"Most owners already have very diluted stock, but it's diluted by investors. There's no reason owners can't still own the majority stake even as they sell the rest to employees. Or they sell it to their employees as their exit strategy."
"The value is replaced because we are growing. I may not be getting as many shares, but hopefully the stock price is growing because we're growing."
Yes but actually no.
ESOP and employee ownership generally is a great model. Its mostly the Warren Buffet model, and I strongly support it. Its not as uncommon as people think. Many software startup software companies use a similar model, giving shares to employees to align their incentives with the company. Every company I have worked for has given me shares.
However:
1/"dilution by investors"... not quite. The reason employees own a small portion of the overall stock base of large companies is that, eventually, all companies run into a cash crunch. Cash demands for expansion (e.g. acquisitions, equipment, buildings, etc) at a fast-growing small/midsize company are often higher than their free cashflow. It's a universal and great problem to have! Or, the economy goes down and manufacturing contracts.
A cash crunch is as inevitable as a full moon. Every company has one or more, and it keeps CFOs awake at night. Companies can survive a lot, but not negative cashflow. Not for long.
The company can finance cash needs either through debt or equity. Debt does not dilute stockholders, but is riskier in a downturn. Companies that have survived multiple recessions have very low debt.
Fast-growing companies generally prefer to finance with equity because debtors suck and investors perceive a higher return.
2/"company growth solves dilution," not quite-- "Earnings per share"-- its a ratio. There is no "hopefully" about it. Either earnings are going up faster than shares, or the c-level suite (CFO) can repurchases shares and reduce "dilution." As long as there is strong positive free cashflow, CFOs usually devote a portion to buying back shares to reduce/eliminating dilution. The trade-off is that cashflow devoted to share repurchases cant be used for expansion.
3/I am not saying there was anything wrong here. You should google how they "redeemed" 2,222,222 shares in August of 2020 from inactive participants and the associated lawsuit, because it illustrates my point. Google "central states companies re leveraging ESOP complaint ERISA 2020" this is the second link.
Basically in 2020 they needed to borrow from the ESOP to redeem shares from inactive participants (oh, that inevitable cash need!). I am thinking 2020, the cash crunch is covid downturn-related.
The company needs cash to redeem shares. It needs cash to pay suppliers and employees. It needs cash to expand. Period.
Who are we selling the stock to at retirement, at at what value? If there is no one to purchase the shares, the value of my shares is zero. If the company does not have the cash to buy me out, its also zero. Or, if the company uses a loan to the ESOP to redeem shares, its dilutative. If the company turns to outside investors, its dilutative.
Nearly every company you can think of (Google, Microsoft, Meta, Berkshire Hathway, even Disney) started as small core of highly invested employees.
Employee ownership is a great model, but eventually, all companies run into a cash crunch. Outside investors exist because internal free cashflow only gets companies so far.
It might be worth looking into the largest ESOP in America, Publix. It’s also the largest grocery store chain in the South. Depending on which employee I talked to about it, they said it’s an amazing job with great compensation or they just said it’s just like every other retail job with overbearing management and little pay. I haven’t looked deeply to really know.
It's an interesting discussion but there are drawbacks to the model. One would be, well, greed.
And I'm talking about the one that is somehow innate for most entrepreneurs. They have an idea, they want the company to be run as they want, and they want to be owners. The ESOP means ownership is diluted so I assume important decisions must be made with the support of the people. And, let's be honest, most of them don't know business.
I am pretty sure neither Jobs nor Bezos would have started companies if this was the only viable model.
Ok I have an answer on the dilution question. I asked Steve Storkan, executive director of Employee Ownership Expansion Network (or EOX), about this and he said that while it’s true that stocks get diluted as new employees become owners, the company is also hiring more people because it is richer. He said: “The value is replaced because we are growing. I may not be getting as many shares, but hopefully the stock price is growing because we're growing. So I don't feel like most ESOP participants feel the dilution as they grow.”
Most owners already have very diluted stock, but it's diluted by investors. There's no reason owners can't still own the majority stake even as they sell the rest to employees. Or they sell it to their employees as their exit strategy.
