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admin
631 Posts |
 Posted - 11 Aug 2006 : 05:33:53
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Research into employee share ownership in Australia has always been seen as a low priority by both Governments and University based research centres. This is a pity, as there are several questions always raised (particularly by the guardians of the Federal budget) about the evidence for the claims that ESOPs will make a substantial contribution to the economy. While there is a substantial body of evidence in this area for other economies, none exists for Australia. This is despite the “plans” for such research having been mooted for some time, and the consultations that have taken place in the past few months with the Federal government.
To assist with the development of a research agenda for ESOPs in Australia, it has now been decided to open up a forum on the topic to generate public input into what needs to be done.
Research so far in this country on the topic has not been extensive. What we do have available are the two research outputs emanating from:
1. The Employee Share Ownership Development Unit of the Department of Employment and Workplace Relations which has done some good work on attitudes towards – and the prevalence of – employee share ownership in various industries, including the “trends” that are apparent from the slow development of ESO here. This research provides a good basis for decision-making on the further expansion of employee share ownership in Australia, particularly towards meeting the targets the Government has set itself (ie: 11% of the workforce in ESO plans by 2009). This work can be seen under "ESO in Australia" at:
http://www.workplace.gov.au/workplace/Programmes/ESO/ESOinAustralia.htm
WITH THE SUDDEN CLOSURE OF THIS UNIT'S WEB-SITE IN AUGUST 2008, WHAT RESEARCH MATERIAL OF THIS EXPENSIVELY FUNDED PROJECT THAT WE HAVE BEEN ABLE TO SAVE CAN NOW BE ACCESSED ON OUR WEB-SITE AT: http://www.aeoa.org.au/0024/default.asp?id=31 .
2. The other body of work has been undertaken by the University of Melbourne’s Law School under the theme of developing “Partnerships at Work”. The research looks more at the role employee share ownership can play in developing fairer and more productive workplaces and how this is hindered by poor legal and regulatory frameworks. The various research reports from this work can be seen at:
http://cclsr.law.unimelb.edu.au/index.cfm?objectid=E3D400E9-B0D0-AB80-E20048F45BEFEC53 .
The work that now needs to be done are on the two related, but separate questions about employee ownership and corporate performance. First, do ESOP companies improve their performance after they set up employee ownership plans; and second, what factors are most associated with successful economic performance in ESOP companies?
Australian based research answering these two questions would go a very long way towards generating greater public support for employee share ownership through advancing the ‘public policy’ agenda for the role that employee share ownership can play in improving productivity within the economy. There would be a need to answer both questions with some statistical certainty.
Public participation is now invited in debating what needs to be done on the research front for advancing the ESOP agenda within Australia. Comments are invited through adding posts on the topic below.
The Moderator
AEOA Discussion Forum.
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Alan
87 Posts |
Posted - 11 Aug 2006 : 05:44:43
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What Makes ESOPs work?
As a contribution to the research debate initiated above, the following are the factors which would have to be looked at by any ESOP research program.
Firstly, it is unclear whether employee ownership is responsible for better performance directly, or if it works through some other mechanism, such as improved employee attitudes and behaviours or organisational changes to the company. There are a number of factors and performance measures which will relate to superior economic performance, which would all need to be examined. In my view, you would have to correlate measures of performance with the following factors:
1. Company contributions: The company’s annual contribution to its ESOP, expressed as a percentage of total payroll, maybe important in predicting employee satisfaction with – and attitude towards - employee ownership. However, the size of the contribution on its own is unlikely to be a predictor of better economic performance, if overseas evidence is anything to go by.
2. Management Philosophy: Management philosophy about employee ownership is probably more promising as a predictor of corporate performance. When employee ownership is integrated into company culture, does the company do better economically? There is much evidence to be found along these lines.
3. Employee participation: Measures of employee participation have had the strongest correlation with the economic performance variable overseas. It is likely to be the same here.
4. ESOP communication: Companies may make employees feel good about being owners by promoting the benefits of an ESOP to them, but this by itself may not improve the fortunes of the firm.
5. Percent owned: Relative to their competitors, do companies do worse or better when they have greater percentages of employee ownership? Overseas research on this has been ambivalent.
6. Plan features: Plan features – such as vesting schedules – may not be related to company performance, despite what the advocates say.
7. Voting rights: Voting rights maybe related to improved performance, but the indication is that this is only a weak correlation from overseas research.
8. Board representation: Again, there may only be a weak correlation there.
9. Company size:: It is likely that neither large nor small companies have any particular advantage in using employee ownership to create better economic performance.
10. Change in management: Since many ESOPs are set up to transfer ownership from a retiring owner or for divesting a division from a large company, it seems plausible that improved or superior performance might be explained by a new, more innovative or more dynamic management.
11. ESOP tax preference: While there are only small tax advantages for ESOP companies in Australia, overseas evidence indicates that tax preference appears to be related only weakly to corporate performance.
Overseas evidence indicates that the strong predictors of performance are employee participation and management philosophy, with the less strong predictors being voting rights, board representation, company size and plan features. These need to feature in any future research program. The rest appear to be unrelated to performance but may be worth also having a look at.
The best hypothesis to test about employee ownership and corporate performance would be that when employees are and feel like owners, they will behave as owners and work to advance corporate goals. They may also work to include in these goals more about social equity and environmental protection, thus making for more corporate social responsibility in its operations, and the building of “better businesses”.
Alan Greig
The Mercury Centre
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Alan
87 Posts |
Posted - 17 Sep 2006 : 08:23:29
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Prevalence of ESO in Australia
Research into employee share ownership in Australia is hindered by the lack of data available on ESOPs. There is no way at present of answering questions such as “how many ESOPs are there" and “what kind of companies are they in”, other than through estimation.
For those researchers interested, the research position on the "prevalence" of ESO in Australia is outlined below.
There appears to be no more up-to-date data on the prevalence of ESO in Australia than that provided by the Federal Government last year (2005) and now available on the DEWR ESO web-site - see below. (Whether their "second round" of research will tackle the question further is yet to be announced).
It would be difficult to get an accurate position on "prevalence" without "registration" of all ESO schemes. It is the fact that ESO schemes have to be "registered" which provides the kind of data the UK and US authorities have available to them.
Extrapolation from what is known about ESOPs in the "Top 100" companies in Australia would not be accurate as ESO penetration in these companies is very high (perhaps the highest in the world in terms of the proportion of companies offering broad based ownership plans and the proportion of their workforces participating – but not the ownership stake that the ESOPs have), but it tapers off very swiftly from these large companies downwards.
