Merits of Employee Ownership Tested at United

In management circles, United Airlines was seen as a high-flying star in a jaw-dropping air show because of its experiment with employee ownership. But the innovation has lost some of its luster.

United's 8,500 pilots bailed out of a proposed wage deal last Thursday. The contract rejection came a week after a similar vote by 13,900 mechanics and technicians. "Pilots are sending a very loud and strong signal that we're disappointed that the cultural values within United have not changed," says Kevin Dohm, spokesman for United's branch of the Air Line Pilots Association. "There must be respect between management and labor." United employees have expressed resentment over the high bonuses received by top executives.

The labor snub is a rude downdraft for a firm that touts itself as America's largest employee-owned company. Both workers and management seem to be shaking apart a 1994 arrangement in which UAL Corp., United's parent, traded 55 percent of the firm's shares with employees for concessions over wages, benefits, and work rules.

"United Airlines is the most high-profile case of majority employee ownership in the entire world, and every corporate observer has been watching it," says Joseph Blasi, professor of labor relations at Rutgers University in New Brunswick, N.J. "A stumble in this case really will make everybody think twice about majority employee ownership."

Still, the turbulence at United should not be seen as a smirch on the growing trend of the worker buyout, which is often hailed as an alternative to downsizing, management experts say. In fact, when it comes to employee ownership, United is as much an instructive exception as a cautionary model. The experts note:

*Unlike in most employee stock-ownership plans (ESOPs), United confronted special challenges because of its complexity and huge size (80,000 employees). Rather than just handle one union or no unions at all, it must simultaneously satisfy the needs of several unions rewarded at vastly different wage rates.

*Only 3 percent of employee ownership arrangements involve the sort of wage concessions made at United, says Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, Calif. The concessions United won in 1994 are usually associated with more troubled companies that undergo a buyout. Like many employee-owned firms, United left vague the future trend in wages, thereby fueling unrealistic expectations. Now that United has recovered, workers expect a weighty wage reward. "The ambiguity over wages in the 1994 agreement now is coming back to bite them," Mr. Rosen says.

*United set itself up for strife by failing to persuade a large portion of its employees to join the buyout. It also should have heeded one of the basic rules of an ESOP and offered a solid profit-sharing plan that could head off calls for a wage rise.

STILL, the wrangle at United reveals some core weaknesses of employee ownership. First, such schemes do not necessarily clear away a longstanding tradition of adversarial industrial relations. After years of tension at United, "we shouldn't assume that employee ownership will make all future wage negotiations amicable; that is not going to happen," Rosen says.

Second, some managers and employees view the buyout as a temporary cure rather than as a means to long-term profit. "ESOPs that trade stocks for concessions raise high hopes about creating a new relationship but generally end up being stopgap measures that are temporary," Mr. Blasi says.

Finally, rather than embrace the promise of a big future rise in the share price, workers often want to win at least marginally higher wages now.

Despite its weaknesses, the United ESOP hit pay dirt unexpectedly fast. With the support of employees, the company has slashed costs and beat back the challenge of low-cost carriers. Profits and market share have expanded. Employees, involved more deeply in planning and operations, have given advice on workaday operations and strategy that has boosted efficiency and overall performance.

Most dramatic, UAL's stock price has nearly tripled, giving the average pilot a $137,000 windfall, according to United.

Most of the nation's 10,000 ESOPs, which involve a total of 10 million employees, have enjoyed a similar bounce after instituting employee ownership.

United's pilots rejected 4 to 1 a deal that would have given them a 10 percent increase in wages over four years. The two sides now go to binding arbitration, as agreed in the buyout.