ESOPs are also not cooperatives, they are employee owned but not employee run. It is still the business executives in charge.
Ah, good catch! An early draft was using valuation figures, then I realized revenue figures would be much more powerful, but then missed editing that sentence.
Thinking through this only because I had been thinking through this for some time now. But it's a lot of thinking on a Monday morning so I will revisit. I have loads of question to ask starting from what is considered a small company considering the huge disparity in currencies across nations and continents.
I have two thoughts about this so far: They could either sell to their employees whenever they want to exit or they could transition to a partial or full ESOP whenever they'd like. For really small companies I'm not sure it makes sense to do it at all, they would have to join a larger ESOP to be able to afford those same benefits (but I have an example of this that i'm writing shortly.)
Please be cautious about using one company as a model. According to news reports, many Enron employees who were fully invested in that company lost all their retirement savings when Enron went bankrupt. Some other large companies that have gone out of business include Lehman Brothers, Radio Shack, Circuit City, Blockbuster, Tower Records, Polaroid, and Pan Am.
There's nothing to prevent any employee of a publicly traded company from buying as many or as few shares in that company as he or she wants and can afford. Making employees automatic shareholders in the company they work for deprives them of that choice. And most employees are better judges of what's important to them than are their managers. Any employee of an average company can get the same average return on investment while substantially reducing the risk of loss by investing in several different companies. Any investment advisor worth his salt will advise having a diversified portfolio—typically consisting of 40% low-risk fixed-income securities (such as T-bills and corporate bonds) and 60% higher-risk assets, which may include REITs and some commodity (especially gold) in addition to common stocks in a variety of small cap, large cap, growth, and value companies. Further diversification can be achieved by including some foreign assets, such as ETFs invested in companies in developed markets and emerging markets. You'd be well advised to consult some economists and investment advisors before writing your book.
Of course, businesses fail. But the ones you mention weren't ESOPs, they were just ordinary companies. It can happen to anyone. Fortunately, 90% of employees with an ESOP account also have a 401k, so having stock ownership in their company is not instead of having a diversified retirement account, it is in addition to it. In this way, ESOP employees are actually more diversified than non ESOP employees and with more potential for upside than an employee without an ESOP.
The companies I mentioned weren't ordinary (unless by "ordinary" you mean non-ESOP); they were large companies--which fail much less frequently than small or mid-size companies, which is why I chose them. That they were not ESOPs is irrelevant unless you have data to show that all ESOPs (since you claim all companies should be ESOPs) are sufficiently less likely to go bankrupt than large non-ESOPs to make up for the risk of having all or most of one's eggs in one basket. Having significant assets in a 401k or an IRA would greatly reduce risk. And I'll grant there are advantages to working for an ESOP. However, being more diversified is not one of them if a huge part of one's portfolio is in one company's stock. I'm unsure why you say ESOP employees have more potential upside than non-ESOP employees. I suspect you mean advantages other than market returns. However, if you're referring to market returns, there's a way to invest in stocks that will usually provide a higher return than having a large proportion of one's portfolio in one's own company: put your money in a small-cap value ETF. Small-cap and value stocks have higher average returns than large-cap and growth stocks. That's because the former stocks are riskier than the latter ones. Investors demand a premium for taking extra risk, which is why T-bills have such a low average return.
If you're just writing a fantasy novel, please ignore everything I've said above. But if you're trying to give financial advice in the process, I suggest you speak with a registered investment advisor, who is required by law to place a client's best interests above those of his own firm.
This. Additionally, I would cap CEO salaries at a maximum of $2 million annually, no additional stock options (must be the same as the lowest paid employee), no bonuses or the bonuses are commensurate with the rest of the staff, no housing or vehicles paid by the company, no additional perks, limited sign-on packages/retirement packages/severance packages. If the CEO drives the company into the ground or his or her choices lose the company profits, their salary is lessened accordingly. C-Suite salaries are the first to get cut when scaling back.
I tend to be more egalitarian.
It’s time to balance everything out. It’s been hugely disproportionate…always?