The most relevant statistics in Australia on the topic (The ESO Development Unit in DEWR, 2005) can be accessed at the web-page below. (This page has further brief details on "trends and statistics" relevant to employee numbers, from Australian Bureau of Statistics "Workforce Surveys"):
http://www.workplace.gov.au/workplace/Programmes/ESO/TrendsandstatisticsonESOinAustralia.htm
The DEWR research position on "prevalence" is as extracted below:
"Key findings of the literature review stage of this research are as follows:
• In Australia, there is conflicting and limited data regarding the implementation of Employee Share Ownership Plans (ESOPs).
• There is no comprehensive (accurate) survey of the incidences of the various types of ESOPs by business type in Australia.
• The limitations of previous research include a lack of differentiation between:
o The ‘Type’ of ESOP and the key factors that are limiting take-up;
o The focus of the ESOP at the company level, and whether the plans are: narrow-based plans (offered to the top management group only) or broad-based plans (offered to most or all of the employees, generally considered to be greater than 50 per cent); and
o The size of the entity, and whether barriers to implementation of
ESOPs differ by entity type and size
• There is a large amount of international research in the area of ESOPs, the majority of which is from the US and, more recently, from the European Union (EU). The key differentiator between the US and EU research is that the implementation of ESOPs is relatively widespread in the US in comparison to the EU (and Australia). The widespread acceptance of ESOPs in the US has broadly been explained as a direct result of tax-incentives introduced in the 1970s and 1980s in the US. Many of these incentives continue to have effect today and encourage further acceptance of ESOPs by both employers and employees in the US.
• Again, the research directly related to the implementation of ESOPs at an international level is limited. This observation clearly raises support for further detailed research in the area of barriers to uptake and over coming limitations in the acceptance and implementation of ESOPs in Australia.
(* Research provided by TNS Social Research, ACT.) "
There is some further information on "Prevalence" under the heading "Awareness and Incidence" on pages 2 and 3 of the Executive Summary of "Employee Share Ownership in Australia: Aligning Interests" Research Project which can be accessed at the web-link above. Also, the KPMG Report "Employee and Share Options Schemes Survey Report" (2003) contains further limited information on the extent of ESO by company type etc. This report can be accessed (members only) on the AEOA “2003 News” web-page.
The lack of data available in Australia on ESOPs can be compared to what is available in the US and the UK below:
“Research Evidence on Prevalence and Effects of Employee Ownership” (US, NCEO) at: http://www.nceo.org/library/kruse_testimony.html
”A Statistical Profile on Employee Ownership” (US, NCEO) at: http://www.nceo.org/library/eo_stat.html
“National Statistics” (HM Revenue and Customs, Share Schemes Office, UK) at: http://www.hmrc.gov.uk/stats/emp_share_schemes/menu.htm .
The AEOA would be keen to hear from any researchers looking to extend our knowledge on the prevalence of ESO in Australia.
Alan Greig (Public Officer, AEOA)
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Alan
87 Posts |
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Alan
87 Posts |
Posted - 10 Dec 2006 : 05:05:09
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New Research on Attitudes and Awareness towards Employee Share Ownership in Australia
The Employee Share Ownership Development Unit in the Department of Employment and Workplace Relations has recently placed on its web-site the presentation by TNS Social Research on their research (which was commissioned by the Department). The presentation is entitled:
“Employee Share Ownership: Summary of Awareness, Attitudes and Endorsement”.
You can find the link to the full presentation on the following web-page:
http://www.aeoa.org.au/0024/default.asp?id=31
This is the most comprehensive research yet undertaken on ESO in Australia. In summary, some of the results are:
The research…
• confirmed that ESO is a complex area and that while general awareness of the concept among businesses is high, there is a lack of depth of understanding of issues related to design, implementation and management of ESO plans
• confirms that the lack of knowledge also extends to some advisors, for whom the complexity of specific tax and legal issues can be overwhelming
• indicates that there is broad support of the concept of ESO among Australian businesses. The majority of businesses with ESO plans are satisfied with the effectiveness of the plans as a workplace and human resource strategy
• indicates, however, that many businesses do not see ESO as a relevant strategy for their business and do not feel that their employees would want such a scheme
• demonstrates that businesses entering into the design and implementation phases of ESO are challenged by the complexity and costs associated with the exercise and some comment on the resistance of employees
Awareness and lack of awareness
Awareness of broad based schemes (‘share plans that are open to all employees’) was highest among:
- Public companies listed overseas (87%)
- Companies with over 100 employees (85%)
- Companies with annual turnover of over $50 million (81%); and
- Companies with mostly white collar workers (79%)
Lack of familiarity with ESO was reported most often among businesses:
- in the Health and Community Services industry (70%)
- in the Transport and Storage industry (73%)
- who rated their organisational culture on a range of measures as Good (65%) or Average (64%) but not Excellent
- with mostly blue collar workers (60%)
Business attitudes
The main barriers to increased implementation of ESO plans related to:
- a perception of a lack of relevance of ESO to their business
- practical issues regarding legal and tax complexities
- employee resistance
Additional legislative/taxation issues were seen as significant barriers for business:
- limited tax incentives and/or unattractive and complicated tax treatments depending on the plan type or transfer of ownership (capital gains tax issues)
- burdensome corporations law disclosure requirements
- annual valuation requirements which can be expensive, complex and difficult for unlisted companies
The research highlighted the key concerns of cost and complexity for businesses wanting to implement an ESO plan
The four main negative perceptions emerging from the survey were:
- businesses without share plans believe that share plans are not applicable to their organisation
- employees would prefer other types of benefits, do not/would not understand ESO and some could not afford to be part of a plan
- set up and maintenance costs are expensive
- legal requirements are too difficult.
Employee attitudes
Employee resistance was one of the most frequently reported concerns for businesses with and without ESO plan
Qualitative research with employees found that while in many cases understanding was low, perceptions varied even within organisations. The views of employees towards ESO plans appeared to be driven by a range of factors, including:
- the performance of the share price – share volatility was not well received by some employees and a declining share price was seen as demotivating
- the size and age of the company – different views for those in smaller or start up phases (i.e. employees can be part of business growth and development) as opposed to more established or larger businesses
- the value and type of shares (needs to be significant/worthwhile)
- previous experiences (positive and negative) with share schemes
- life stage and current financial position – younger employees looking for different types of investments or cash flow compared to those closer to retirement
- understanding of share ownership generally and an openness to this type of remuneration as part of a wealth creation strategy
- existing employee relations and trust of management
Alan Greig
AEOA |
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Alan
87 Posts |
Posted - 28 Dec 2006 : 09:06:18
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What is ‘Better Performance’?
