La Bourse / Volume V / Nº V.03 / Quiz, reflection, essays

A woman in a soft knit sitting on a sofa, drinking from a cup held in both hands, pale window light. — Plate V.03 · Quiz, reflection, essaysThe Statement on the Kitchen Table.A share in the company arrives once a year as a number on a page. What that number is worth to the person holding it is a different number, and almost nobody has been shown how to compute it.

ASSESSMENT · Chapter V.03 — Ownership and the Worker

Three instruments: a ten-point quiz, eight reflection questions, five essay prompts. The quiz checks comprehension rather than recall. The reflections are private and first-person. The essays are arguable from more than one side.

THE QUIZ — ten points

Four on recall.

1. Decompose the risk of holding a single employer's shares, with a beta of 1, and say which part the market pays for.

Total variance σ_c² splits into the covariance term β · σ_m² and the idiosyncratic remainder σ_ε² = σ_c² − β²σ_m². With σ_c = 40% and σ_m = 17%: 0.1600 − 0.0289 = 0.1311, an idiosyncratic volatility of 36.2% a year. The market pays for the covariance term only. One mark for the subtraction, one for naming idiosyncratic risk as uncompensated — that is the whole of the concentration argument.

2. State the diversification election under IRC §401(a)(28)(B): who qualifies, for how long, and for how much.

A qualified participant is one who has reached age 55 with ten years of participation. The election period runs six plan years: up to 25 percent of the post-1986 account in years one to five, and up to 50 percent cumulative in year six.

3. What did the GAO's 1987 study actually find, and what was the average ESOP stake in its sample?

No consistent, statistically significant improvement in profitability or productivity — except that of every factor examined, only employee participation in decisions showed a significant relationship with productivity. The average stake was 8.5 percent, one twelfth of the company. Full marks require the exception and the 8.5 percent; a null from an underpowered test on a tiny dose is a statement about the test.

4. Name the three funding sources for an employee stake, in order of what they cost the employee.

Given by the employer (costs nothing); bought with a diversified dollar — company stock in a 401(k), a match paid in shares (costs a dollar of index); bought with a wage — pay concessions for equity (costs a dollar of certainty, which is worse, because a wage has no volatility at all).

Four on application.

5. A colleague says: "Our ESOP is clearly working — employee-owners in the national data have 92 percent more household wealth." What is missing?

The gap is about the size of the account. An eight-year account at 8 percent of a $45,000 salary is $38,292; the implied gap over an external base is $35,880 — a ratio of 1.07. The study may be observing the plan balance rather than any change in behaviour, and it compares two populations of workers, not the same worker before and after. Credit any answer that keeps both halves: the money is real, the causal reading is unsupported.

6. Your board wants to move the ESOP from 20 percent to 40 percent of employees' retirement savings, arguing it doubles the alignment. Respond.

The exposure to any premium does double — but the risk charge, γw²σ_ε²/2, quadruples, from 0.52 to 2.10 points a year. Benefit is linear in w; cost is quadratic. The right response is not refusal but a question: what annual excess return does the board believe employee ownership produces? At 40 percent, the hurdle is 5.24 points a year, and nothing in the literature supports it.

7. Two companies each transfer 60 percent of equity to their workforce. One funds it from company profit; the other from a 15 percent pay concession. The share price performs identically. Have the employees done equally well?

No, and the difference is the whole chapter. The gifted stake's alternative was an empty account, so its value to the employee is positive — about 35 cents on the dollar at high concentration, which is real money. The purchased stake's alternative was cash already earned, with no volatility; the employee paid a dollar of certainty for a stake worth cents. Reference to United Airlines earns full marks.

8. Why does a rising valuation make a mature private ESOP less safe rather than more?

Because the repurchase obligation scales with the share price. Every share issued must one day be bought back under the §409(h) put, so a plan that succeeds in raising its own valuation has raised its own liability in the same motion — and the obligation is typically invisible on the balance sheet until the put is exercisable. Roughly a tenth of payroll a year, growing.

Two that require the arithmetic to be done.