Personally I would prefer tying the pay of the highest paid employee to the pay of the lowest paid employee. For example, Dr. Bronner's has a rule that the highest paid employees can't make more than 10x the lowest paid employees. Rather than keeping the highest salary from growing, this keeps the lowest salaries growing. What harm could there be if the CEO is making $3 million but the lowest paid employee is making $300,000. I'm working on a story now about a company where the highest paid make only 6x the lowest paid. In their case, a CEO who makes $3 million would mean the lowest paid employee is making $500,000.
I never thought about that…hm. It’s certainly another option. I most likely wouldn’t go higher than 5x the salary of the lowest paid. I would continue to mitigate perks, stock options, etc.
"First of all because the founder of a company is entitled to own the entirety of his company because he founded it by himself and takes all the risk of starting a company."
If a company needs capital injection (boot strap), will employees be required to fund or put up their assets as collateral? How will bankruptcies be managed?
ESOPS can get loans fairly easily, but they don't typically sell to another company or go public as options. But I'll write more about this in a separate essay taking this into consideration.
Here's a ~150-year-old UK example of employee ownership via a trust, to the extent staff aren't called employees, but 'partners'. They're the 3rd largest non-share traded company in Britain. Profits are paid as staff bonuses. https://en.wikipedia.org/wiki/John_Lewis_Partnership?wprov=sfla1
I think ESOPs can be great alternatives to traditional corporate structures, but the discussion of CEO compensation is incomplete if it does not mention the brief history of high marginal income tax rates, or of the income tax in general.
We're laying a bed of foolish, regressive tax policy decades in the making that has, along with inflation, spelled ruin for the middle/working class.
The income tax came into existence in 1913, along with the Federal Reserve. Initially, it was passed as a small tax levied only on the super rich. By the time my parents were born just 40 years later, everyone who drew a paycheck was paying the income tax, and simultaneously, the super rich had shifted their compensation to receive shares of stock instead of income, thanks to preferential tax treatment.
The IRS aims its taxes at the super rich, and they always start out small, but the IRS has terrible aim and even worse magnitude control, so they hit the middle class with taxes larger than they claimed were only intended for the super rich.
ESOPs don't solve this problem, because most people need to earn income to pay bills. Even if you paid everyone in 90% stock (like many CEOs currently get paid) it wouldn't help people, because they would need to turn around and sell their stock, triggering a tax event that would be more or less the same as if they had earned income.
The problem isn't compensation structure, it's the tax code, which taxes the middle class punitively in the same we tax cigarettes, alcohol and sugary beverages. Inflation is the other hidden tax that even more perversely hurts income earners while preferentially benefitting the rich and politically connected.
And why the hell should anybody still start a company and wants to become an entrepreneur when he needs to give stocks to every employee he hires? This is completely stupid. If you want to become rich, become an entrepreneur. And you can have responsibility and a say in the company if you get up the corporate ladder. This collectivist ownership of companies reminds me of Socialism at its best.
A company is rarely an altruistic project intended to make everyone rich. It is a means to solve a real problem in the real world for real customers.
I often compare a company to an army. It needs a centralized command structure. The infantry soldier (employee) should not have the same say in the strategic affairs as the general (entrepreneur / CEO) has. While the general can and should take the advice of the infantry seriously, it is ultimately his decision. And this is good as it is. Decentralized systems only work well when everybody has the same goal. And that is also rarely the case in companies.
But it is much easier to be the general of the army then an infantry soldier. If the general dies, the army collapses and disintegrates, if an infantry soldier gets cut down in machine gun fire, he is easily replaced. The same with most employees. There is always another developer, another secretary, another salesman, etc. But especially with small companies, if there is no good CEO or Founder, the company never gets big and dies small. Never having realised their potential.
There are plenty of good CEOs and founders (just like there are plenty of people who can step up and be a General when one dies). They are not rare, they are made through experience and training. One company, a cooperative that I'm writing about now, allows employees to start their own companies within the parent company, and even sends them "CEO school" as they build it and rise through the ranks. They grow effective founders and CEOs from within.