The idea of installing an ESOP in a company is an issue that usually has to be brought to the shareholders for their approval as it is their proprietorship that will be diluted if employees are offered newly issued shares. In cases where the ESOP involves the company in assisting employees in the purchases of existing listed shares (rather than new ones), the approval of the shareholders must also be obtained, since it is with their profits that the company will fund the purchase of the shares.
Certainly, it would seem good sense to endorse a system that encourages staff to have an added ‘stake’ in the company in which they work, through their share ownership. However, there has been little research undertaken in Australia (unlike overseas) to support the belief that ESOP companies performed any better than others.
Some early research in this area which has been drawn to the attention of the AEOA is the survey conducted by the Sydney-based consulting firm Remuneration Planning Corporation (RPC) Pty. Ltd and the Australian Stock Exchange in 1991. This survey produced results which went some way towards proving ESOP companies performed better. The survey examined the overall incidence of share plans, the prevalence of stock issues and values, as well as corporate performance relationships. Among other things, it found that ESOP companies consistently performed better than the industry norm across a number of performance measures (even throughout the recession at that time).
The RPC study showed significantly better performance by companies operating some form of employee share plan. But what is ‘better performance’ and how was it measured?
Often, different industries measure performance in different ways, so it is good practice to use a range of indicators to get a realistic picture of performance.
The measures that were used in the RPC research study included:
• Return on assets
• Productivity
• Profit margin
• Return on funds
The performance of all the ESOP companies in the survey was then reviewed and compared with an industry median. (That is the median performance of companies of a similar size and structure in the same industry group).
The results of this study – the first of its kind conducted in Australia – revealed that:
• A range of different kinds of Employee Share Plans were in operation in companies in Australia;
• Employee share plans were found in 44% of the 318 companies surveyed, representing 80% of the 1.06 million employees involved.
• When asked about the objectives of the plan, the participants focused on:
- motivation (33%)
- employee partnership (26%)
- additional reward (28%)
• About half of the companies participating felt that these objectives were being achieved and another 25% partly achieved
• Many of the companies who did not have share plans were relatively new. Very few companies considered ESOPs as not relevant to their business.
A sample of companies known to have an employee share plan was then taken and each company’s performance was compared to an industry median. The results were significant. Despite the then recession, ESOP companies outperformed their industry standards on a number of different performance measure. For example, on the ‘return on shareholders funds’ measure, ESOP companies were 39% higher than the norm.
Performance of ESOP Companies relative to Industry Medians – RPC Study, 1991.
Measure - Average % over Industry Median
Return on Assets - 32%
Productivity - 12%
Profit margin - 28%
Return on Funds - 39%
As you can see, the results were quite dramatic. For the first time in the history of ESOPs in Australia, here was some evidence indicating that companies with ESOPs performed better than their industry counterparts. The study however has never been replicated to update and compare the research.
Alan Greig
AEOA
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Edited by - Alan on 28 Dec 2006 09:08:07 |
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admin
631 Posts |
Posted - 02 Jan 2007 : 11:51:29
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ESOP Companies in Canada – the Performance Link
Further to the post above discussing the issues in the measurement of "better performance" in relation to ESOPs, some of the earliest – and most widely used – evidence of this performance link with employee share ownership was produced in a study conducted by the Canadian “Toronto Stock Exchange” in 1987.
This study analysed the performance of listed companies with plans against their industry competitors who did not have plans, and produced results which can be compared to the post above. The results were as follows:
Performance measure – Excess over Industry Average
Productivity – 24%
Net Profit Margin – 95%
5 year profit growth – 123%
Return on Equity – 93%
Return on funds – 66%
(Nightingale and Laroque, 1987)
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admin
631 Posts |
Posted - 06 Jan 2007 : 08:52:36
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A Guide to Doing Academic Research on Employee Ownership
If you are considering undertaking a research project on employee ownership in Australia, it is recommended you first have a look at "A Guide to Doing Academic Research on Employee Ownership" by National Center for Employee Ownership (US) executive director, Corey Rosen, which you can see at: http://www.nceo.org/library/research.html .
The Guide is in two sections - "What we know" and "What we don't know" - and covers the following topics in each: 'Impact on Economic Performance', 'Employee Attitudes towards ownership', 'Characteristics of Employee Ownership Companies', 'Ownership and Control', and 'Financial impact on employees'
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admin
631 Posts |
Posted - 15 Feb 2007 : 03:53:48
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Alternative Forms of Ownership
The Institute of Industrial Relations, University of California, Berkeley provides web-based “Berkeley Labor Guides”, one of which is on the topic “Alternative Forms of Ownership”. This guide includes a research directory providing a selective list of key resources on the topic, which is updated periodically as resources evolve.
You can see this web-page at: http://iir.berkeley.edu/library/blg/altown.html
Much of the research in labor relations and organizational development is concerned with conventional post-industrial revolution business models, featuring private, corporate, or state ownership of the means of production and a hired labor force. These models almost invariably involve dynamic tension between owners, managers, and workers. However, there are ways to structure an enterprise that are predicated on shared ownership by the workforce and democratic management processes. Although these approaches represent only a fraction of businesses, they stand out as testing beds that encourage "thinking outside the box" and offer many valuable lessons.
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admin
631 Posts |
Posted - 12 Mar 2007 : 11:15:37
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Research and Statistics
The National Centre for Employee Ownership in the US serves as the leading source for information on employee ownership research.
In addition to reviewing all the significant research as it develops, the NCEO conducts original research, often in conjunction with leading academics. The NCEO also provides assistance and advice to members who are conducting their own research on employee ownership.
The articles on the web-page provide basic information on employee ownership research, while the publications report on and analyze research the NCEO and others have conducted.
The web-page can be seen at: http://www.nceo.org/reference/research.html
On this page, you can connect to “Articles Online” which provides web-pages on Fast Facts, Research Publications, NCEO Research Services, Survey Data for Academics, and separate pages on research relating to Share Options and ESOPs.
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admin
631 Posts |
Posted - 18 Mar 2007 : 06:50:01
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Who benefits from ESOPs? What does the research say?
