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Human Resources and Company Performance

Noémi Giszpenc

July 2003

Sometimes, science is about verifying common sense. It's common sense that employee ownership makes a positive contribution to company performance, and after compiling data from over 25 years' worth of academic studies, Dr. Douglas Kruse concluded that ESOP companies do, in fact, outperform similar non-ESOP companies by 4 to 5% on productivity measures.

Dr. Kruse observed, however, that some companies do much better and others see virtually no change. A few even experience declines. Sorting out what separates success from mediocrity takes science beyond mere common sense, and poses a new question: What is the source of the ownership advantage? Some studies suggest that participative management and ownership culture make the difference. But these studies are limited because they either include economic performance data or look at detailed measures of ownership culture. Until recently, no study had ever included both.

A new report by a team of researchers looks at data on both economic performance and measures of ownership culture. (Douglas Kruse, Richard Freeman, Joseph Blasi, Robert Buchele, Adria Scharf, Loren Rodgers, and Chris Mackin, "Motivating Employee-Owners in ESOP Firms: Human Resource Policies and Company Performance," panel presentation on "Econometric Case Studies of Human Resources and Firm Performance," Industrial Relations Research Association, Washington, D.C., January 2003.) It compares differences among ESOP firms as well as differences among employees within a particular ESOP firm. The study looks at differences in employee attitudes toward work and the different policies and practices of firms to see how firms may be able affect employee performance.

HR Practices and Employee Performance

The study's between-firm comparison looked at 11 ESOP firms and combined data from the Ownership Culture Survey (OCS) and from the Employee Ownership and Financial Trends (EOFT) survey, both provided by Ownership Associates.

The EOFT survey, which investigates a number of ESOP and company characteristics, was developed by Amy Smith-Boden, then working at Ownership Associates. The data from the EOFT allowed researchers to put together a human resource index that combines a number of practices: firms' level of employee involvement and information sharing, the percent of pay contributed to the ESOP, and whether the firms had a pension plan apart from the ESOP, a grievance procedure in place, labor-management training, and employee surveys. The researchers found that this index of practices was related to employee performance measures.

Specifically, in those firms with a higher score on the HR index, employees were more likely to respond on the OCS that their fellow employees worked hard, met customers' needs, made sacrifices to help co-workers, and were committed to the company and its future. The HR practices were also related to employees reporting that their co-workers cared about company performance and worked just as hard when supervisors were not watching.

Not only do higher measures on the HR index relate to improved employee performance, they also are linked to greater perceptions of fairness, better co-worker relations, better supervision and increased worker input and influenc

Performance and a Sense of Ownership

The study combined OCS and EOFT data in one more way. The researchers linked improved performance to the workers' sense of ownership. Employees' feelings of ownership, in turn, tend to be linked with the percentage of company shares owned by the ESOP and the ESOP value per employee.

Reacting to Under-Performance

In the second part of the study, researchers looked at information from two case studies of ESOP firms done as part of the National Bureau of Economic Research's Shared Capitalism Research Project. The object was to compare different behaviors of employees within each firm. In the firms, some employees were on Employee Involvement committees or were otherwise involved in group decision making, for example in setting goals for their work group, and others were not. The researchers looked at the differences between the attitudes of employees who participated and those who did not toward their co-workers' under-performance.

The researchers found that involved employees are significantly more likely to speak directly to an under-performing co-worker, and are significantly less likely to do nothing. Those employees are also more likely to say they are "willing to work harder than I have to in order to help the company I work for succeed."

Means, Motive, and Opportunity Needed

The researchers concluded from this study that ownership is not enough, on its own, to motivate employees to improve their performance. Firms need to provide at least two more elements:

Firms should give employees the means to understand how their actions contribute to company performance and the opportunity to participate and take those actions.
Firms should create a company culture that increases employees' motivation to make their own best efforts and call on their co-workers to do the same.

With this increased motivation and the means and opportunity to follow through with improved performance, employees are more likely to help their companies achieve and maintain significant productivity increases. As researcher Amy Smith-Boden comments, "ESOP proponents should be encouraged by the fact that what they inherently believed to be true is supported by objective data: that is, where ownership and participative HR practices combine in employee owned companies, the result is likely to be success."

Next Steps

The study researchers devised questions similar to those in the current study for use by the National Opinion Research Center (NORC) in a recently completed national survey. This new survey has both a representative sample of workers and data that match workers with firms. Thus, in the near future there will be new and nationally representative information on the topic of firm practices and improved employee performance.

Firm description and list of other columns in this series

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