II. Review of Employee Ownership Performance Literature

Introduction

There has been only one in-depth study concerning the effectiveness of state employee ownership policy efforts. However, there have been several exploratory studies done on state employee ownership legislation. One field of employee ownership that has received much more attention, and is the primary focus of this review, are performance comparisons of employee owned firms with traditional firms and the impact of worker participation.

Concerning the performance of employee-owned firms compared with conventional firms, the literature is much more extensive. There have been at least 25 such studies since the 1970s. This literature will be presented in three parts. First, studies done prior to the 1987 General Accounting Office study will be discussed. Second, the findings of the General Accounting Office study on employee ownership will be presented. The GAO study provides a convenient dividing point for two reasons. First, chronologically, it was done at the midway point between passage of the Employee Retirement and Income Security Act of 1974 and the present. Second and more importantly, it cast serious doubt on the validity of earlier studies leading to more rigorous studies concerning employee ownership. The third part will focus on studies conducted after the General Accounting Office study.

Employee Ownership Program Evaluation

In 1990, the National Center for Employee Ownership (NCEO) did an evaluation of the state employee ownership programs that were in operation at the time. For the purpose of this of this review the focus will be on the key findings of the Ohio employee ownership program. The study found all the state programs were involved in outreach and networking. The Ohio program published a semi annual newsletter, put on an annual conference, and created a network of Ohio employee-owned companies. The annual conference was (and still is) the largest state conference on employee ownership. Ohio’s Employee Owned Network was deemed the largest and most successful project of its kind.

It was also found that the state programs were also involved with providing technical assistance to some degree. According to the study, the Ohio program appears to provide the right services to businesses and labor unions. The quality of these services was also found to be quite high. It was also found that the formation rates for employee ownership companies, in Ohio, grew faster than the national rate since the Ohio program was established. The relative rate of employee ownership plan after the establishment of the Ohio program increased by 18%, and for only private companies the rate increased by 45%. Lastly, state programs were also involved in research on employee ownership. State employee ownership programs have conducted the most extensive research on employee ownership. Ohio’s program was found to be the most research intensive during this time.

Before the GAO Study

Concerning early studies of employee ownership, there was substantial evidence presented that firms with significant employee ownership outperform "conventional" firms in a narrow economic sense. There were few studies disputing the evidence of these findings. Studies show that companies with employee stock ownership plans (ESOPs) had twice the productivity increases of comparable firms. An analysis for the New York Stock Exchange estimated that productivity in the U.S. would increase by 20% if American companies made a serious effort to involve employees in decision-making at all levels and reward them with the gains from this effort. One study found that employee ownership by itself was not necessarily related to increased productivity. However, employee ownership firms coupled with employee participation were found to have higher productivity than do employee-owned firms without employee participation.

The evidence suggests that employee ownership is often more conducive to higher rates of employment growth than are traditional firms. One study, in particular, reached the dramatic result that, in companies where employees own a majority of the stock; three times as many new jobs are created per year as in conventional firms. In addition, employee ownership seems correlated with greater worker satisfaction. Another benefit suggested by early studies is the increased performance and value of stock of employee-owned firms compared to conventional firms. A 1985 study projected on the basis of the performance of 147 ESOPs that the average employee making the median wage of $18,000 in 1983 would acquire a share worth $31,000 in ten years and $120,000 in twenty. The former figure exceeds the net worth of one half of American families; the latter exceeds the net worth of all but the top fifth of families for 1985.

An examination of ESOPs in Ohio in 1985-86 found that not all ESOPs are equally beneficial. Many companies, it was found, made small or irregular contributions to their plans in effect limiting the benefit to employees. Employee participation also appeared to be quite limited. The benefits ascribed to ESOPs in the early studies (see above) were not as likely to materialize under such conditions. The authors concluded that most benefits ascribed to ESOPs in the literature are not necessarily the consequence of merely establishing an ESOP. In the few firms that were characterized by high employee ownership, large contributions made to their plans, and high employee participation were found to be more to likely to reap the potential benefits than were firms that did not have these characteristics.

A similar study done in Michigan also found that employee ownership had a positive impact on companies in several different ways. It was found that there was an increase in opportunities for employee involvement in decision-making. It was also found that there was either stable or increased productivity since the introduction of employee ownership. The higher the level of employee participation the more likely there would be increased productivity. Lastly, it was found that democratically structured firms were more likely to report greater increases in productivity than firms without such structures in place were. This was also found to be true of majority owned firms compared to minority owned firms.