All the research that has been done of ESOPs has demonstrated that the positive effects of an ESOP can reach far beyond the immediate workplace.
So who benefits?
The Enterprise – because of improved productivity and better returns;
The Shareholders – from improved corporate performance;
The Customers – due to better customer service and better quality control;
The Suppliers – due to increased demand for the company’s products and services;
The Community – from better employment prospects, community ownership of local enterprise, the cultural and social support provided by successful community-minded companies and better quality products;
The Employees – from a better work environment and a better financial return as ESOPs enable employees to become part-owners of the company in which they work. ESOPs provide a way for a business to share its wealth creation with its workers, allowing employees to better understand and share in the benefits and responsibilities of a controlling a company.
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admin
631 Posts |
Posted - 29 Mar 2007 : 04:59:06
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New Research Report: Insolvency, Employee Rights & Employee Buyouts
A new research report has been completed by Australian employee ownership researcher, Anthony Jensen of Ithaca Research. The work has been presented in both Europe and Australia (at the Workplace Research Centre at the University of Sydney). This excellent report can be accessed through the European Employee Ownership Federation’s web-site at:
http://www.efesonline.org/LIBRARY/2006/Insolvency,%20Employee%20Rights%20&%20Employee%20Buyouts.pdf
This report is the result of a two year research project supported by a grant from Cooperative Action, a UK foundation. It has involved fieldwork researching the extensive worker buyout experience in Spain, and research at the Business School of the University of Sydney drawing on the considerable specialist expertise of lawyers, accountants and industrial relations specialists.
The Employee Buyout (EBO) phenomenon emerged across Europe in the 1970s and 1980s as a reactive strategy by working people to save their jobs when faced with the collapse of their employer, due to the economic crises and industrial restructuring of the period. Faced with few alternatives in finding employment, workers became entrepreneurs not by choice but by necessity, and took over businesses usually when no one else was prepared to do so. Hundreds of companies and thousands of jobs were preserved, moribund organisations were transformed, and industrial capacity was preserved and reconstructed. New ways of working and new roles for trade unionists have developed, established social and political ideas have been re-evaluated, new networks and economic formations have emerged, and men and women have surprised themselves by what they have become and achieved.
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admin
631 Posts |
Posted - 06 Apr 2007 : 05:10:35
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Four new publications are now available from the Employee share ownership plans: Current practice and regulatory reform research project at the the Centre for Corporate Law and Securities Regulation at the University of Melbourne Law School.
The four publications - as listed below - can be accessed at:
http://cclsr.law.unimelb.edu.au/index.cfm?objectid=A9840D89-1422-207C-BA2319347B2EE439
Publications
I Landau, R Mitchell, A O'Connell and I Ramsay, 'An Overview of Existing Data on Employee Share Ownership in Australia' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).
I Landau, R Mitchell, A O'Connell and I Ramsay, 'Employee Share Ownership: A Review of the Literature' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).
I Landau and I Ramsay, 'Employee Share Ownership Plans in Australia: The Corporate Law Framework' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).
A O'Connell, 'Employee Share Ownership Plans in Australia: The Taxation Law Framework' (Research Report, Employee Share Ownership Project, Melbourne Law School, The University of Melbourne, March 2007).
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admin
631 Posts |
Posted - 06 May 2007 : 06:30:21
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Australian Labour Market Statistics, July, 2005
Spotlight: Employee share schemes
(To view the graphs and tables, go to:
http://www.abs.gov.au:80/Ausstats/abs@.nsf/7d12b0f6763c78caca257061001cc588/eb4112383cbc0e73ca257259007d6c70!OpenDocument ).
INTRODUCTION
Providing benefits in addition to regular wages or salary is a common way for employers to remunerate their employees. Benefits are goods, services, concessions, allowances or other privileges provided to employees, in addition to wages or salary.
One increasingly common type of employment benefit is providing employees with shares, share rights or options in the employer's business. A share right, or option, is a contractual right to acquire shares in the future, at a set price. The shares are issued when the employee exercises this right to the shares.
These arrangements, where employees receive shares (including share rights or options) in the employer's business as an employment benefit, are often referred to as 'employee share schemes'.
Employee share schemes are designed to encourage employees to invest in the business they work in, both financially and in terms of increased commitment. The schemes provide a link between corporate and individual performance and can therefore provide extra motivation for employees. Employee share schemes are therefore considered to benefit both the employer and the employee.
This article uses estimates from the Survey of Employee Earnings, Benefits and Trade Union Membership to show how the incidence of employees receiving shares as an employment benefit has increased over time. It then looks at the characteristics of employees who received shares as an employment benefit in August 2004.
EMPLOYEES RECEIVING SHARES AS AN EMPLOYMENT BENEFIT
Over the last twenty-five years it has become more common for employers to provide shares as an employment benefit. In 1979, the proportion of employees who received shares as an employment benefit was 1.3%, but by 2004 this had increased to 5.9% of employees. Most of the increase occurred between 1989 and 1999, with the proportion increasing from 2.4% to 5.5% during this period.
1. Proportion of employees receiving shares
CHARACTERISTICS OF EMPLOYEES RECEIVING SHARES AS AN EMPLOYMENT BENEFIT
In August 2004, 299,000 male employees and 182,300 female employees received shares as an employment benefit in their main job. This represents 6.9% of all male employees and 4.8% of all female employees. A higher proportion of full-time employees received shares as an employment benefit than part-time employees (7.0% compared to 3.4%).
2. Employees receiving shares as an employment benefit - August 2004
The proportion of employees who received shares as an employment benefit was higher for trade union members than employees who were not trade union members (8.5% compared to 5.3%). It was also higher for owner managers of incorporated enterprises than other employees (12.0% compared to 5.4%).
The proportion of employees receiving shares as an employment benefit also varied across industries and occupations.
Industry
The Finance and insurance industry had the highest proportion of employees who received shares as an employment benefit (32%), followed by Mining (16%) and Communication services (16%). While only 4% of employees worked in Finance and insurance, this industry accounted for 21% of all employees who received shares as an employment benefit.
The proportions of employees in the Mining and Communication services industries who received shares as an employment benefit were also relatively high (16% in each), yet these industries only accounted for 3% and 5% of all employees who received shares as an employment benefit. In contrast, only 8% of employees in Manufacturing received shares as an employment benefit, yet this industry accounted for 16% of all employees who received shares as employment benefit.
