So what do you think? Do employees actually respond to employee stock ownership programs with a performance boost? Does it change how they think about the company and, in turn, how they go about their jobs?
Ask a sampling of business people about this, and some will hazard the view that employees will take their work more seriously – after all, it’s only logical. As stockholders, it’s in their interest to do what they can to help the company grow. Others opine that they seriously doubt it – employees are employees and they’ll be glad to have the stock, but won’t change their ways.
Fortunately, we don’t have to rely on hunches, opinions, viewpoints or gut instinct. This is a subject that has been studied extensively by business school academics. In fact, over 30 studies in the past 20 years have addressed the question of whether and how employee ownership affects firm performance. So, what does all this research show?
The jury is in: companies that establish employee stock ownership programs experience a boost in business performance. A 1997 study by Rutgers professors Douglas Kruse and Joseph Blasi, for example, analyzed all private companies with ESOPs (employee stock ownership plans) for which there were sufficient data. Their findings: sales grew 2.4 percent faster per year. Likewise, annual productivity growth increased 2.3 percent.
A 2004 study by professors from the University of Michigan and University of North Carolina found that companies that established employee stock plans saw an increase of 8.12% in “Tobin’s Q” (the ratio of the company’s stock value to its book equity value) relative to the industry median. And another 2004 study found that companies that established an employee stock program saw an average increase in their return on assets of 5.5 percent, an increase in their net profit margin of 10.3 percent, and an increase in their return on equity of 5.6 percent.
Looking at the data from all of these studies combined, the average estimated productivity difference between ESOP and non-ESOP firms is 6.2 percent.
The bottom line? Employee ownership is effective in producing a more competitive company.
But there is one big caveat. Employee stock plans are not magic pixie dust: just sprinkle on some stock and – Presto! – employees are not magically transformed. Rather, these programs have to be leveraged with a commitment to employee education and engagement. The companies that have seen big performance gains with employee stock plans have done so only after making a real effort to get employees to understand some key points, such as:
- What does it mean that I am a company shareholder through this program?
- What is it that actually drives the value of our stock?
- How exactly do I play a role in driving the value of our stock?
The companies that showed their employees how the business works and how each person can contribute to the team’s success, and then empowered them with the tools and information to make a difference, saw financial performance gains that far exceeded the averages found by the research studies cited above.
That’s how you do it right.
Martin Staubus is Executive Director of the Beyster Institute at the Rady School of Management. The Institute advises company leaders on the effective deployment of employee stock plans. The Institute was established by entrepreneur Bob Beyster, who grew his start-up venture into a Fortune 500 company. http://www.rady.ucsd.edu/beyster/