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New Research Reaffirms Positive Effects of Employee Ownership on Business Performance
By Martin Staubus, Beyster Institute Staff
  A new study released in October is the latest piece of research to confirm the general principle that employee ownership improves the business performance of American companies.
The study’s researchers, Richard Freeman (Harvard University), Joseph Blasi (Rutgers University), Douglas Kruse (Rutgers University) and Christopher Mackin (Ownership Associates, Inc.), have reported their findings in a paper entitled “Creating a Bigger Pie? The Effects of Employee Ownership, Profit Sharing, and Stock Options on Workplace Performance.” The paper was presented on October 1 of this year at a conference in New York City sponsored by the National Bureau of Economic Research (NBER).
The study focused on what the researchers call “Shared Capitalism.” By this they mean the use of any of several mechanisms that enable a firm’s employees to participate not only in the process of production, but also in a share of the wealth-generating economic results of that production. The researchers focused specifically on two mechanisms that allow employees to share in their firm’s net income: profit sharing and gain sharing and two additional mechanisms that allow employees to share in the growing equity value of their firm: stock ownership and stock options.
Rather than simply attempting to measure the effects of these shared capitalism mechanisms on overall company results, the researchers dug deeper in an effort to identify exactly how shared capitalism produces better corporate results. To do this, they measured six specific employee attitudes or behaviors that typically affect overall business results:
- Employee turnover
- Absenteeism
- Employee’s beliefs regarding the work effort being put out by co-workers
- Employee loyalty to the firm
- A willingness to work hard for the firm
- The frequency with which
employees offered suggestions to improve operations.
By looking at response data collected from thousands of employees at a wide variety of firms, the researchers were able to conclude that the various shared capitalism mechanisms were clearly correlated with improvements in each of the above six measures of employee performance, except for absenteeism, which was not improved by shared capitalism according to their data. Their data also generally showed that the degree of improvement in these factors was correlated with the amount of profit sharing or equity ownership the employee received, with larger awards to employees generating greater improvements in the desirable employee behaviors.
Significantly, some of the shared capitalism mechanisms appeared to be more effective than others. Said the researchers, “Overall, the forms of shared capitalism that appear to have the strongest effects on outcomes are profit sharing and employee ownership.” These mechanisms, suggested the data, are more effective than gain sharing or stock option awards.
An Ownership Culture
Based on earlier studies, the researchers suspected that the superior levels of loyalty, employee effort, turnover, etc. that were associated with the companies practicing shared capitalism might be driven by additional factors beyond the monetary incentives provided by the sharing mechanisms. They therefore probed the data in an effort to determine whether the shared capitalism mechanisms operate interactively with other factors to produce the observed improvements in employee behaviors. Specifically, they identified a set of factors that they refer to collectively as “high-performance work policies.” These policies included: employee involvement teams, formal skills training for employees, high job security levels, basic wage rates that are at market rates or better, and low levels of direct employee supervision.
The data showed some interesting results. Significantly, the researchers found that the tendency of employees to look for a new job fell at shared capitalism companies only if the company also featured high-performance work policies. However, the tendency to look for new work actually increased where the shared capitalism company failed to reduce direct employee supervision below the levels seen at conventional companies. Actual turnover rates at the studied companies showed this even more starkly. The data show that the absence of high-performance work policies and the presence of employee supervision both correlated with higher turnover rates. In contrast, high performance policies and reduced supervision levels caused expected turnover to fall from 12.8 percent to 2.4 percent. A similar pattern emerged with regard to employee loyalty and willingness to work hard, with high-performance work policies strengthening those attitudes at shared capitalism companies and excessive direct supervision weakening those attributes.
The researchers interpret these findings to suggest that the concept of corporate culture “may provide a useful way to understand the relation between shared capitalism and the workplace outcomes.” Rather than looking for simple, one-to-one correlations between individual factors, it may be more useful to think of the interplay of several underlying variables – referred to collectively as corporate culture – as producing the bottom line results that are achieved.
Conclusion
The researchers are unequivocal in summing up their findings:
The principal finding of this paper is that shared capitalism affects workplace performance. It lowers turnover and increases loyalty and willingness to work hard, particularly when combined with high-performance policies, low levels of supervision, and fixed pay at or above market levels. Workplaces where workers average more shared capitalist compensation report greater employee effort along several dimensions.
For the full paper by Freeman, Blasi, Mackin and Kruse, Click Here.
©2006. The Beyster Institute and its authors and their entities. All rights reserved.
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