The evidence from studies done prior to the GAO study suggest that employee-owned firms have higher levels of productivity compared with traditional firms. The evidence suggests that this is especially true for employee-owned firms with higher levels of levels of employee participation. It was found during this time, however, that there was very little worker participation in employee-owned firms-even in majority employee-owned firms. One researcher noted, given the evidence that employee-owned firms with greater participation seem to out perform employee-owned firms without such structures, that "legislation mandating significant worker participation in employee-owned firms would be a move toward a more efficient and a more just society."

The General Accounting Office Study

The United States General Accounting Office administered the most extensive study done on employee ownership during this time. This study was important for two reasons. First, this study raised a number of questions about the validity of earlier employee ownership studies. Specifically, it called into question the representativeness of the samples of employee-owned companies used in earlier studies. Unlike earlier studies, the GAO was able to draw on a much more representative sample of ESOP companies. Second, the study called into question the assumption that employee ownership, by itself, was enough to bring about increases in productivity and profitability.

Employee ownership was evaluated against both its explicit and implicitly stated goals. Concerning the goal of broadening ownership, the study found that ESOP plans do broaden ownership to a very limited degree. In 1983, ESOP assets accounted for less than 1% of the total stock outstanding. Concerning the goal that ESOPs can be an alternative mechanism for financing capital growth, there was little evidence that ESOPs were utilized to finance capital growth.

Although not explicitly stated in federal legislation as a goal, the study examined the productivity of ESOP companies compared with traditional firms. The study found that there was little evidence to support the claim that the establishment of an ESOP contributes to either profitability of productivity. Furthermore, the study found that there was limited employee participation at employee-owned firm. However, it was found that participation was the only factor that contributed to increased performance among employee-owned firms.

After GAO Study

Studies done after the GAO study studies find similar results to the pre-GAO studies, but not necessarily with as dramatic results. These later studies suggest that employee-owned firms have comparable profitability with conventional firms of similar size but there was not necessarily a relationship between increased sales and employee ownership. Later studies provide more evidence concerning the relationship between employee ownership and employee participation. Employee ownership has been criticized by some for not exhibiting greater change once an ESOP is in place. In response to these critics, one author notes "they [the critics] make the theoretical assumption that because companies are employee owned, they will therefore be expected to have higher levels of employee participation."

A comparison of the differences between ESOPs, producer co-ops, and traditional firms, found that co-ops seem to have equal of greater job satisfaction than do both ESOPs and traditional firms. This seems linked to the level of worker participation. It was found that there is a lower rate of turnover at ESOPs than at traditional firms. It was also found that ESOPs and producer co-ops were characterized by lower levels of absenteeism than were traditional firms. The author notes that these results have important policy implications because, currently, the federal government, as well as several state governments, has policies that give preferential treatment to ESOPs, but not necessarily to co-ops. Furthermore, virtually all of the preferential tax treatments go to financial aspects of employee ownership. Worker participation, on the other hand, gets little, if any, public policy support or any tax incentives. The author suggests that some minimal level of participation be required.

A similar study found that employee ownership was tied to greater satisfaction when employees perceived that they were more involved. Psychological ownership, or perceived control, was considered a more important factor than actual control. The evidence suggests that increased value of ownership as well as higher levels of perceived influence seemed to have a greater impact on organizational commitment than did lower levels of perceived influence. Salary was not correlated to employee attitude but was correlated with the financial value of the ESOP. Workers who left the firm often felt they had less influence than those who stayed, despite the fact that they were owners. For those who stay, perceived employee influence may be of more value than the financial aspects, which are normally not realized till the worker retires.

The effectiveness of employee ownership and participation on productivity is contingent on various factors. One study found that increased productivity appears linked to employee participation in decision-making (albeit restricted participation). This is contingent, however, on the level of return employees enjoy. When employees have no control rights, increasing employee return rights can have either negative or positive effects on productivity. This is contingent on the nature of the agency problem, unionization, and other factors. Increases in productivity are dependent on the level of control, with moderate to dominant control found to be best, the amount of profit to be shared, and the justification for the type of control implemented.

