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Employee Share Plans and Company Performance

Over the past 25 years a wide range of research projects have established that employee ownership, especially when combined with participative management, is linked to significantly improved corporate performance. The research findings have been unusually consistent.

Among the studies already completed, the following are considered the most significant on the connection between ESOPs and company performance. Most of the studies summarised below examined and compared company performance both before and after employee share plans were introduced.

1. The 2000 Rutgers study 1

In this Douglas Kruse and Joseph Blasi of Rutgers University compared the performance of more than 250 ESOP companies that adopted plans between 1988 and 1994 and a similar number of non-ESOP companies. It found that these companies increased sales, employment and sales per employee by 2.3% to 2.4% per year over what would have been expected without an ESOP. Although at first glance the relative growth numbers may seem small, projected out over 10 years an ESOP company with these differentials would be a third larger than a company without an ESOP.

2. The 2000 NCEO Stock Options study 2

In this study Blasi, Kruse, and James Sesil of Rutgers University, and Maya Kroumova of the New York Institute of Technology, studied 490 companies including a survey of 105 companies with broad-based stock option plans and 385 additional companies that offered broad-based stock options to a majority of their full-time employees.

Among a number of findings, the key one related to a comparison of the performance of broad-based stock option companies with non-broad-based stock option companies both before and after they had implemented their option plans. The results showed that broad-based stock option companies had 6.3% higher productivity levels than non-broad-based companies before option plans were implemented, and 14% higher productivity levels non-broad-based companies after the implementation of option plans. The researchers considered the 7.7% difference as statistically significant.

3. The 1986 NCEO study 3

This study by Michael Quarrey and Corey Rosen of the U.S. National Centre for Employee Ownership (NCEO) was the first to show a specific causal linkage between employee ownership and corporate performance. It found that ESOP companies had sales growth rates 3.4% per year higher and employment growth rates 3.8% per year higher in the post-ESOP period than would have been expected based on pre-ESOP performance. ESOP companies with highly participative management structures showed by far the biggest gains, growing three to four times faster than ESOP companies without such structures. Other studies suggest that worker ownership without participation can be short-lived or ambiguous. Ownership appears to provide “the cultural glue” to keep participation going.

4. The New York and Washington studies 4

In 1997 economist Gorm Winther and colleagues followed up the NCEO study with a study of 25 employee ownership firms in New York and 28 in Washington State. In both studies, employee ownership per se had little or no impact on corporate performance, but a substantial impact when combined with participative management. In Washington ESOP companies grew in employment by 10.9%, and in sales by 6% per year more than would have been expected. The New York results were similar. In Washington, majority employeeowned firms that were participatively managed did even better.

5. The GAO Study 5

In 1987 the US General Accounting Office (GAO) studied 110 firms focusing on productivity and profitability. The study found that while ESOPs had no impact on profits, participatively managed employee ownership firms increased their productivity growth rate by 52% per year. In other words, if a company's productivity growth rate were 3.0% per year, it would be 4.5% after an ESOP. Due to the particular methodology used these results are considered conservative.

6. The 1998 employee compensation study 6

Carried out by Peter Kardas and Jim Keogh of the Washington Department of Community, Trade, and Economic Development, and Adria Scharf of the University of Washington, this study matched 102 ESOP companies with 499 comparison companies. It found that employees in the ESOP companies were "significantly better compensated". In terms of wages, the median hourly wage in the ESOP firms was 5% to 12% higher than the median hourly wage in comparison companies. The study also found the average value of retirement benefits in ESOP companies was equal to $32,213, with an average value in the comparison companies of about $12,735.

7. The 1998 Hewitt Associates study 7

This study by Professor Hamid Mehran, formerly of Northwestern University J.L. Kellogg Graduate School of Management, in partnership with Hewitt Associates, found that ESOPs in 382 publicly-traded companies increased the return on assets (ROA) 2.7% over what would otherwise have been expected. Mehran also found that for the 303 ESOP companies surviving the entire four-year, post-ESOP study period, ROA was 14% higher than the comparison group scores, while for the 382 companies as a group, ROA was 6.9% higher for the four-year period. Over 60% of the companies experienced an increase in their stock price, averaging 1.6%, in the two-day period following public announcement of the ESOP, illustrating that the stock market now reacts positively to ESOPs, instead of concluding that the company is trying to prevent a hostile takeover.

8. The 1998 study of the stability of public companies 8

Margaret Blair, Douglas Kruse, and Joseph Blasi found that publicly traded companies that are 20% or more owned by an ESOP are more organizationally stable. Looking at companies between 1983 and 1996, the study found that 74.1% of the ESOP companies remained as independent operations while only 37.8% of the comparison companies did. None of the ESOP companies went bankrupt, but 25% of the comparison companies did.

9. The 1990 Michigan study 9

The Michigan Center for Employee Ownership and Gainsharing and Michigan State University asked executives to indicate if employee ownership had had an impact on sales, profits, productivity and other measures. The results were most positive in companies that scored high on participative management measures. The study also found that the incidence of employee participation programs increased 50% to 100% after an employee ownership plan was set up.

This pattern of dramatic increases in participation after ESOPs are set up was confirmed by a 1993 Northeast Ohio Employee Ownership Center study.10

References

  1. A research project designed and carried out by Joseph Blasi and Douglas Kruse and reported by National Center of Employee Ownership, 2002. See www.nceo.org/library/esop_perf.html;
  2. Joseph Blasi, Douglas Kruse, James Sesil, Maria Kroumova, Public Companies with Broad Based Stock Options: Corporate Performance from 1992-1997, Oakland, CA; National Center for Employee Ownership, 2000.
  3. Corey Rosen and Michael Quarrey, "How Well is Employee Ownership Working?" Harvard Business Review, Sept/Oct, 1987, Vol. 65, No. 5, pp.126-128, 132.
  4. Gorm Winther and Richard Marens, “Participatory Democracy May Go a long Way: Comparative Growth performance of Employee Ownership Firms in New York and Washington States”, Economic and Industrial Democracy, Vol. 18, No. 3, August 1997, pp. 393-422.
  5. General Accounting Office, Employee Stock ownership Plans: Little Evidence of Effects on Corporate Performance, GAO/PEMD-88-1, October 1987, Washington, DC.
  6. Peter A Kardas, Adria L Scharf, and Jim Keogh, Wealth and Income Consequences of Employee Ownership: A Comparative Study from Washington State, National Center for Employee Ownership, Oakland CA, 1998; originally published in Journal of Employee Ownership Law and Finance, Vol. 10, No. 4, Fall 1998.
  7. Hewitt Associates, Unleashing the Power of Employee Ownership: A Research Report, July 1988.
  8. Margaret M. Blair, Douglas L. Kruse, and Joseph R. Blasi, “Is Employee Ownership an Unstable Form? Or a Stabilising Force?” in Margaret M. Blair and Thomas A. Kochan (Eds.), The New Relationship: Human Capital in the American Corporation, The Brookings Institution Press, Washington, D.C., 2000, pp. 241-298.
  9. Michigan Center for Employee Ownership and Gainsharing, A Study of Employee Ownership in Michigan, October 1990.
  10. John Logue and Jacqueline Yates, The Real World of Employee Ownership, Cornell University Press (ILR Press), Ithaca (NY) and London, 2001.