3. Proportion of employees receiving shares, By industry - August 2004
Occupation
The occupations with the highest proportions of employees who received shares as an employment benefit were Managers and administrators (12%), Advanced clerical and service workers (11%) and Associate professionals (8%). While only 7% of all employees were in the Managers and administrators group, this group accounted for 14% of all employees who received shares as an employment benefit.
4. Proportion of employees receiving shares, By occupation - August 2004
MEAN WEEKLY EARNINGS
Employees who receive shares as an employment benefit generally have higher earnings than those who do not receive shares as an employment benefit. This reflects the high proportion of employees receiving shares in industries where employees have high earnings (i.e. Finance and insurance, and Mining). Mean weekly earnings in main job (excluding the value of benefits) of employees who received shares as an employment benefit were 49% higher than those who did not receive shares ($1,096 compared to $737).
The correlation between mean weekly earnings and the receipt of shares as an employment benefit can also be seen when looking at earnings ranges. The proportion of employees who received shares as an employment benefit was highest for employees with weekly earnings of $2,000 and over, and lowest for employees with weekly earnings of under $200.
5. Proportion of employees receiving shares, By earnings ranges in main job - August 2004
FURTHER INFORMATION
For further information on these statistics please contact Assistant Director, Labour Market, on Canberra 02 6252 5514. For email enquiries, please contact Client Services on client.services@abs.gov.au
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admin
631 Posts |
Posted - 17 Jun 2007 : 08:46:47
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A Guide to Doing Academic Research on Employee Ownership (2007 update)
By NCEO executive director Corey Rosen, Ph.D.
May 2007
This article can be seen at: http://www.nceo.org/library/research.html
What We Already Know
Research on employee ownership has moved from what Joseph Blasi at Rutgers once called "advanced storytelling" to sophisticated statistical analysis. As a result, we now have a pretty clear picture about a number of aspects of the subject.
Impact on Economic Performance
This Web site (www.nceo.org) already contains a summary of the research on this issue you can consult to see what the major studies have found, as well as in more detail in our publication "Employee Ownership and Corporate Performance." Basically, they show that when employee ownership is combined with a "high involvement" management style, companies perform a great deal better than they would have been expected to perform otherwise. Employee ownership, on its own, seems to have, at best, a small positive impact, not unlike the findings for high-involvement management absent employee ownership or, perhaps, some other substantial form of gainsharing. This finding was first reported by Quarrey and Rosen (1987) and later by the U.S. General Accounting Office (1987), Gorm Winther et al. (1989), and Peter Kardas et al., each of whom used a "before and after" approach to measure the impact of employee ownership. The findings were confirms in numerous studies, several of which are described in the NCEO material referenced above. An intensive 2003 study for the National Bureau of Economic Research came to the same conclusion (the results can be found at http://www.ownershipassociates.com/motivate_eo_2.shtm). A thorough academic review of the research on employee ownership research can be found in Eric Kaarsemaker's dissertation, "Employee Ownership and Human Resource Management" (available at http://eric.kaarsemaker.eu/). Although there is a special emphasis on the Netherlands, there is a comprehensive discussion of all of the academic research on this topic in the U.S. and elsewhere. A shorter review focusing on ESOPs through 2006 can be found in Stephen Freeman's paper at http://repository.upenn.edu/od_working_papers/2/.
For this interactive effect between ownership and employee participation to work, the employee ownership must be significant, as measured by how much an employee gets in stock contributions each year. While there is no precise dividing line to measure what "significance" is, it seems clear that contributions under 3%-4% per year are not going to get the employee's attention unless the stock value is increasing in spectacular fashion. Similarly, there is no dividing line to separate "high involvement" from "low involvement" companies, but the high involvement companies would be likely to employ such practices as self-managing teams, open book management, and cross-functional teams. The more ownership and the more involvement, the better the results tend to be.
Finally, there have been a number of studies looking at the impact of employee ownership on stock price. A study through the 1990s by American Capital Strategies tracking of the stock price performance of publicly traded employee ownership companies with more than 10% employee ownership showed that these companies consistently outperformed the broader market indexes. Previous studies by a variety of academics looked at the short-term impact (two-day price movements) associated with the announcement of an employee ownership plan. Studies done in the late 1980s had mixed results; where the ESOP was announced in the context of a takeover effort, the impact was negative; otherwise, it was mostly positive. The most recent study as of this writing was a 2006 study by Robert Stretcher, Steve Henry, and Joseph Kavanaugh (the study was in submission as of this writing) looking at 196 publicly traded U.S. ESOP companies during the years 1998 through 2004. It found very positive post-ESOP results. But other studies prior to that came to different conclusions.
The research on performance has number of limits, however. Three of the most important studies (Quarrey and Rosen, 1987, Winther in 1989, and Kardas et al., 1993) were based mostly on closely held companies and looked only at employment and sales growth. Studies of public companies looked at several measures of financial performance, such as return on assets, and found mixed results for employee ownership. None of the public company studies, however, analyzes the interactive impact of ownership and high involvement management that proved so crucial in the other studies. Moreover, ESOPs in public companies typically own relatively small percentages (5% to 15% typically) whereas private company ESOPs tend to be at least 30%, and often more than 50%, owned by employees. Private company data is not generally available for other than sales and employment numbers; public companies provide much better data, but their plans play a much smaller role, both financially and organizationally, than do ESOPs in private companies.
In the broad-based stock option plan area, we know less. A 2000 study by Douglas Kruse, Joseph Blasi, Jim Sesil, and Maya Krumova used NCEO stock option plan survey data to show that stock option companies have 17% greater productivity in a three-year post plan period than would have been expected based on pre-plan performance relative to their industry. Their return on assets was about 2% better. Their total shareholder return was about the same, however, as the dilution from the options may have been just offset by the improvement in performance. Kruse, Blasi, Sesil, and Krumova have done some follow-up studies, described in our paper on employee ownership and corporate performance, that confirm these general results. Other scholars have not looked at this issue yet, however (at least as of this 2007 writing).
Employee Attitudes Toward Ownership
There are a number of case studies, mostly from the early 1980s, that survey employees about their attitudes toward ownership. The results are mostly positive, although there do not appear to be dramatic changes in how employees feel about their work. A 1983-1986 NCEO study detailed in Rosen, Klein, and Young, Employee Ownership in America (Lexington Books, 1986), included a 140-item survey of 3700 employees in 45 companies. It is by far the most comprehensive study to date. It found that employees' response to being owners is largely a function of three factors: how much stock is contributed to their plan each year, how much involvement they have in decision-making at the job level, and how often the company communicates with them about the plan and the company. Other factors, such as the size of the company, unionization, line of business, demographics of the work force, percentage of the company owned by employees, age of the plan, voting rights, etc., were not related to employee attitudes, just as they were not related to corporate performance.