Not all forms of employee participation, however, have been found to be of equal benefit. Comparing different types of employee participation, one study found that the most effective approaches to employee ownership were self-directed work teams and gainsharing programs. The evidence seems to demonstrate that these two forms of participation general produce significant improvements in both productivity and employee attitudes. The least effective types of participation were worker councils/employee representatives and quality circles. Quality of worker life programs, employee ownership, and job enrichment were considered intermediate in terms of effectiveness. The effectiveness of employee ownership varied depending on whether other forms of participation were introduced.

Comparing managerial buyouts (MBO) with employee buyouts (EBO), one study found several interesting characteristics. Prior to buyouts, relative to MBOs, EBOs firms usually had a lower value of assets per employee, poorer stock price performance, and lower leverage. EBOs were also more likely to have overfunded pension plans, more likely to be under takeover pressure, and have less ownership by officers and directors. After the buyout, however, cash-reducing compensation changes were reported by only 2.6% of MBOs compared to 56% of EBOs. EBOs were as highly leveraged as MBOs but tended to use a higher proportion of bank debt. It was also found that EBOs had a lower percentage of third party and institutional investors and employees fail to obtain substantial control rights early in EBOs. Lastly, EBOs did not appear to differ from MBOs with regard to employment growth or long-term outcomes.

Comparing firms’ performance for pre- and post-employee ownership, it was found that employee ownership seems linked to improved performance within the individual firm over time. The majority of employee-owned firms, in one study, had improved growth and sales rates from their pre-ESOP to their post-ESOP period. A similar study found that both ESOP and profit-sharing plans increased productivity. The productivity effects increased with the age of the plans. The rate of relative growth in output, for publicly held firms, was about 1.8% for ESOPs and 3.8% for profit-sharing plans.

One study examining the impact of ESOPs on wealth and income in Washington found that ESOP companies have significantly higher pay than did traditional firms. Furthermore, employees at ESOP companies had at least one retirement plan where as workers at traditional firms were much less likely to have any form of retirement plan. In terms of equality of economic opportunity, it was found that that employees at ESOPs than employees in traditional firms. However, there was greater economic inequality within ESOPs. The benefits of employee ownership were greatest for the highest paid employees while there appeared to be little benefit for the lowest paid employees. Employee ownership, it was concluded does not necessarily bring about economic equality. However, unionization was found to diminish the gap between the highest and lowest paid workers in ESOP companies.

The effect of employee ownership seems to vary from firm to firm. One study attempted to assess the effect of employee ownership, profit sharing, and gainsharing on high tech firms. The evidence suggests that there is a positive link between employee ownership, profit sharing, and gainsharing on productivity. However, the study found that the positive effect varied depending on the particular industry, type of plan, and even human resource practices.

Summary and Implications

Although the majority of studies suggest that employee ownership seems related to increased productivity, the results have become more diverse as more (and better) studies are done. Increased productivity appears linked to the age of the ESOP and may also be contingent on the level of employee participation. The evidence appears to suggest that some forms of employee participation are more effective than are others. Employee participation appears to be the one constant factor attributable to increased productivity. Furthermore, employee ownership, it was found does not necessarily entail economic equality. Employees at employee-owned firms, however, are more likely to have higher wages than employees in traditional firms. The evidence seems to indicate that these results do vary depending by industry type. Given the mixed results concerning employee ownership and performance, one researcher contends "further research is [still] clearly needed to determine what aspects of worker ownership, if any, are conducive or nonconducive to productivity."

It appears that research on employee ownership has had little influence on state policy and policy makers. The research suggests that employee ownership can help retain jobs, yet there is scant mention of employee ownership as a job retention or job creation strategy. The business community at-large seems to be much more aware of employee ownership research. But like state policy makers, many in the private sector (business leaders, consultants, attorneys) are unaware of the benefits available at the state level.

Given the research findings, there is one primary implication for future policies. The one factor, consistent through the research, is that when employee ownership is coupled with employee participation, employee-owned firms outperform their conventional counterparts. Not only does higher levels tend to bring about improved productivity but increased job satisfaction. It seems logical then that requirements of participation should be tied to financial assistance for employee buyouts. The effectiveness of employee ownership programs indicates that such programs should also be part of future policies.

Date: 2015-01-11; view: 912