A Comprehensive Overview of Employee Ownership
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Employee Ownership and Employee Motivation
During the early 1980s, the National Center for Employee Ownership conducted an exhaustive investigation of how employees react to being owners. We surveyed over 3,500 employee owners in 45 companies. We looked at hundreds of factors in an effort to determine whether it mattered to employees that they had stock in their company, and if so, when.The results were very clear. Employees did like being owners. The more shares they owned, the more committed they were to their company, the more satisfied they were with their jobs, and the less likely they were to leave. Naturally, some employees in some companies liked being owners more than others. Individual employee response to ownership was primarily a response to how much stock they got each year. After that, employees responded more favorably if they had ample opportunities to participate in decisions affecting their jobs, worked in companies whose management really believed in the concept of ownership and not just the tax breaks, and were provided regular information about how the ownership plan operated.
By contrast, the size of the company, the line of business, demographic characteristics of the employees, seniority, job classification, presence or absence of voting rights or board membership, percentage of the company owned by employees (as opposed to the size of the annual contribution), and many other factors did not have any impact. Employees looked at the employee ownership plan and asked "how much money will I get from this?" and "am I really treated like an owner?" If they liked the answers to these questions, they liked being an owner.
Employee Ownership and Corporate Performance
In 2000, Douglas Kruse and Joseph Blasi of Rutgers University analyzed all the ESOPs set up between 1988 and 1994 for which data were available. They then matched these companies to comparable non-ESOP companies and looked at the sales and employment data for the paired companies for three years prior to a company setting up an ESOP to the period three years after. They found that when they indexed out for the performance of the competitor companies, the ESOP companies grew 2.3% to 2.4% faster after setting up their plan than would have been expected otherwise. That seemed to give strong evidence that ESOPs do make a significant and positive contribution to corporate performance.Impressive as these findings were, however, they did not indicate what it was about employee ownership that caused the improved performance or whether the improved performance was accounted for by just a subset of ESOP companies with particular characteristics. Other research, however, suggests that it is the combination of employee ownership and employee involvement that really makes the difference.
Knowing the answer to whether employee ownership motivates employees seems to provide the answer to whether ownership improves corporate performance. Not so. In most companies, labor costs are under 30-40% of total costs. Motivation on its own, presumably, makes employees work harder. We often ask managers just how much more work they think they could hope to get from more motivated employees, based on an eight-hour day. Fifteen minutes is a typical response. That comes to just 3% more time. Three percent times even a high estimate of 40% for labor costs results in just a 1.2% savings, assuming everyone will be more motivated, which is, of course, far from true.
While a 1% improvement can be a lot of money, it is not what distinguishes the really successful companies from the mediocre ones. The star performers are those that react to their environment in creative, innovative ways, providing better value to their customers than competitors. How is that achieved? Through processing information and acting on it intelligently. In most companies, information gathering is limited to a group of managers. The generation of ideas is similarly limited. So is decision-making. The assumption is that only these people have the talent, and perhaps motivation, to carry out these tasks.
In fact, no one has more daily contact with customers than employees, at least in most companies. No one is closer to the day-to-day process of making the product or providing the service than the employees. And, employees often do have useful ideas they could share with management.
Thus, for a company to use employee ownership effectively, it needs to do more than motivate people to work harder at what, after all, may not be the most efficient or effective thing to do. Instead, it must enlist employee ideas and information to find the best ways to do the most important things. To do that, companies need to get employees involved. Managers should seek their opinions. Employee task forces, ad hoc and permanent, should be established to solve problems. Quality circles and employee involvement teams can be set up. Individual jobs can be enhanced and supervision limited. Suggestion systems can be implemented. This all may seem like common sense, and it is. It is not very common practice in most companies, however.
Data indicate that it is becoming common in employee ownership companies. In a 1987 General Accounting Office report, about one-third of all ESOP firms had some degree of employee participation. By 1993, a study of Ohio firms by the Northeast Ohio Employee Ownership Center and Kent State University found that about 60% of the companies now had active employee involvement programs, such as autonomous work teams, total quality management, or similar programs. The incidence of participation roughly doubled after the initiation of an ownership plan. These participative firms, the GAO reported, showed a strong improvement in productivity when they combined their ESOPs with participative management practices.
In a study by the National Center for Employee Ownership published in the Sept/Oct 1987 Harvard Business Review, we found that participative ESOP firms grew 8% to 11% faster with their plans than they would have without them. In both the NCEO and GAO studies, no other factors had any influence on the relationship between ownership and performance. Three other recent studies confirmed both the direction and magnitude of these findings. Only participation can translate the motivation of ownership into the reality of a fatter bottom line. Participation is not enough on its own, either, as hundreds of studies have shown. One reason is that few participation programs last more than five years in conventional companies. By contrast, over the last decade we have not found a single ESOP company that has dropped its program.
The structure of participation varies from company to company, but basically boils down to employees forming groups to share information, generate ideas, and make recommendations.
At United Airlines, for instance, employee task teams were formed soon after the employees purchased the company. Over the ensuing two years, the teams took apart every aspect of the business, making recommendations for often substantial changes. The teams were appointed to include a broad cross-section of employees, but anyone could volunteer to join one. The ideas helped generate hundreds of millions of dollars in cost savings and new revenues. Ironically, when the teams completed their work, management backed away from the idea of participation, causing the airline some well-reported difficulties in the years that followed. The ESOP is now frozen and both most managers and employees feel that it was not a success. United shows clearly that just setting up an ESOP, and even starting off in the right direction, is not enough. Companies must commit to a long-term ownership culture program.
Stone Construction Equipment Company in Honoeye, NY is a good example. It set up an ESOP set up in the late 1970s was having little impact. Then the company hired a new president, Bob Fien, who started a participative management program. Eventually, all employees were trained in "just-in-time" management and organized into work cells that schedule and control their own work flow and have considerable input into the design and organization of their jobs. Stone had been limping along and had developed a reputation for poor quality; by 1991, the company had made so much progress Industry Week named it one of America's top 10 manufacturers.
At Springfield ReManufacturing in Springfield, Missouri, employee owners are taught to read detailed financial and production data. Meeting in work groups, they go over the numbers then figure out ways to improve them. Employees are sometimes given 90-page financial statements to digest. Springfield's stock went from 10 cents a share when it started its ESOP in 1983 to $21.00 in 1994. Employment increased over 500%.
Other approaches include employee advisory committees to management, eliminating levels of supervision while giving non-management employees more authority, meetings between management and randomly selected groups of employees, suggestion boxes, and anything else companies can imagine to get people involved.
This "high-involvement" management style has, of course, become conventional wisdom, if still unconventional practice, at many companies. Is ownership really essential to make it work? There are no conclusive data on this, but there is good reason to believe that ownership, if not essential, is at least highly desirable. First, ownership is a cumulative benefit. Each additional year, an employee has more and more at stake in how well the company performs. It is not unusual in mature plans for the appreciation in share value and employer contributions to add up to 30% to 50% or more of pay in a year. In profit sharing or gainsharing, both of which are paid periodically and almost always amount to a small portion of total compensation, the benefit always remains relatively minor. Second, ownership has a stronger emotive appeal. People may be very proud to say they are an owner; few would brag to friends they are a profit-sharer. Finally, only ownership encourages people to think about all aspects of a business, not just short term profits or some efficiency measure. This is especially important in companies moving towards open-book management systems.
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