Given the comprehensive nature of the NCEO study, there have not been any significant new studies of employee attitudes toward ownership, although, as will be noted below, there are some other areas to investigate.
Characteristics of Employee Ownership Companies
Basic data on ESOPs has been relatively easy to gather, and we have a fairly good picture of who adopts ESOPs and why. The data are always based on numbers at least two years old, however, as this is when they are reported by the Department of Labor and made public. Detailed surveys on companies in Michigan (1990) and Ohio (1994) provide good data on characteristics of ESOP companies, such as whether they pass through voting, if they have employees on boards, how much their plan owns, how much is put into the plan each year, what kinds of participation plans they have, etc. A 1991 study by Blasi and Kruse (The New Owners, Harper-Collins) detailed employee ownership through all kinds of ownership plans in public companies. A 1987 GAO study looked at plan operational characteristics, such as voting rights, board representation, percentage ownership, leveraging features, industry, etc.
Lists of ESOP companies can be obtained from Judy Diamond Associates for approximately $700. This provides data on all companies who have indicated they have an ESOP on their Form 5500 filing with the Department of Labor. For various reasons, not all companies with ESOPs will show up on this list, but most will. The data include the company name, address, plan date, value of total plan assets, value of employer securities, and the number of plan participants. You can also determine if companies have other retirement plans and how they are funded. For information, go to www.freeerisa.com. You can also use that site to look up the filings of individual companies one by one to see if they have an ESOP.
The NCEO also maintains lists of ESOP companies. These are not as comprehensive (or expensive), but contain somewhat more data.
Data on companies with broad-based individual equity plans is much harder to obtain. These companies do not have to file reports about their plans in any systematic way, other than for public company disclosures about awards for key executives. Some companies include information on their web site, generally in the benefits area, or, if they are publicly traded, in their annual reports of 10-K securities filings (available on line of through their web sites). There are, however, no reliable lists of companies with broad based plans available for purchase.
Ownership and Control
The major work here has been by the NCEO in a 1991 study that looked at the consequences of employee voting rights in majority ESOP companies, finding that these democratic companies' management structures were not dramatically changed.
Financial Impact on Employees
One common contention about employee ownership, particularly among free market economists, is that employees will only get ownership in place of something else. While there is strong evidence that employees rarely explicitly give up wages or benefits for employee ownership, it could be that their ownership plans are in place of something they would have received otherwise. For details of what we know about the impact of employee ownership on employee financial well being, go to http://www.nceo.org/library/eo_stat.html. There are also some limited survey data on this issue available in the periodic General Social Survey, detailed at http://www.nceo.org/library/widespread.html.
Overall, the data show that ESOPs significantly add wealth to employees, albeit with substantial variations from one company to another. They also show that ESOP participants are more likely to have other retirement plans than comparable non-ESOP participants. In the equity plan area, the data are less comprehensive, but do suggest that wages are rarely sacrificed and that the plans provide meaningful levels of awards for most participants, equal over several years to one year's pay or more.
What We Don't Know
Corporate Performance
While the studies on corporate performance have left most researchers fairly convinced that employee ownership and employee participation result in improved performance, we do not know a great deal about the texture of these results. What kinds of employee involvement work best? How durable are the changes? Do they plateau over time, for instance? In public companies, do ESOPs that are essentially just substitutes for 401(k) contributions, as many are, make any difference in performance, pro or con? In the equity plan area, we know even less. Do equity plans improve employee tenure or motivation? Do these companies have significantly different management cultures than comparable companies, and does that affect performance? Is there a threshold level for benefits from these plans to engage employees?
Employee Attitudes Toward Ownership
Employee attitudes toward ESOPs were well measured in the 1986 NCEO study described above, but that study is aging and attitudes may have changed. We also have little information about employee attitudes toward ownership through stock option plans or 401(k) plans, both of which rely on very different mechanisms to enable employees to become owners.
Characteristics of Employee Ownership Companies
While we know a lot about the demographic characteristics of ESOP companies, we do not know much about whether these companies are more or less participative in their management styles than non-ESOP companies, a critical question given the thrust of the research to date. Only the Ohio study in 1994 provides good data on this, but much more work is needed.
We also know very little about the typical financial structure of ESOP companies, nor are there any recent national data on plan characteristics such as voting rights, board representation, leveraging, annual contributions to the plan, etc. since the 1987 GAO study.
We have very limited information about employee ownership through 401(k) plans (other than a very preliminary NCEO survey) or stock option plans stock purchase plans (section 423 plans). There are good surveys of the characteristics of these plans (see the NCEO Issue Brief The Future of Broad-Based Equity Plans for a review, but efforts to do employee surveys in these companies have not gotten very far. Few companies have been willing to agree to participate, and the costs of undertaking them are substantial.
Ownership and Control
The 1991 NCEO study on this issue provided a reasonable design, but only could be expanded in terms of the sample and the scope of issues covered.
Financial Impact on Employees
While recent studies have provided a great deal of insight into these issues, there is room for more work, particularly on the interaction between these plans and other benefit plans.
Getting the Data and Other Problems
As noted, the Department of Labor collects data on ESOPs and 401(k) plans through its "5500" form. Large (over 100 employee) companies file annually and small companies file every three years. These data can tell you the name of the plan, the size of its assets, the number of participants, when the plan was started, and if the company is public. The NCEO maintains lists of ESOP companies, described above.
Data on the economic performance of public companies are available from a variety of sources, but data on private companies, other than sales and employment (available from Dun and Bradstreet), are not. Few private companies will provide financial data, making studies that rely on productivity, profits, stock prices, return on assets, or other measures, essentially impossible. "Date of plan announcement" data (for public company studies on market reactions to the stock price) can be obtained from annual reports. Because most broad-based equity plans are in public companies, good economic analyses would be possible if reasonable lists of companies and were available and information on plan start dates was included. Unfortunately, such lists do not exist and must be tediously compiled looking at one company at a time and hoping they reveal something about their plans.
Data on plan characteristics other than what is on the 5500 form must come from surveys. Survey response rates tend to fall between 5% and 25%, creating sample reliability issues.
