What Types of Firm Use Minority Employee Share Ownership Plans, and Why Do They Do so?
If a firm uses a minority share ownership plan, external shareholders own it with a minority of employee owners, usually no more than 5% of the firm. Management or the board of directors exercises control of the firm and there is limited employee participation. While a significant number of employees may own shares in the firms they work for, almost all of this stock is in firms that are only minority employee-owned. In this essay I intend to explore the causes and consequences of firms choosing to use minority employee share ownership plans.
Firms using minority share ownership plans tend to be larger and have high levels of employment, greater levels of sales and are capital intensive. These firms all have complex tasks in industries such as finance, retail and communication. This leads onto the first reason employee share ownership plans are used. Agency theory (Jensen & Meckling 1976) implies that firms that have a sole owner will have the lowest agency costs. The opportunity for agency costs to incur arise because there is not a sole owner and individuals become agents. The person who delegates work in the firm is called the principal and the person to whom work is assigned is called the agent. Firms use minority share ownership plans because the risk preferences by the agents differ to those of the principals’ and that leads to inefficient decisions being made. Agency theorists explain the use of minority employee share ownership plans as a way of delaying compensation to motivate employees and limit the risk of employees shirking their responsibilities.
The primary source of agency costs is the “separation of ownership and control” (Berle & Means, 1991), which becomes more apparent as the ownership of firm’s shares is wide spread and this is generally the case in large firms. To eliminate the agency costs and the agency problems, firms use minority share ownership plans as a way of monitoring because this reduces the gap between principal and agent
Firms using minority share ownership plans tend to be larger and have high levels of employment, greater levels of sales and are capital intensive. These firms all have complex tasks in industries such as finance, retail and communication. This leads onto the first reason employee share ownership plans are used. Agency theory (Jensen & Meckling 1976) implies that firms that have a sole owner will have the lowest agency costs. The opportunity for agency costs to incur arise because there is not a sole owner and individuals become agents. The person who delegates work in the firm is called the principal and the person to whom work is assigned is called the agent. Firms use minority share ownership plans because the risk preferences by the agents differ to those of the principals’ and that leads to inefficient decisions being made. Agency theorists explain the use of minority employee share ownership plans as a way of delaying compensation to motivate employees and limit the risk of employees shirking their responsibilities.
The primary source of agency costs is the “separation of ownership and control” (Berle & Means, 1991), which becomes more apparent as the ownership of firm’s shares is wide spread and this is generally the case in large firms. To eliminate the agency costs and the agency problems, firms use minority share ownership plans as a way of monitoring because this reduces the gap between principal and agent