9. A participant holds $96,000 of employer stock and $144,000 in a diversified account. Assume γ = 2, σ_ε² = 0.1311, a ten-year horizon. Compute her concentration, the value of one dollar of employer stock in diversified terms, and the annual excess return her employer's shares must earn to justify the position. Show your working.

w = 96,000 / 240,000 = 0.40. R = exp(−γ · w² · σ_ε² · T / 2) = exp(−2 × 0.16 × 0.1311 × 10 / 2) = exp(−0.20976) = 0.8108. Value per dollar = 1 − (1 − R)/w = 1 − 0.1892/0.40 = 1 − 0.4731 = 52.7 cents. So her $96,000 is worth $50,587 in diversified terms. Hurdle λ = γwσ_ε²/2 = 2 × 0.40 × 0.1311 / 2 = 5.24 points a year. Credit any method reaching roughly 52–53 cents and 5.2 points. The point of the question is that both answers are computable in two minutes by anybody holding a statement.*

10. Her board believes employee ownership genuinely produces an excess return of 1.5 points a year. What is the largest stake it can defend, and by how much must her position change?

w = 2λ / (γ σ_ε²) = 2 × 0.015 / (2 × 0.1311) = 0.015 / 0.1311 = 11.4 percent of financial wealth. At 40 percent she is 3.5 times the ceiling. On $240,000 of wealth the defensible stake is $27,460, so $68,540 should be redirected over time. The stronger answer notes the redirection is done through future contributions, not a forced sale — a forced sale is a tax event the participant did not choose — and that the board's 1.5 points is an assumption it now has to minute.*

REFLECTION — eight questions, for one person and a pen

These are not for a room. Write the answers by hand if you can.

What proportion of your own savings depends on the continued success of the organisation that pays you? Compute it before you estimate it. What did the computed number do to the estimate?

If the place you work closed next month, list what you would lose in the same week — income, savings, pension, network, identity. Which of those did you choose to concentrate there, and which arrived without a decision?

Recall a time you were given a stake in something — equity, a share of a result, a stake in a project. What did it actually change about how you worked? Be honest about how much and for how long.

Where do you already have a voice without a share, or a share without a voice? Which of the two absences has cost you more?

What is a right you hold that you have never exercised, because nobody explained what it was worth? Name it, then go and find out what it is worth.

Think of a number you have repeated in an argument without knowing its denominator. What was it, and what would it take to find out?

Where in your working life are you being asked to accept risk that nobody is paying you to carry? What would it cost to hand that risk back?

If you could design the statement that arrives once a year about your own future — from an employer, a pension, a fund — what second number would you put underneath the first one?

ESSAY PROMPTS — five

Each is arguable from more than one side. Each requires at least one source the chapter cites and at least one it does not.

1. Is concentration a design flaw or a feature? The chapter argues that an employee stake should be capped at a tenth to a fifth of a worker's financial wealth. But a large stake is also what makes the alignment real, and Mondragon's members hold far more than a fifth. Argue either that the ceiling is a genuine welfare constraint that ownership movements must adopt, or that it imports an investor's framework into a relationship that is not an investment. Use Meulbroek or Kruse, and one source on co-operative membership capital that the chapter does not cite.

2. The GAO problem. The 1987 GAO study found little evidence of ESOP effects — on a sample whose average stake was 8.5 percent. Argue whether the field's subsequent practice of treating that null as uninformative is sound methodology or motivated reasoning. Engage the GAO report directly, and one source on publication bias or dose-response in organisational research that the chapter does not cite.

3. Survival, or selection? French and Italian worker co-operatives survive markedly better than conventional firms, and Pérotin concedes they may be more selectively created. Take a position on whether the survival advantage is causal, and specify what evidence would settle it. Use Pérotin or Burdín, and at least one source on firm survival methodology that the chapter does not cite.

4. Who should bear the repurchase obligation? An employee-owned company's promise to buy back its own shares is a large, growing, largely undisclosed liability. Argue either that it should be recognised on the balance sheet — with whatever that does to covenants and credit — or that voluntary disclosure and a funded reserve are the better answer. Use the NCEO repurchase survey, and one accounting-standards source the chapter does not cite.

5. Ownership without voice. Doucouliagos measured participation in decisions outperforming ownership by two to three and a half times, and codetermination alone measuring negative. Argue what that ordering implies for policy: whether governments promoting employee ownership through tax relief are subsidising the weaker half of the mechanism, and what an instrument that subsidised the stronger half would look like. Use Doucouliagos and the UK EOT legislation, and one source on works councils or board-level representation the chapter does not cite.