Performance Effects of Options in "New Economy" and Unionized Companies
An analysis of data on broad-based stock option plans finds that the plans seem to have a significant positive impact in "new economy" companies. Unionized stock option companies also perform better than non-stock option companies, but not differently than stock option companies without unions. The data were a subset of a larger analysis of the performance effects of stock options plans reported here. The new studies were authored by James Sesil, Joseph Blasi, Douglas Kruse (all of Rutgers University) and Maya Krumova of the New York Institute of Technology.New Economy Companies
The authors evaluated the performance of 229 companies with broad-based option plans in the pharmaceutical, software, semi-conductor, and high-technology manufacturing sectors. Data was provided by the NCEO from its Current Practices in Stock Option Plan Design survey and other research. Each company was compared to a matching company not on the list as well as to industry norms. The NCEO list identified companies we believe have option plans that provide options to most or all employees. However, that practice has become very widespread and even the norm in many parts of the industrial classifications being examined, and companies not on our lists may nonetheless have plans that would meet our definitions. For this reason, the authors caution that their results are almost certainly understate the magnitude of the differences they found.
To evaluate the data, the researchers did regression analyses of several economic measures, including productivity, Tobins q (a measure of how the market values a company's intangible assets), total shareholder returns, economic value added per employee (a measure of sales less the cost of goods sold, labor costs, and rental expenses), and patents applied for, adjusted for R&D expenditures. The broad-based plan companies were compared to paired samples of non-broad based option plan companies as well as industry norms for both a three year period before the companies had started their plans and the period 1992 through 1997.
The results generally show the stock option companies improve their performance relative to what would have been expected based on their comparative performance to other companies before their plans were set up. To make this comparison, researchers looked at companies in the sample in the 1985-1987 period relative to matched paired company results, and in the 1992-1997 period. Most sampled companies had plans at some point in the 1992-1997 period, but few, if any, had them in the 1985-1987 period. This methodology is imperfect, but provides a better assessment of whether options may have caused a change in performance.
Looking at the results, productivity increased 17.7% over what would have been expected during the two periods studied. For Tobin's q, there was a slight increase in the first three years of the 1992 through 1997 period, but not after. For economic value added, there was a 19.9% improvement in expected performance among the broad stock option companies. Grants for new patent applications also increased in option companies, but the difference from non-option companies is not statistically significant (meaning it could have been a random effect).
Finally, turning to total shareholder return, the researchers found no statistically significant difference between the two periods, suggesting that the improved economic performance of the firms may have just offset the added dilution caused by the options. If shareholder return of the stock option companies is compared only to non-option companies in the 1992-1997 period, however (not adjusting for how these companies did relative to the norms prior to having plans), they show a much better rate of return. In other words, having a broad-based plan may be a good marker for improved shareholder return, even if it does not cause it.
These results closely parallel what the researchers found for broad-based stock option companies in general. The precise causes of these differences, however, are uncertain. Option companies may be better able to attract and retain people, have more motivated employees, or may be performing better for other reasons.Unionized Companies
The authors then turned to unionized companies. They found that only 5.5% of the companies with unions had broad-based stock options, while 12% of the non-union companies did. When the researchers controlled for size of the two different samples of companies, they found stock option companies were 9.4% less likely to have unions than would have been expected. Of course, stock option companies are often in very non-unionized sectors such as technology. Sixty companies in the sample had unions. The authors were not able to determine what percentage of these companies covered their union employees (some companies might still meet the criteria for covering most of their full-time employees with options if they excluded a union that represented a minority of workers).
The study found that unionized stock option companies improved productivity relative to non-stock option companies, but that compared to non-union stock option companies, the unionized companies did somewhat worse. However, the latter difference was not statistically significant. On other performance measures, the union and non-union companies have very similar results. Data on shareholder return are inconsistent and not statistically significant. In other words, the results suggest that unionization is not a major factor in differentiating the performance of stock option companies. Both unionized and non-unionized stock option companies generally perform better than non-stock option companies on economic performance measures and are not readily distinguishable based on changes in total shareholder return.