He doesn’t need to give stock to every employee he hires. He can start his own business and be an entrepreneur as long as he likes. And when he wants to exit, he can choose to sell his equity to his employees and allow them to continue to run it rather than take it public or sell it off to another company if he wants.
That's an option which is viable. As an Entrepreneur I would only consider selling the company to employees, never giving stock out to them before that. First of all because the founder of a company is entitled to own the entirety of his company because he founded it by himself and takes all the risk of starting a company. And secondly because not everyone should be allowed to have a say in company affairs.
It is the same as in the military. No infantry soldier should have a say in grand strategic affairs. Only the general should have that. He can and should take advice from the infantry for certain things, but he has the command in the end. Too much decentralization without a unifying goal destroys every political, military or economic entity.
It's worth noting that Central States Manufacturing is not a cooperative—they are employee owned, not employee run. The executives are still very much driving the ship, even as the employees are also incentivized to make sure the ship does well.
"First of all because the founder of a company is entitled to own the entirety of his company because he founded it by himself and takes all the risk of starting a company."
An employee is much easier to get and also much easier to replace. And also, most normal people do not even want to bear the risk of starting and growing a company. They just want a stable job and have a work life balance, which is totally okay. They also do not want to be responsible for their company's growth and their salary by extension. They want someone else to blame if something goes wrong. Most people are not made to have high responsibilites in companies.
Even in an employee owned company, employees do not need to be responsible for their company's growth to still receive a good salary and earn benefits as their company does well.
"Most owners already have very diluted stock, but it's diluted by investors. There's no reason owners can't still own the majority stake even as they sell the rest to employees. Or they sell it to their employees as their exit strategy."
"The value is replaced because we are growing. I may not be getting as many shares, but hopefully the stock price is growing because we're growing."
Yes but actually no.
ESOP and employee ownership generally is a great model. Its mostly the Warren Buffet model, and I strongly support it. Its not as uncommon as people think. Many software startup software companies use a similar model, giving shares to employees to align their incentives with the company. Every company I have worked for has given me shares.
However:
1/"dilution by investors"... not quite. The reason employees own a small portion of the overall stock base of large companies is that, eventually, all companies run into a cash crunch. Cash demands for expansion (e.g. acquisitions, equipment, buildings, etc) at a fast-growing small/midsize company are often higher than their free cashflow. It's a universal and great problem to have! Or, the economy goes down and manufacturing contracts.
A cash crunch is as inevitable as a full moon. Every company has one or more, and it keeps CFOs awake at night. Companies can survive a lot, but not negative cashflow. Not for long.
The company can finance cash needs either through debt or equity. Debt does not dilute stockholders, but is riskier in a downturn. Companies that have survived multiple recessions have very low debt.
Fast-growing companies generally prefer to finance with equity because debtors suck and investors perceive a higher return.
2/"company growth solves dilution," not quite-- "Earnings per share"-- its a ratio. There is no "hopefully" about it. Either earnings are going up faster than shares, or the c-level suite (CFO) can repurchases shares and reduce "dilution." As long as there is strong positive free cashflow, CFOs usually devote a portion to buying back shares to reduce/eliminating dilution. The trade-off is that cashflow devoted to share repurchases cant be used for expansion.
3/I am not saying there was anything wrong here. You should google how they "redeemed" 2,222,222 shares in August of 2020 from inactive participants and the associated lawsuit, because it illustrates my point. Google "central states companies re leveraging ESOP complaint ERISA 2020" this is the second link.
https://www.ti-trust.com/wp-content/uploads/2024/04/Re-Leveraging-and-the-Central-States-Manufacturing-Case-Early-Take-Aways-and-Best-Practices-for-Fiduciaries-and-Boards-of-Directors.pdf
Basically in 2020 they needed to borrow from the ESOP to redeem shares from inactive participants (oh, that inevitable cash need!). I am thinking 2020, the cash crunch is covid downturn-related.
The company needs cash to redeem shares. It needs cash to pay suppliers and employees. It needs cash to expand. Period.
Who are we selling the stock to at retirement, at at what value? If there is no one to purchase the shares, the value of my shares is zero. If the company does not have the cash to buy me out, its also zero. Or, if the company uses a loan to the ESOP to redeem shares, its dilutative. If the company turns to outside investors, its dilutative.
