Motivating Employees with Stock and Involvement

An understanding of how and when employee ownership works successfully requires a three-pronged analysis of: 1) the incentives that ownership gives; 2) the participative mechanisms available to workers to act on those incentives; and 3) the corporate culture that battles against tendencies to free ride.

For decades now, American firms have engaged in a capitalist experiment, helping their employees to become partial owners of their companies in the expectation that this will encourage them to work harder. Currently, more than one-fifth of U.S. private-sector employees -- 24 million workers -- own stock in their own companies; eight million participate in Employee Stock Ownership Plans (ESOPs).

The growth of ESOPs over the past 25 years is part of a general trend in compensation arrangements linking worker pay to company performance. These techniques include profit sharing, gain-sharing, and broad-based stock options in addition to the various methods of employee ownership. Some research shows that firms with employee ownership tend on average to match or exceed the performance of other similar firms. There may be an average 4 to 5 percent gain in productivity with introduction of an ESOP, but with a wide band of outcomes around that average. Several studies find higher satisfaction, commitment, and motivation among employee-owners. Other studies find no significant differences in these factors between worker owners and non-owners, or before and after an employee buyout of a firm.

For example, employee ownership of United Airlines failed to prevent its bankruptcy, while multiple forms of employee ownership and profit sharing at Science Applications International Corp., a Fortune 500 company engaged in research and engineering, have led to its continued success.

One common problem for employee ownership firms is "free riders" - workers who slack off but, as owners, still receive the rewards of hard work by their colleagues. Especially as a firm grows and the number of workers increases, the link between an individual's performance and financial payoff becomes weaker. In Motivating Employee-Owners in ESOP Firms: Human Resource Policies and Company Performance (NBER Working Paper No. 10177), authors Douglas Kruse, Richard Freeman, Joseph Blasi, Robert Buchele, Adria Scharf, Loren Rodgers, and Chris Mackin explore what companies can do to overcome this problem of how to motivate employee slackers and thereby improve firm performance.

For their study, the authors use data from: a survey of employees and managers in 11 relatively small ESOP companies over the period 1996-2002; three firms surveyed by the NBER's Shared Capitalism Research Project in 2001 and 2002; and a national survey of workers. These new data, the authors find, tend to support the need to combine the incentive of ownership with the involvement of participation.

At the 11 surveyed firms, employees were asked whether they work hard, care about meeting customer needs, are willing to make sacrifices to help co-workers, and are very committed to the company and its future. They also were asked whether company performance is important as long as jobs are secure, and whether employees work less when supervisors are not watching. The authors then devised an index of human resource policies, asking whether they increased employee involvement in job-level decisions with quality circle; autonomous work groups, or employee task forces; if employees had any involvement in new hires; and whether employees were represented on the board of directors. The survey also asked about nine methods of sharing information with employees, including new employee orientations and regular meetings with workers at the department or work group level, and whether the company had a formal grievance procedure, a suggestion system, or a cash profit sharing or bonus system.

The results show that a higher human resource index number at a firm results in greater worker-reported work effort and better company performance. However, the size of the stake of all employees in an ESOP company had no impact on performance. "This supports the idea that it is not ownership per se, but the cooperative culture that can be fostered by employee ownership, that drives better workplace performance in ESOP firms," the authors write. Performance improves, they add, if workers perceive they are being treated fairly, have good supervision, and have input and influence in the firm.

Some of the data indicate that workers on employee involvement committees, or who are otherwise involved in setting goals for their work group, are more likely to exert peer pressure on shirking co-workers, talking directly with them about their performance, and are less likely to do nothing. "We conclude," the authors write, "that an understanding of how and when employee ownership works successfully requires a three-pronged analysis of: 1) the incentives that ownership gives; 2) the participative mechanisms available to workers to act on those incentives; and 3) the corporate culture that battles against tendencies to free ride."

-- David R. Francis