
90% of employee owners also have a 401k or retirement account. An ESOP account is in addition to their retirement account, not instead of it. So it's actually more of an upside without any downside.
Technically off by 6 orders of magnitude, or a factor of a million. Orders of magnitude are exponential - each order of magnitude is a factor of 10 more than the last, so you take the log10 of the factor of increase.
>As for how these get started, it's the same as any tech startup. [...]
To clarify, the gp was asking a rhetorical question that he already knew the answer to when he stated, "How would a business [that already looks attractive for ESOP] like this get started? [... his recap similar to your recap ...]"
To put it differently, the scenario he's trying to explain is something like this given that ~9 out 10 businesses fail :
- you can't look at just a single company's successful timeline to judge the ESOP for society; you also have to consider all the failed companies and how ESOPs would play out in those timelines as well. Since ~90% of businesses fail, you have to play out the financial dynamics of employees buying into ownership of all those failed companies. And in contradiction of employee-ownership, a lot of employees would prefer getting a bigger paycheck from a dying company rather than having money deducted to buy worthless equity shares.
- e.g. of course employees would love to be significant workers-cooperative owners of Amazon Inc and Apple Inc. But the analysis also must include employees owning worthless shares of Pets.com (bankrupt 2000 and shutdown) and Commodore Computer (bankrupt 1994). Some workers got employee-ownership shares of Commodore Inc instead of Apple Inc?!? Well, it sucks to be those workers.
There's no reason why this is beneficial. Money and stocks are fungible you can freely exchange one for the other as much as your heart desires. There's no difference between which one you receive.
Money and stocks would be fungible if all companies were public, all investors had perfect information, and no employee could make a difference in the stock price of their employer. All three of those conditions are false. You may be working for a private company that you would not otherwise be able to buy the stock of; sometimes, employment is the only way to get ownership of it. You often have better information about how your own employer is doing than you do about random public companies. And for smaller companies, you can often make a difference in the company's bottom line. This is why companies offer stock compensation in the first place, as an incentive for you to have a stake in the company's success.
If your company is a shithole or fraud, then you absolutely do not want to be receiving company stock. But then, if that's the case you may want to re-evaluate working for it at all.
Let's ignore that most of the places people work are not publicly traded companies and pretend that any employee could buy stock in their employer.
If that were the case and employees were compensated equally in stock vs cash, then yes there is no _rational_ difference. However, most human are not rational.
People like to take pride in their work and do a great job, this is amplified when they stand to directly benefit from their efforts. By enabling employees ownership in a company you're hoping to incentivize them to work harder and therefore amplify the return on their labor.
The private company case is worse because now it's completely illiquid. This all strikes me as a rich person's idea of what poor people want. Someone making $15/hour wants the $15 not $10 + equity in a private company worth $5 which they cannot sell but gives them 1/1000 voting rights and maybe sometimes a 7 cent a quarter dividend subject to board approval and market whims.
Most workers are not sophisticated investors and I'd rather they put excess savings into broadly diversified index funds instead of low quality equity in whatever small business they happen to be working at.
how does equity in privately held companies work? I get that some share provide voting rights, but that's not generally what to employees.
when the people in the article cash out their ESOP shares to buy a house... who's on the other end of that deal to buy those shares? is it some other employee? Wouldn't that mean that money is just switching hands between your employees rather than helping all your employees get rich?
related: i exercised some options for a startup that i used to work at a few years ago. they're now >10 years old and financially healthy, but no IPO in sight. what's the point of those shares if there's never an exit?
The vast majority of small businesses have no "exit" in sight. Instead they want to rely on solid business fundamentals. Sell a product/service for a profit. Typically the owners of the business get access to the profits proportional to their ownership stake.
By enabling employees to be owners you grant them access to those profits and to participate in discussions around how to spend/re-invest profits.
In small businesses like that, how often do profits actually appear? It seems like big public companies often decide to increase spending to chase growth that would increase revenue and be profit-neutral. Do smaller companies think about it in the same way?
We spend our profits in different ways. Some of it goes to future planning (bigger stock piles, larger cash reserves, growing headcount etc). Technically all our working capital, all our assets, all our stock, has been funded by "retained income".
That said we also pay bonuses (13th check) in profitable years , and we issue dividends to owners. The dividends can be significant. Or 0. Or less than 0 (salary deferred in bad years.)
We want long-term sustainability , but also returns for being owners (otherwise we might as well go get a job somewhere. )
Organic growth is fine, sales going up is good, but we're not looking for hyper growth.
There us no "exit" (for the business) on the cards. An IPO is out of the question, and having seen the destruction caused by corporate acquisitions that's not a route we like either.
It's not glamorous being a small business churning out regular profits. But it pays well.
>If that were the case and employees were compensated equally in stock vs cash, then yes there is no _rational_ difference.
Even if this assumes an equal net present value, wouldn't the volatility of stock vs. cash make a very rational difference in expected future value? For people who are risk adverse, the cash would probably be preferred; for those who are less risk adverse, the opposite is probably true.
In an ESOP, stocks are not normally fungible and cannot be traded easily. Usually they are bought back post employment. In my case I was able to either get cash or have it put into a 401k.
Stock vests over time. By providing stock instead of cash the company incentivizes the employee to do their best, because that will ostensibly help the stock to be worth more than the cash by the time it vests. Hence, incentive.
As for how these get started, it's the same as any tech startup. The founding team owns the whole company at formation, and then they progressively give it away to increase the overall valuation of the company. You can do that through giving away stock in exchange for funding from a VC that you can use to pay employees, or you can give away stock directly in exchange for services rendered.
And yes, this looks bad during a down year. Tech companies have this problem all the time - employees are demotivated when the stock price goes down, which can have further negative effects on the stock price.