Nearly every company you can think of (Google, Microsoft, Meta, Berkshire Hathway, even Disney) started as small core of highly invested employees.
Employee ownership is a great model, but eventually, all companies run into a cash crunch. Outside investors exist because internal free cashflow only gets companies so far.
It might be worth looking into the largest ESOP in America, Publix. It’s also the largest grocery store chain in the South. Depending on which employee I talked to about it, they said it’s an amazing job with great compensation or they just said it’s just like every other retail job with overbearing management and little pay. I haven’t looked deeply to really know.
It's an interesting discussion but there are drawbacks to the model. One would be, well, greed.
And I'm talking about the one that is somehow innate for most entrepreneurs. They have an idea, they want the company to be run as they want, and they want to be owners. The ESOP means ownership is diluted so I assume important decisions must be made with the support of the people. And, let's be honest, most of them don't know business.
I am pretty sure neither Jobs nor Bezos would have started companies if this was the only viable model.
Ok I have an answer on the dilution question. I asked Steve Storkan, executive director of Employee Ownership Expansion Network (or EOX), about this and he said that while it’s true that stocks get diluted as new employees become owners, the company is also hiring more people because it is richer. He said: “The value is replaced because we are growing. I may not be getting as many shares, but hopefully the stock price is growing because we're growing. So I don't feel like most ESOP participants feel the dilution as they grow.”
Most owners already have very diluted stock, but it's diluted by investors. There's no reason owners can't still own the majority stake even as they sell the rest to employees. Or they sell it to their employees as their exit strategy.
ESOPs are also not cooperatives, they are employee owned but not employee run. It is still the business executives in charge.
A little correction: a unicorn is a company which is valued at more than $1B, not which is earning $1B in revenue.
> In business, a unicorn is a startup company valued at over US$1 billion which is privately owned and not listed on a share market.
https://en.wikipedia.org/wiki/Unicorn_(finance)
Ah, good catch! An early draft was using valuation figures, then I realized revenue figures would be much more powerful, but then missed editing that sentence.
Thinking through this only because I had been thinking through this for some time now. But it's a lot of thinking on a Monday morning so I will revisit. I have loads of question to ask starting from what is considered a small company considering the huge disparity in currencies across nations and continents.
How do small family oriented businesses key into this?
I have two thoughts about this so far: They could either sell to their employees whenever they want to exit or they could transition to a partial or full ESOP whenever they'd like. For really small companies I'm not sure it makes sense to do it at all, they would have to join a larger ESOP to be able to afford those same benefits (but I have an example of this that i'm writing shortly.)
Please be cautious about using one company as a model. According to news reports, many Enron employees who were fully invested in that company lost all their retirement savings when Enron went bankrupt. Some other large companies that have gone out of business include Lehman Brothers, Radio Shack, Circuit City, Blockbuster, Tower Records, Polaroid, and Pan Am.
There's nothing to prevent any employee of a publicly traded company from buying as many or as few shares in that company as he or she wants and can afford. Making employees automatic shareholders in the company they work for deprives them of that choice. And most employees are better judges of what's important to them than are their managers. Any employee of an average company can get the same average return on investment while substantially reducing the risk of loss by investing in several different companies. Any investment advisor worth his salt will advise having a diversified portfolio—typically consisting of 40% low-risk fixed-income securities (such as T-bills and corporate bonds) and 60% higher-risk assets, which may include REITs and some commodity (especially gold) in addition to common stocks in a variety of small cap, large cap, growth, and value companies. Further diversification can be achieved by including some foreign assets, such as ETFs invested in companies in developed markets and emerging markets. You'd be well advised to consult some economists and investment advisors before writing your book.
Of course, businesses fail. But the ones you mention weren't ESOPs, they were just ordinary companies. It can happen to anyone. Fortunately, 90% of employees with an ESOP account also have a 401k, so having stock ownership in their company is not instead of having a diversified retirement account, it is in addition to it. In this way, ESOP employees are actually more diversified than non ESOP employees and with more potential for upside than an employee without an ESOP.
