1998 an Eventful Year for Employee Ownership Research

1998 saw the continued rapid growth of broad-based employee ownership plans, particularly through the continuing expansion of the trend for companies to give stock options to most or all employees. The NCEO estimates that at least 18 million employees in the U.S. now participate in ESOPs (employee stock ownership plans), broad-based stock option plans, or other plans designed to deliver equity to rank-and-file workers. 1998 also saw the a growing number of multinational companies offering stock plans to their work forces worldwide, something almost unknown just a few years ago. As the concept of broad-based plans has grown, so has the research on the phenomenon. In fact, 1998 was a landmark year for new studies, the most important of which are highlighted below.

Without question, the most important new research of 1998, indeed of any year, was a study by Peter Kardas, Jim Keogh, and Adria Scharf of the impact of ESOPs on employee pay and benefits. Kardas and Keogh were working out of the Department of Commerce and Economic Development while Scharf was a graduate student at the University of Washington. Using compensation data from the state of Washington, the researchers found that compared to employees in non-ESOP companies, participants in ESOPs received 5% to 12% higher wages and had three times the assets in their retirement plans. This contravened the conventional economic wisdom that employee ownership could only come at the expense of other compensation. Given that prior studies of Washington employee ownership companies also showed these businesses are more successful than their peers, the results indicate that employee owners generate an additional surplus for their companies, part of which they share and part of which adds to the success of the company. We have now published this research in full (Wealth and Income Consequences of Employee Ownership; $10 for NCEO members, $15 for nonmembers).

Another significant study was completed by Hamid Mehran of the Kellogg School of Business at Northwestern University. Sponsored by Hewitt Associates, the study looked at 382 publicly traded companies with ESOPs. Companies were compared to their competitors for two years before setting up a plan and two years after. Mehran found that after indexing out market effects, the ESOP companies had a return on assets 2.7% per year better in their post-ESOP period than in their pre-ESOP period.

Eighty-eight percent of the information technology companies offered options to all employees. A study by Joseph Blasi and Douglas Kruse at Rutgers and Margaret Blair at the Brookings Institution showed that companies that were at least 20% owned by employees were 16% more likely to continue as independent businesses over the period 1983 to 1997 than were comparable non-employee ownership companies. Fortune magazine's listing of the "Top 100 Companies in America to Work For" found that 31 had broad-based employee ownership plans. Southwest Airlines (15% employee owned) topped the list, while TD Industries (majority employee-owned) ranked fifth, W.L. Gore (also majority employee-owned) ranked seventh, Microsoft (where 85% of employees get options) ranked eighth and Hewlett-Packard (another all-employee option company) ranked 10th.

The explosion of broad-based stock option plans was also explored in a number of new surveys. The most in-depth of these was an NCEO study, Current Practices in Stock Option Plan Design ($50 for NCEO members, $75 for nonmembers). The 220-page study found that about 55% of the value of options in broad-based plans goes to top management and the rest to rank-and-file employees. Eighty percent of the plans provide employees with options on a regular, rather than one-time basis. The awards are significant in size as well, with administrative employees averaging options grants of over $12,000 per grant and professional/technical employees averaging grants of $37,000 to $41,000. A ShareData survey showed that 53% of the respondents offering stock option plans now offered options to all employees, compared to 30% in 1994. A William Mercer study of large, publicly traded companies showed that 30% had plans that made all employees eligible for options, while 11% had actually provided options to most or all employees. An Arthur Andersen study of the 1,250 largest multinational companies showed that 27% of the companies offer stock plans for most or all of their employees.

The burgeoning of research on this topic clearly reflects the growing interest in the subject. Given the generally very positive results, we can only expect this growth to continue on the coming years.