The NCEO would be happy to speak to academic researchers about significant, planned research projects. If you are not an NCEO member, of course, this will be only a preliminary talk; you'll need to join the US NCEO if you intend to do any sort of serious research in this field by accessing available data and studies. Balancing what the NCEO needs to know and what can realistically been found out is difficult, but the NCEO may at least help you avoid common errors.
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admin
631 Posts |
Posted - 11 Aug 2007 : 05:18:25
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Largest Study Yet Shows ESOPs Improve Performance and Employee Benefits
From : http://www.nceo.org/library/esop_perf.html
In the largest and most significant study to date of the performance of employee stock ownership plans (ESOPs) in closely held companies, Douglas Kruse and Joseph Blasi of Rutgers have found that ESOPs appear to increase sales, employment, and sales per employee by about 2.3% to 2.4% per year over what would have been expected absent an ESOP. ESOP companies are also somewhat more likely to still be in business several years later. Moreover, ESOP companies are substantially more likely to have other retirement-oriented benefit plans than comparable non-ESOP companies. While the results are in line with previous studies, no study of closely held companies yet has matched the scope of this one.
Methodology
Kruse and Blasi are the pre-eminent researchers in the employee ownership field, and have previously worked with the NCEO on studies on ESOPs and stock options. In this study, they obtained files from Dun and Bradstreet on ESOP companies that had adopted plans between 1988 and 1994. They then matched these companies to non-ESOP companies that were comparable in size, industry, and region. They then looked for which of these companies had sales and employment data available for a period three years before the plan’s start and three years after. The sales and employment growth data were then compared for each year for each paired company. They also checked the companies’ filings with the Department of Labor to determine which of the companies had other retirement-oriented benefit plans. Finally, they looked to see what percentage of the companies remained in business in the 1995 through 1997 period.
The process yielded 343 ESOP companies and 343 pairs for the overall sample. However, missing data meant that employment data were available only for 254 ESOP companies and 234 pairs, 138 ESOP companies and 77 pairs for sales, and 115 ESOP companies and 65 pairs for sales per employee (some pair companies could be used for more than one ESOP company).
To illustrate the methodology, assume Bill’s Hardware set up an ESOP in 1990. Bill’s sales and employment data for 1987, 1988, and 1989 would be compared to Joe’s Hardware for the those years, as well as for the three-year period after 1990. Bill’s sales grew at 3% per year in the pre-ESOP period, while Joe’s only grew at 2%. In the post-ESOP period, however, Bill’s grew at 4% per year, while Joe’s stayed at 2% per year. The conclusion would be that, relative to Joe’s Hardware, Bill’s grew 1% per year faster in the post-ESOP period than before. In other words, the ESOP at least appears to be associated with a one percent increase in sales over what would have been expected.
Results
The results showed that ESOP companies perform better in the post-ESOP period than their pre-ESOP performance would have predicted. The table below shows the difference in the pre-ESOP to post-ESOP period for ESOP companies on sales growth, employment growth, and growth in sales per employee:
Difference in Post-ESOP to Pre-ESOP Performance
Annual sales growth +2.4%
Annual employment growth +2.3%
Annual growth in sales per employee +2.3%
It might be assumed that sales per employee would not go up by 2.3% per year since sales and employment growth differences were about the same, but, the researchers explain, the differing compositions of the samples for the measures makes such a simple comparison misleading. The relative growth numbers might seem small at first glance, but projected out over 10 years, an ESOP company with these differentials would be a third larger than its paired non-ESOP match.
Blasi and Kruse also looked at whether the ESOP companies stayed in business longer than the paired comparisons. Looking at 343 companies and their matches, they found that 77.9% of the companies survived through 1996, compared to 62.3% of the non-ESOP companies, while 69.6% survived through 1999, compared to 54.8% of the non-ESOP matches. "Survival" here means continued to do business as the same entity. Closing, sale, or merger would constitute non-survival.
The final point of comparison was whether the companies had other kinds of benefit plans. The table below shows striking differences:
Percentage of Companies Having Other Retirement Plans: ESOP and Non-ESOP
Defined benefit: 20.1% and 4.9%
401(k): 33.3% and 6.2%
Non-401(k) profit sharing: 35.7% and 8.0%
Other defined contribution: 14.7% and 2.3%
What the Results Mean
The results show that sales, employment, and productivity all grow faster in companies after they set up their ESOPs than would have been expected based on their performance relative to comparable companies prior to setting up their plans. They are also more likely to survive as independent companies, despite the fact that some ESOP companies feel compelled to sell in order to handle their repurchase obligation. That may reflect the fact that many ESOPs are set up specifically to help closely-held companies retain their independence. Finally, and perhaps most strikingly, ESOP companies are considerably more likely to offer other kinds of retirement plans. The general assumption by economists and many observers about ESOPs is that they must be a tradeoff for other wages or benefits. While this may be true in some ESOP companies, this study shows that in the benefits area, they are an overall net addition, not a substitution, to retirement plans.
These results are strikingly consistent with previous research by the NCEO in 1987 and by Gorm Winther in studies of companies in New York and Washington. Using the same pre- and post-ESOP methodology, but smaller samples, the NCEO study found post-ESOP sales were 4% per year higher, while employment growth was 3% per year higher. Winther, using a smaller sample still, found that employment growth was 3.3% per year greater, but sales growth was .7% slower. Studies of public company ESOPs have focused primarily on return on asset measures, coming to somewhat mixed results, although the largest of these studies, by Hamid Mehran at Northwestern, found that public ESOP companies had an increase in this measure 2.7% per year better than what would have been expected based on pre-ESOP experience. The results also are consistent with a study of ESOPs in Washington state by Peter Kardas, Adria Scharf, and Jim Keogh that showed that ESOPs pay employees more than comparable non-ESOP companies.
For those who want a more detailed look at the data, the Rutgers team has provided a set of tables at: http://www.nceo.org/library/esop_perf_tables.html
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admin
631 Posts |
Posted - 21 Aug 2007 : 06:56:54
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Employee Ownership: Economic Miracle or ESOPs Fable?
From: Federal Reserve Bank of Minneapolis, 7 June, 2007 which you can see at:http://www.minneapolisfed.org/pubs/region/07-06/employee.cfm
by: Ronald A. Wirtz, Senior Writer
Worker ownership is a growing phenomenon, but experts are divided as to its inherent rewards
Here's a riddle for you: If you melded Adam Smith with Karl Marx, what would you get? Aside from a person constantly arguing with himself, you might also get something similar to an economic model that is slowly taking root in the U.S. economy: employee ownership.
