Friday, July 3, 2009

Beeronomics: Employee Owned Companies

Yesterday, Full Sail Brewing celebrated 10 years of employee ownership. They have a lot to celebrate. Full Sail appears to be thriving largely because they seem to have an exquisite sense of the market and have made some pretty savvy commercial decisions that seem to have worked out very well (e.g. the logo and packaging redesign of a few years ago - including the cringe inducing "Brewed to Stoke, Stoked to Brew" slogan - and the successful release of Session). Of course, they also produce excellent beer... But should we expect employee ownership to make a company like Full Sail more or less commercially savvy?

Economists in general have always been fairly skeptical of employee owned companies. The dominant theme in the literature is generally that the incentives of employee owners are to reward themselves at the expense of the firm and to be more interested in the short term success of the company than its long term growth, as well as to have too diffuse a decision making structure and to have too little independent supervision of employees. For example, can employee owned companies make the hard decision to cut positions in economic downturns?

On the other hand, employee-owned companies can be seen as a solution to a classic principal agent problem in that they tie employee compensation to the economic success of the firm. In this theory, employees should be more motivated, disciplined and productive as they understand that their effort is directly linked to firm performance. This incentive is amplified for smaller companies. [One reason why economists tend to be skeptics is that this incentive is often pretty small at the individual level, so would seem to be dwarfed to the incentive to give yourself a big raise regardless of firm performance, for example]

So is Full Sail the exception the the rule or a classic example of the sensibility of employee ownership? Well, it turns out that almost every study of employee owned firms has found that they are either no worse or slightly better than non-employee owned firms in terms of firm performance. [See this nice meta-study for some evidence] It appears that ownership in companies can, in fact, boost firm performance be giving employees a larger interest in the success of the firm.

It is particularly interesting that in an industry that is artisanal in nature this should be true - you might expect another tension between making distinct beers with small market potential and more mainstream beers. Full Sail seems to be mastering both, they were pioneers in developing the more macro-style 'Session' beers, and yet produce some of the most distinctive beers in their 'Brewmaster's Reserve' series. How much does all this have to do with being an employee-owned company is impossible to say, but perhaps it is not too surprising after all.

Regardless, here is to another 10 years of success to Full Sail. Cheers!


nixzusehen said...

I can't imagine why anyone would think that "the incentives of employee owners are to reward themselves at the expense of the firm and to be more interested in the short term success of the company than its long term growth" - especially given the current economic situation.

I think most employee owners can look at the company and say "well, I can extract a $50,000 bonus right now or let the company grow and get more later" and choose the latter, because they realize at the end of the day, $50,000 just isn't that much money in the grand scheme of things (besides being a wildly huge amount for a company with 50 odd employees - assuming they all get a similar amount, a tenth of that would be more realistic).

Contrast that with executives of publicly traded companies who can say "I can drive our stock price up and cash out my options for $150 million plus my $100 million golden parachute and never work again."

Now I'm well aware of the way people tend to discount the future in irrational ways that favor the short term, but the employee-owner jeopardizes his own livelihood by doing so, while the executive only jeopardizes others'.

Now, I can see why a more diffuse decision making structure would might make it harder under certain circumstances for an employee-owned company to succeed, but similarly, it also mitigates against short-term thinking. Again, contrast that to publicly traded companies whose boards are typically stuffed with friends of the executives (who in turn serve on their friends boards), combined with a group of stockholders whose own interests are generally not nearly so intimately tied up with one company.

So we need only ask ourselves what the incentive structure is like for those capable of awarding themselves short term gains to see that the EO company is likely better off.

Anyway, I can't find anything in the anti-employee ownership arguments you present that doesn't strain credulity.

Corey Rosen said...

There is more research on employee ownership and corporate performance on our Web site (the National Center for Employee Ownership) at It turns out employees do a lot better too.

When this research had reached maturity, a conference n it was held in D.C. with about 20 leading economists (Alan Blinder was one, Richard Freeman another). They were befuddled at first. How could it be that there was a "free lunch" for employees? Surely, the ESOP contribution (companies buy the shares for employees; employees do not buy them) had to show up in less of something. But is doesn't. The companies just do better and share more.

I think this is one more indictment of model-based traditional classical economics. All those assumptions about rational economic behavior make for wonderfully neat equations, but, alas, we now know that humans are a lot more complicated creatures who respond to much more diverse incentives in much more complex ways. So maybe economists need to become a lot more inductive and gather data then create theory instead of the other way around.

Corey Rosen
National Center for Employee Ownership

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