Broad‐Based Employee Stock Ownership: Motives and Outcomes

Abstract

Firms initiating broad-based employee share ownership plans often claim employee stock ownership plans (ESOPs) increase productivity by improving employee incentives. Do they? Small ESOPs comprising less than 5% of shares, granted by firms with moderate employee size, increase the economic pie, benefiting both employees and shareholders. The effects are weaker when there are too many employees to mitigate free-riding. Although some large ESOPs increase productivity and employee compensation, the average impacts are small because they are often implemented for nonincentive purposes such as conserving cash by substituting wages with employee shares or forming a worker-management alliance to thwart takeover bids.

Does employee ownership improve performance?

“…A comprehensive study of all ESOP adoptions over 1980−2001 found that employee wages, apart from the ESOP, either increased or remained constant after adoption, so that ESOP contributions came on top of existing pay [7]. Consistent with this, comparisons of matched ESOP and non-ESOP firms found similar levels of pay and other benefits, apart from the ESOP in the two types of firms.…”

Employee ownership and firm performance: a meta‐analysis

“…Furthermore, increasing employee ownership diminishes the focus on growth through reduced R&D investment and commitment to innovation (Gamble, 2000) and leads to a decreased focus on maximising value and greater preference for lowering risk (Faleye et al, 2006). Recent work by Kim and Ouimet (2014) showed that increased employee ownership led to increased productivity and lowered growth.…”

The white squire defense: Evidence from private investments in public equity

“…21 ROAIA and LEVBIA are industry-adjusted return on assets and leverage ratio. We control for a battery of issuer characteristics that may correlate with PIPE and ESOP structures (Wu, 2004;Chakraborty and Gantchev, 2013;Dai, 2014;and Kim and Ouimet, 2014) defined in the Appendix. All control variables are winsorized at the 1st and 99th percentiles.…”