How much incentive would it improve by giving employees shares?

It is commonly believed that giving employees shares of their companies could improve companies' productivities as once employees get their companies' shares, they can share the additional benefits gained by their hard working and they have more incentives to work hard. However, this belief is too general and is not always true in all cases. To give employees shares of their companies is to combine operation with ownership. Usually it is more common to see a combination of management and ownership where the executives of companies are given shares or options in order to give them incentives to provide more benefits for their shareholders. Such decision is carefully calculated by shareholders that the shares they give away should be fully compensated by the potential benefits gained by the likely improved management. On the other hand, managers and other employees who are given shares or options also need to consider their costs and benefits. They will only improve or at least try to improve their productivities once their benefits are greater than their costs. Moreover, as marginal benefits are declining, a employee gains less and less incentive when he or she gains more and more incomes, at a certain wage level, he or she views luxury time more valuable than incomes. From this point of view, it seems more effective to give employees with lower income levels shares or options to improve the companies’ productivities. However, to large companies, such strategy is not desirable or achievable, as the employees with relatively lower incomes are the majority of all the employees in the companies, it is too expensive to give employees with low incomes shares or options to improve their productivities. Therefore, giving away shares is possible but not effective to improve the performance and productivity of a company, as such method is unable to improve the productivities of the entire employees.

In addition, giving away shares or options has a negative effect that not only shareholders are short-sighted, the managers and other employees are also short-sighted as well. Once all interest groups around the company are short-sighted, companies could increase its risk rapidly in order to boost growth and expansion in the short term. Furthermore, once one company gives its managers or employees share awards, other companies in the same sector have to follow this rule in order to attract talented managers or developers. Therefore, giving shares to employees does not necessarily increases the absolute benefits for shareholders, but aims to maintain its competitiveness in the sector and prevent talented employees from leaving their companies. From this, we can clearly see a flow of benefits from ownership to its managers and talented employees.

To conclude, such awarding system may have been a voluntary strategy to improve a company’s productivity; however, nowadays, the awarding system is an involuntary decision of shareholders in order to prevent their talented employees from leaving their companies and maintain the competitiveness of their companies and remain in the markets rather than voluntarily trying to improve the productivities to win competitions over other companies. And the transfer of benefits from ownership to employees I think will become more and more common in the coming years.