The companies I mentioned weren't ordinary (unless by "ordinary" you mean non-ESOP); they were large companies--which fail much less frequently than small or mid-size companies, which is why I chose them. That they were not ESOPs is irrelevant unless you have data to show that all ESOPs (since you claim all companies should be ESOPs) are sufficiently less likely to go bankrupt than large non-ESOPs to make up for the risk of having all or most of one's eggs in one basket. Having significant assets in a 401k or an IRA would greatly reduce risk. And I'll grant there are advantages to working for an ESOP. However, being more diversified is not one of them if a huge part of one's portfolio is in one company's stock. I'm unsure why you say ESOP employees have more potential upside than non-ESOP employees. I suspect you mean advantages other than market returns. However, if you're referring to market returns, there's a way to invest in stocks that will usually provide a higher return than having a large proportion of one's portfolio in one's own company: put your money in a small-cap value ETF. Small-cap and value stocks have higher average returns than large-cap and growth stocks. That's because the former stocks are riskier than the latter ones. Investors demand a premium for taking extra risk, which is why T-bills have such a low average return.
If you're just writing a fantasy novel, please ignore everything I've said above. But if you're trying to give financial advice in the process, I suggest you speak with a registered investment advisor, who is required by law to place a client's best interests above those of his own firm.
This. Additionally, I would cap CEO salaries at a maximum of $2 million annually, no additional stock options (must be the same as the lowest paid employee), no bonuses or the bonuses are commensurate with the rest of the staff, no housing or vehicles paid by the company, no additional perks, limited sign-on packages/retirement packages/severance packages. If the CEO drives the company into the ground or his or her choices lose the company profits, their salary is lessened accordingly. C-Suite salaries are the first to get cut when scaling back.
I tend to be more egalitarian.
It’s time to balance everything out. It’s been hugely disproportionate…always?
Personally I would prefer tying the pay of the highest paid employee to the pay of the lowest paid employee. For example, Dr. Bronner's has a rule that the highest paid employees can't make more than 10x the lowest paid employees. Rather than keeping the highest salary from growing, this keeps the lowest salaries growing. What harm could there be if the CEO is making $3 million but the lowest paid employee is making $300,000. I'm working on a story now about a company where the highest paid make only 6x the lowest paid. In their case, a CEO who makes $3 million would mean the lowest paid employee is making $500,000.
https://www.elysian.press/p/an-alternative-to-tax-the-rich
I never thought about that…hm. It’s certainly another option. I most likely wouldn’t go higher than 5x the salary of the lowest paid. I would continue to mitigate perks, stock options, etc.
"First of all because the founder of a company is entitled to own the entirety of his company because he founded it by himself and takes all the risk of starting a company."
He can do all the bloody work then, alone.
Good luck with that.
This has I make the french-fries so I should own the means of production type energy.
Don't get why the French fry chef can't get a piece of the company they're making money for??
If a company needs capital injection (boot strap), will employees be required to fund or put up their assets as collateral? How will bankruptcies be managed?
ESOPS can get loans fairly easily, but they don't typically sell to another company or go public as options. But I'll write more about this in a separate essay taking this into consideration.
Here's a ~150-year-old UK example of employee ownership via a trust, to the extent staff aren't called employees, but 'partners'. They're the 3rd largest non-share traded company in Britain. Profits are paid as staff bonuses. https://en.wikipedia.org/wiki/John_Lewis_Partnership?wprov=sfla1
Amazing! I’m headed that way in a week, I’ll see if I can get some interviews! Thank you!
I think ESOPs can be great alternatives to traditional corporate structures, but the discussion of CEO compensation is incomplete if it does not mention the brief history of high marginal income tax rates, or of the income tax in general.
We're laying a bed of foolish, regressive tax policy decades in the making that has, along with inflation, spelled ruin for the middle/working class.
The income tax came into existence in 1913, along with the Federal Reserve. Initially, it was passed as a small tax levied only on the super rich. By the time my parents were born just 40 years later, everyone who drew a paycheck was paying the income tax, and simultaneously, the super rich had shifted their compensation to receive shares of stock instead of income, thanks to preferential tax treatment.
