The prevalence of employee ownership in companies has been on the rise in recent years, with companies increasingly using long term incentives and employee stock ownership plans in the belief that it will increase company performance. A comprehensive study across 14 countries looked to examine the validity of this apparent positive link between employee ownership and company performance. The results did indeed find a significant relationship between these two factors, and this positive relationship held across both publicly and privately held companies.
Key Topics: Employee ownership; Long term incentives; Company performance
Title of Reviewed Article: Employee ownership and firm performance: a meta-analysis
Researchers: Ernest H. O’Boyle (The University of Iowa), Pankaj C. Patel (Villanova University), and Erik Gonzalez-Mulé (Indiana University).
Publication: Human Resource Management Journal, Vol. 26 No. 4, pp. 425–448.
Setting the Scene
Shared company capitalism relates to the multitude of employee ownership plans (e.g. stock options, restricted stock, phantom stock) which are structured to tie employee compensation to company performance (Freeman et al., 2010). The prevalence of such plans has been on the rise, with the US National Center for Employee Ownership (NCEO) stating in 2013, that 28 million US employees were participants in approximately 11,000 employee ownership plans, with similar ownership levels being seen in Europe.
This rise in the use of such plans relates to the desire of companies to shift more towards performance-based pay and increase strategic responses (Ledford, 2014). These employee ownership plans can differ across various criteria, such as whether the benefit is given to employees or purchased by them, and if purchased stock is discounted; if there are voting rights; whether actual company stock ownership is conferred; the legal structure of the ownership plan; whether employee participation in the plan is voluntary.
While there has been a significant amount of research conducted on the relationship between company performance and employee ownership, the results of these studies have been somewhat mixed, with some indicating increased performance and others indicating unchanged performance (e.g. Kruse & Blasi, 1995), while some studies suggest that a small proportion of employee stock ownership is sufficient to increase firm performance, and others highlighting some of the negative consequences of employee ownership, such as risk aversion (Freeman et al., 2010). Research also suggests that the benefits of employee ownership plans may differ between private and public companies (e.g. Kaarsemaker, 2006). Also, when it comes to effects on company performance, prior research indicates that there may be differing effects across company growth and company efficiency measures of performance (e.g. Harden et al., 2010).
The current study aims to do a comprehensive review of research in this area, via meta-analysis, in order to clarify this relationship, and as such the researchers put forward a number of primary research questions for examination:
Research Question 1 – “What is the relationship between employee ownership and firm performance?”
Research Question 2 – “Is the relationship between employee ownership and performance different in publicly held firms that in privately held firms?”
Research Question 3 – “Is there a difference in the effects of employee ownership on efficiency versus growth related performance outcomes?”
How the research was conducted
This study took a meta-analysis approach to identify the effects of employee ownership on
The researchers searched for all empirical studies published in the English language until 2013 in all disciplines related to employee stock ownership and company performance. Abstracts of Academy of Management conferences from 2006 - 2013 were also reviewed.
From their search, a final 102 studies from 14 countries and representing 56,984 companies were identified for inclusion in the meta-analysis.
In conducting the meta-analysis, the researchers weighted the effect sizes reporting in each study based on the study’s respective sample size. This information was then used to calculate an overall mean-weighted correlation.
Companies in the sample were coded as publicly held or private. Measures of efficiency and growth were also computed for assessment of Research Question 3.
Key Research Findings
A correlation was found between employee ownership and company performance.
Companies with employee ownership had, on average, performance scores 35% higher than those that didn’t. Additionally, the introduction of employee ownership schemes saw a 32% average increase in company performance.
Stock ownership and stock option plans were both found to effect performance positively, but no performance effect difference was found between them.
In testing Research Questions 2 (i.e. differences in performance effect size of public vs private companies) and Research Questions 3 (i.e. differences in effect size of efficiency vs growth performance outcomes) no effect differences were found between these opposing categories.
Analysis found that the effect of employee ownership on company performance increased over time, indicating sustained and increasing value of employee ownership.
Interestingly, the amount of company employee ownership did not predict greater company performance.
The link established in this study between employee ownership and company performance is encouraging and further validates the idea that employee ownership can improve company performance. Additionally, the results indicate that the effect of employee ownership plans on company performance increases over time and so can provide sustained benefits past the short term.
The performance gains also appear to be present in different contexts, including across different measures of company performance (efficiency and growth), employee ownership types, and company type (public vs private; and company size), indicating that employee ownership reaps benefits in a multitude of scenarios.
Organizational and Reward Implications
This study demonstrates that employee ownership is not just a fad, as suggested by some (e.g. Ghemawat, 2002), but rather has sustained and growing influence on company performance. The results of this study offer strong encouragement to companies considering whether to implement share ownership plans.
Before implementation however, companies should consider factors unique to themselves that may impact on the success of employee ownership plans, such as company culture, HR practices, and employee commitment levels, to name a few.
The finding of a relationship between employee ownership and company performance, along with the comprehensive nature of this study, lends strong support to the value in the current trend of companies increasingly offering employee ownership plans as part of their employee reward offering. Following on from the results of this study, it would be interesting for future studies to further examine the specific role of HR practices in the employee ownership – company performance relationship.
Source Article: O’Boyle, E. H., Patel, P. C. & Gonzalez-Mulé, E. (2016). Employee ownership and firm performance: a meta-analysis. Human Resource Management Journal, 26(4), 425–448.
Published by: John Wiley & Sons Ltd
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Freeman, R. B., Blasi, J. R., & Kruse, D. L. (2010). ‘Introduction’, in Kruse, D. L., Freeman, R. B., & Blasi, J. R. (eds), Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options. Chicago, IL: University of Chicago Press.
Ghemawat, P. (2002). Competition and business strategy in historical perspective. Business History Review, 76(1), 37–74.
Harden, E. E., Kruse, D. L. & Blasi, J. R. (2010). ‘Who has a better idea? Innovation, shared capitalism, and human resources policies’, in Kruse, D. L., Freeman, R. B., & Blasi, J. R. (eds), Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options. Chicago, IL: University of Chicago Press.
Kaarsemaker, E.C. (2006). Employee Ownership and Human Resource Management. A Theoretical and Empirical Treatise With a Digression on the Dutch Context. Nijmegen, the Netherlands: Radboud University.
Kruse, D. & Blasi, J. (1995). Employee ownership, employee attitudes, and firm performance (Working Paper 5277). Cambridge, MA: National Bureau of Economic Research.
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