Employee ownership may increase firm productivity.  The relationship between EO and firm productivity has been the focus of extensive research.  Theory argues that employees may work more because their retirement is clearly dependent upon the success of the firm, or less because of the “1-over-N” problem, i.e. because the reward an individual receives for his work is divided among all employees, there is little incentive to work hard, especially in a large firm.  On the whole, the research shows that EO alone has little or no effect on productivity, but when combined with meaningful employee participation, firm productivity does increase.  "Employee participation" is employee involvement in decision making processes in the firm.

 
Some plants threatened with closure by their owners can be run profitably by employees.  Although many plants are closed because they are losing money, some are closed because they are no longer consistent with the parent firm's corporate goals or are not profitable enough for their parent firm.  Employees are often able to keep these firms alive by making a smaller profit that is consistent with their goals.

 
A large percentage of small, family run businesses do not have plans for what will happen to the business when the founder retires.  If there are no heirs to take over, EO can be a viable option to keep firms open and independent.  Often, founders initially sell only a portion of their business to their employees,  retaining some portion form themselves, which helps give continuity and stability to the business as it transitions to a new ownership structure.  Over time, the founder generally sells his remaining shares to the employees.

 
Employee ownership may help employees feel "empowered" in their workplace and in their wider community.  Many support democratic EO as a way to alter the demoralizing workplace conditions many employees face.

 
The federal government encourages pension plans (through the tax deductibility of 401(k) contributions); since ESOPs are a form of pension, the government should encourage them.

 
Locally owned firms may have higher local multipliers and are generally thought to be more accountable to their local community than firms owned by investors and operated by distant managers; local owners and managers may run the firm better due to more accurate, on-the-job information and a more appropriate balancing of social costs and internal profits.

 
The governmental and social costs of a plant closing are enormous in terms of unemployment benefits, family disruption, depression, etc.; the cost of supporting EO is minimal in comparison.

 
Very few employee-owned firms are run democratically.  ESOPs are the most common form of employee ownership and few have majority ownership of the firm, and fewer still offer democratic participation by employees; employee participation programs that give employees control over their workplace may be more important than ownership.

 
ESOPs are not an ongoing incentive to employees, but rather more like a one-time bonus since the employee does not see the benefit until he departs the firm; this may explain why ESOPs do not increase employee productivity.  It also demonstrates that ESOPs give managers little additional flexibility on annual employee compensation packages -- wages can not be lowered during times of trouble because the employees only other benefit will not be realized for years.

 
ESOPs are extremely risky for employees -- their job and their entire retirement package is dependent on the success of one firm.  ESOPs are exempt from the ERISA (Employee Retirement and Income Security Act of 1974) provision that pension plans be diversified over multiple investments, a provision designed to protect employees from exactly the kind of high risk inherent in ESOPs.

 
Little justification for government intervention on economic grounds exists, since any market failures present are not part of the overall economy, but rather internal to individual firms.

 
The government uses its belief in employee ownership as a rationale for its involvement, but does not explain why it supports ESOPs and pension plans but not profit sharing, gainsharing, and other forms of EO.

 
Few employees become "empowered" through the EO process; in fact, studies show that most employee owners are supportive of their ESOP solely because they need a job.

 
On the far right, some fear that ESOPs are the first step toward a socialist America.

 
On the far left, some fear that ESOPs encourage the transformation of laborers into capitalists who will then exploit other laborers as much as possible and lose all class consciousness.

 
Short-term versus long-term goals must be clarified.  Research shows that ESOPs used to save troubled firms do not always remain ESOPs for very long -- they become successful and are sold to private investors.  If the goal of the economic developer is to save or create jobs, this outcome will be judged successful; if the goal is to create local ownership, this outcome will be judged a failure.

 
Short- versus long term goals must be clarified.  Research shows that ESOPs used to save troubled firms do not always remain ESOPs for very long -- they become successful and are sold to private investors.  If the goal of the economic developer is to save or create jobs, this outcome will be judged successful; if the goal is to create local ownership, this outcome will be judged a failure.

 
ESOPs can affect different employees in the same firm differently.  For example, setting up an ESOP often involves employee wage concessions and/or the sacrifice of their pension fund in order to secure additional financing.  This means that junior employees may take a unacceptably large pay cut, or senior employees may lose years of an accumulated pension.

 
Enormous political pressure can exist to save a firm at all costs.  Economic developers must be able to withstand pressure and not support an ESOP buy-out if it is not feasible.

 
Using ESOPs to save closing firms is an inherently reactive strategy.  Economic developers should probably think about combining ESOPs used in this way with more proactive strategies such as developing transition plans with owners of smaller firms.

 
ESOPs often have difficulty finding qualified managers.  Managers skilled in the business of the firm and dedicated to the ideals of the ESOP are rare.

 
Economic developers may play very different roles with closing firms depending on their size and management.  Larger firms may be less likely to pay attention to local government staff than smaller, family owned businesses.