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March 2008. 26 pp. (8.5" x 11"), printout (not a bound book). $15 for NCEO members; $25 for nonmembers.
This 25-page report details the extent and growth of employee ownership through ESOPs, 401(k) plans, stock options, ESPPs, and other vehicles; summarizes the leading research on employee ownership and corporate performance; and discusses current challenges and prospects.
Overview
Prevalence of Employee Ownership Plans
- Current estimates of employee ownership
- Growth of ESOPs and equivalent plans
Employee Ownership and Corporate Performance
- ESOPs and private companies
- Research on public companies and ESOPs
- Broadly granted stock options and corporate performance
- Effect of stock options accounting on stock prices
- Employee ownership and employee financial well-being
Recent Legislative, Regulatory, and Case Law Developments
Challenges and Prospects for Employee Ownership
It is important to view any study of the relationship between compensation strategies and corporate performance with some caution. People's behavior in organizations is highly overdetermined. Think of all the things that motivate people at work-pay, benefits, relationships, personal issues outside work, individual work ethics, the content of what you do, work organization, relationships with superiors, what you ate that day, and on and on. Identifying any set of factors across a company and saying that is what makes the difference is no easy task. But this just tells us what motivates people. Attempts to then link motivation to individual performance, and then to link individual to corporate performance, face a similarly daunting list of complications. For instance, does working harder really improve corporate performance much if work structures prevent people from sharing ideas and information on how to do things better?
Ideal studies look at large numbers of companies, identify measurable changes that have been instituted in discrete ways and at specific times (rather than creeping changes, such as gradual increases in benefits), index out industry effects, and compare before-and-after performance. This is practical in the case of employee ownership, because these plans usually have specific starting points. It is harder with executive compensation because it is rare to find executives who started off with no ownership, then received significant amounts into their tenure.
Nonetheless, the data are strikingly consistent. Broad-based ownership seems to improve corporate performance most of the time. Narrowly focused ownership has at best an uncertain impact and, in most analyses, a neutral or negative one. It is thus disheartening that many corporations now report that they will move away from what has been proven to work for shareholders toward something that appears not to work.
But in a free market, how can this be? If it is more rational for a company to share ownership more widely, won't the market make that happen? To a considerable extent, it has, as witnessed by the tremendous growth of broad-based ownership over the last 30 years. As the General Social Survey data indicate, it appears that about 40% of employees who work for companies that have stock actually own stock in their employers. This represents dramatic growth over the last few decades.
Still, enormous amounts of seemingly irrational equity grants are going to top executives. While it may not be rational for the company they head to do this, it is entirely rational for them to want this to continue. Given the short tenure of many top executives, the fact that narrowly distributing ownership may not be good for stock prices in the long run is hardly their rational concern as individual wealth maximizers. As long as they and the boards who go along with them can control their compensation, there is not much reason to expect greed to morph into responsibility. That kind of change will depend on shareholders taking much more activist views on ownership distribution than they currently do. It is not enough for institutional investors to rage, as they now often do, about "too much dilution." They need to rage too about who gets how much.
Copyright © 2008 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.
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