Employee ownership has attracted substantial attention in many countries, and a variety of public policies encourage it. While employee ownership may help raise company performance along with worker incomes and influence at work, one of the major objections is that workers may face too much risk, by having both their jobs and some of their wealth tied to one company. This risk is shown especially in the high-profile failure of Enron and the sacrifices made by employees at United Airlines.
Employer stock tends to come on top of other wealth
Assessing risk comprehensively issue requires data not just on individual employee holdings of employer stock, but on how these holdings fit into their family wealth portfolios. A recent IZA Discussion Paper by Rutgers University economists Douglas L. Kruse, Joseph Blasi, Dan Weltmann, Saehee Kang, Jung Ook Kim and William Castellano provides the first estimates of how employer stock relates to family wealth using data from the 2004-2016 U.S. Survey of Consumer Finances. They find that 15.3% of families with private-sector employees had employer stock in their portfolio, with a median value of $6,000 and a median percent of family net worth of 3.1%.
Recent theory by Harry Markowitz, who won the Nobel Prize for portfolio theory, concludes that 10-15% of a worker’s wealth portfolio can be prudently invested in employer stock provided the rest of the portfolio is properly diversified. This study finds that about one in five (19.2%) of the families with employer stock exceed the 15% threshold. The risk may be overstated, however, given that Markowitz says the 15% threshold pertains to purchased stock and not to stock granted with no sacrifice by the employee, and the data show that employee ownership appears to generally add to, rather than substitute for, other wealth.
Employee owners report higher financial knowledge and risk tolerance
Are employee owners simply more naïve about the risks they face? The data show that respondents from families with employer stock express greater risk tolerance, have higher self-rated knowledge of personal finances, and are more likely to understand the general value of diversification. The finding that employee owners are more likely to understand the value of diversification, but still invest in employer stock, suggests the relevance of Keynes’ view that investing in a company one knows well may be smarter than investing in diverse companies that one does not know well.
While financial risk does not appear to represent a substantial problem in practice for most employee share owners, a small minority may face excessive risk. The study concludes with approaches to address excessive financial risk in company stock when it appears, including steps that can be taken both by companies and by policy-makers.
Approaches to reduce excessive risk
For example, companies and HR professionals could help employees manage by providing access to financial counseling, so employees can become aware of the risks of overconcentration and will consider their employee ownership in the context of the rest of their family wealth. A second way for companies to minimize risk is to ensure that employees have access to diversified retirement plans to supplement employee share ownership plans.
Another approach would be to provide financial products, such as a form of pooled equity insurance by companies with employee share ownership, which would compensate employees in failing companies for at least some of their lost employer stock value. This idea is embodied more generally in stock protection funds. These policies could be expanded particularly where employees are purchasing the entire value of the stock with wages or savings.