U-M’s E. Han Kim: Does employee capitalism work?

ANN ARBOR-Broad-based employee stock ownership plans, if properly designed, are the best way to ramp up productivity, new research finds. E. Han Kim, a finance professor with the University of Michigan's Ross School of Business, said the plans work best when the right incentives are in place. Although firms with such plans, also known as ESOPs, claim they increase productivity by improving employee incentives, Kim's research finds that results vary by size of the plan as it relates to the total shares granted to employees and the number of employees. Some ESOPs are implemented by firms with low cash reserves and limited access to external financing. These firms want to conserve cash by substituting wages with employee shares, leading to lower wages after the plans take effect. Other plans are meant to align managers and workers in an attempt to thwart hostile takeover bids, Kim said. "These non-incentive motivated large ESOPs are unlikely to enhance productivity," Kim said.