The IRS aims its taxes at the super rich, and they always start out small, but the IRS has terrible aim and even worse magnitude control, so they hit the middle class with taxes larger than they claimed were only intended for the super rich.
ESOPs don't solve this problem, because most people need to earn income to pay bills. Even if you paid everyone in 90% stock (like many CEOs currently get paid) it wouldn't help people, because they would need to turn around and sell their stock, triggering a tax event that would be more or less the same as if they had earned income.
The problem isn't compensation structure, it's the tax code, which taxes the middle class punitively in the same we tax cigarettes, alcohol and sugary beverages. Inflation is the other hidden tax that even more perversely hurts income earners while preferentially benefitting the rich and politically connected.
Open mouth, Insert Foot https://open.substack.com/pub/michael880/p/open-mouth-insert-foot?r=3b6pw1&utm_campaign=post&utm_medium=web
Fascinating! Cool to worker ownership gain popularity in a variety of ways
And why the hell should anybody still start a company and wants to become an entrepreneur when he needs to give stocks to every employee he hires? This is completely stupid. If you want to become rich, become an entrepreneur. And you can have responsibility and a say in the company if you get up the corporate ladder. This collectivist ownership of companies reminds me of Socialism at its best.
How about try and make rich not only yourself but your workers as well?
A company is rarely an altruistic project intended to make everyone rich. It is a means to solve a real problem in the real world for real customers.
I often compare a company to an army. It needs a centralized command structure. The infantry soldier (employee) should not have the same say in the strategic affairs as the general (entrepreneur / CEO) has. While the general can and should take the advice of the infantry seriously, it is ultimately his decision. And this is good as it is. Decentralized systems only work well when everybody has the same goal. And that is also rarely the case in companies.
Companies a group of people that create something for society. The CEO is just a part of the cog of that group. Everyone does their part.
But it is much easier to be the general of the army then an infantry soldier. If the general dies, the army collapses and disintegrates, if an infantry soldier gets cut down in machine gun fire, he is easily replaced. The same with most employees. There is always another developer, another secretary, another salesman, etc. But especially with small companies, if there is no good CEO or Founder, the company never gets big and dies small. Never having realised their potential.
There are plenty of good CEOs and founders (just like there are plenty of people who can step up and be a General when one dies). They are not rare, they are made through experience and training. One company, a cooperative that I'm writing about now, allows employees to start their own companies within the parent company, and even sends them "CEO school" as they build it and rise through the ranks. They grow effective founders and CEOs from within.
He doesn’t need to give stock to every employee he hires. He can start his own business and be an entrepreneur as long as he likes. And when he wants to exit, he can choose to sell his equity to his employees and allow them to continue to run it rather than take it public or sell it off to another company if he wants.
That's an option which is viable. As an Entrepreneur I would only consider selling the company to employees, never giving stock out to them before that. First of all because the founder of a company is entitled to own the entirety of his company because he founded it by himself and takes all the risk of starting a company. And secondly because not everyone should be allowed to have a say in company affairs.
It is the same as in the military. No infantry soldier should have a say in grand strategic affairs. Only the general should have that. He can and should take advice from the infantry for certain things, but he has the command in the end. Too much decentralization without a unifying goal destroys every political, military or economic entity.
It's worth noting that Central States Manufacturing is not a cooperative—they are employee owned, not employee run. The executives are still very much driving the ship, even as the employees are also incentivized to make sure the ship does well.
"First of all because the founder of a company is entitled to own the entirety of his company because he founded it by himself and takes all the risk of starting a company."
He can do all the bloody work then, alone.
Good luck with that.
An employee is much easier to get and also much easier to replace. And also, most normal people do not even want to bear the risk of starting and growing a company. They just want a stable job and have a work life balance, which is totally okay. They also do not want to be responsible for their company's growth and their salary by extension. They want someone else to blame if something goes wrong. Most people are not made to have high responsibilites in companies.
Even in an employee owned company, employees do not need to be responsible for their company's growth to still receive a good salary and earn benefits as their company does well.