Power to the people. At least, that is Nick Clegg’s vision. The UK’s deputy prime minister wants employees in all but the smallest companies to be able to request shares in their employer. It is not the stupidest idea a politician has ever had. Over the past two decades, shares in British companies in which non-board level employees owned more than 10 per cent of the stock outperformed other FTSE All-Share companies by an average of 11 per cent a year, says law firm Field Fisher Waterhouse. The model is retailer John Lewis which is entirely employee-owned, pays a flat-rate bonus to all staff and in the past decade has more than doubled its profit before bonuses and tax to £368m.
Academics, however, are divided on the benefits of shared capitalism (employee share ownership and profit sharing), particularly for employees. Research has found some positive links between such schemes and attitudes towards work. But most employees have no influence on important decisions. Indeed, about one-quarter of the shares in Lehman Brothers, and one-third of the shares in Bear Stearns were staff owned. Furthermore, equality initiatives, such as flat-rate bonuses, can encourage free-riders and demotivate good performers.
At worst, such schemes prey on less financially savvy workers. The mobility of labour can be reduced as equity can handcuff employees to their company. Wealth diversification is also discouraged: about one-fifth of British share plan participants have half or more of their savings tied up in their employer’s stock, according to University of York research. The proportions are similar for US employee-owners. This can lead to catastrophic losses for workers such as those at Enron whose savings were tied up in the bust energy trader’s stock. All the motivation and hard work in the world means nothing if management messes up.