British Study Shows Perfomance Related Pay and Stock Ownership Plans Improve Corporate Performance

A new study of British companies by Martin Conyon at Wharton and Richard Freeman at Harvard shows that companies with stock option plans and profit sharing improved their performance over a four-year study period. The study was based on two sets of data, one encompassing 2,191 companies and one with 882 publicly traded companies. The larger sample provided only respondent assessments of whether their companys performance had improved; the second sample provided usable data on 299 companies and included actual productivity data. The study found that 45% of the companies in the public company sample used a "Save as You Earn" plan (a kind of stock purchase/stock option plan similar to U.S. Section 423 stock purchase plans), while 30% used such a plan in the larger sample. Option plans were in place at 43% of the listed companies and 21% in the larger sample. The option plans ranged from broad-based plans to executive-only plans.

Looking at the smaller sample where actual performance data were available, the study found that option plans and increased productivity 12.2% over the four-year study period, compared to 18.9% for profit sharing plans and no significant effect of SAYE plans. The study did not specifically break out companies that had ESOP-type plans that in Britain are primarily reported as profit sharing plans. The SAYE results are not surprising given that they function more like savings plans. Participation in the plans varies widely between companies and the amounts invested vary considerably within companies. Employees accumulate savings over a three-year period, then can buy shares at a low price and quickly "flip" the shares back into cash.