Employee ownership and its newly coined cousin “shared capitalism” might sound like concepts straight out of the Communist Manifesto, but they've built a largely unnoticed niche in the U.S. economy. An estimated 20 percent, and possibly more, of the private workforce holds some form of direct ownership in the company it works for, up from almost zilch little more than three decades ago. An even larger percentage of workers receives add-on compensation based on company earnings—a quasi-ownership claim to profit from a firm's good performance.
Arguments on behalf of employee ownership sometimes revolve around a squishy desire for economic fairness, “distributing the fruits of economic success more widely and equitably,” as one source put it, and creating “a form of economic democracy that complements our political democracy.” But research to date suggests that employee ownership holds a much more convincing economic argument: Firms that offer some form of ownership or other worker-reward system have demonstrated impressive performance, possibly better than those that don't.
Employee ownership combines the capitalist motives of profit and private ownership with a populist desire for workers to share in the wealth they help create. Though it seems like the start of a bad joke (“so Karl Marx and Adam Smith walk into this business...”), employee ownership has demonstrated a unique chemistry with the U.S. economy. Those familiar with employee ownership consider it something of a secret—not the kind you keep to yourself on purpose, but more of an idea that's had trouble gaining much visibility despite its growth.
The lack of visibility traces back to a research base that is rather narrow and shallow. Recently, though, researchers have been wielding a bigger shovel, and they have just completed a major study that gives a better idea of the incidence and depth of employee ownership. Even so, this research offers but a prologue to the effects of employee ownership and shared capitalism on workers, firms and the broader U.S. economy.
Taking stock
Various models of employee ownership are in place today. The most differentiated form is the employee stock ownership plan (ESOP) which, among other things, offers workers the opportunity to gain majority ownership and control of a business.
Technically, an ESOP is a retirement plan trust. Created as part of the landmark Employee Retirement Income Security Act of 1974 (ERISA), it is designed to help employees buy out an existing owner, sometimes partially at first. Without going into the financial and operations minutiae, as a trust, an ESOP can go into debt on behalf of workers to buy out existing owners.
From a worker's viewpoint, the ability to finance debt is an ESOP's central advantage over a cooperative, where workers must invest personal capital upfront to own a company. (It's one reason there are over 9,000 ESOPs in the United States, compared to only an estimated 300 or so worker co-ops.) An ESOP gives employees “a no-money-down freebie” on company ownership, says Don Israel, president of Benefit Concepts Systems, a benefit consulting firm in New York City that specializes in ESOPs. “It's the best kept secret there is.”
Once the ESOP is established, the firm makes contributions to it that gradually pay off the transaction debt, thereby creating equity that is distributed as company shares to employees, based on a prearranged formula. The total value of the company (and its individual shares) is determined periodically by independent valuation consultants.
All of this takes place with considerable tax advantages. For example, if a sale to an ESOP entails 30 percent or more of the company, the owner can defer capital gains taxes on the sale, and sometimes avoid them altogether. “The attractions are so compelling, it's hard to turn them down,” said Martin Staubus, director of consulting at the Beyster Institute at the University of California, San Diego. Though ESOPs have a steep learning curve, “a very high percentage of [owners] are going to want to do it.”
Tax benefits also accrue to the sponsoring company and its worker-owners. Because ESOPs are a qualified retirement plan for employees, a company's contributions to the ESOP are made with pretax dollars. This enlarges the ESOP contribution a company can afford to make, which in turn allows the ESOP to retire its transaction debt and build shareholder equity more quickly. ESOPs are also eligible to become so-called S corporations, which place the income tax burden on shareholders rather than on the firm. As trusts, S-corp ESOPs are exempt from taxes on any income they receive as shareholders.
A fuzzy snapshot
All these advantages might give you the impression that ESOPs must be growing like gangbusters. Wrong impression.
Since their inception more than three decades ago, ESOPs have seen both growth and stagnation, reaching 9,000 plans in the early 1990s, falling to 7,700 plans in 2000 and climbing again to 9,225 plans in 2005, according to the National Center for Employee Ownership (NCEO), a nonprofit industry association. ESOPs come in different sizes and shapes. The number of firms that are majority-owned by their ESOP is estimated to be about 2,500. Roughly a thousand firms are believed to be 100 percent ESOP-owned.
Depending on how you look at it, ESOPs are both undersized and oversized. The total number of ESOP firms represents a tiny rounding error among the nation's 6 million firms with employees, but they employ a disproportionately large number of workers who, as a group, have grown steadily over time. Today, about 10 million participate in an ESOP, or about one of every 11 workers in the private sector.
Most ESOPs—and virtually all ESOPs with majority ownership—are privately held companies. But the biggest ESOP firms in terms of employees and revenues tend to be large, publicly traded companies whose ESOP share of company stock is typically less than 30 percent. Total assets in ESOP plans have skyrocketed, from $133 billion in 1990 to more than $620 billion by 2003.
Oddly, that's the rough extent of our knowledge of ESOPs as a macroeconomic phenomenon. What little we do know has been cobbled together by the NCEO from a patchwork of sources. “It's nasty to try and figure out these numbers,” says Corey Rosen, NCEO executive director and co-founder.
Probably the most fundamental reason for the lack of firm and other ESOP-related data stems from this being largely a private-company phenomenon, particularly of late, and likely going forward. Changes made in federal law in the 1980s made ESOPs less attractive for public companies, so their numbers have slowly been declining and now represent a sliver of all ESOPs. As ESOPs become concentrated with private firms, they are harder to study because private firms aren't legally required to divulge company information as fully as public companies.
About the only regularly reported information on ESOPs offers a glimpse at the research challenge. Firms with ESOPs have to file IRS form 5500 relating to qualified retirement plans. The Department of Labor publishes an infrequent report on 5500 filings; the most recent iteration came out late last year. But the 2006 report profiles 2003 filings and counts only 7,600 ESOPs because plans with fewer than 100 participants are not required to file. Rosen said it's not uncommon for ESOP firms to not show up in the 5500 data for a variety of other reasons. “So there are a lot of data inaccuracies,” he says.
Which way now?
With unreliable data at the most basic levels, it's difficult to know exactly what's happening with ESOPs.
We might think that ESOPs are on the cusp of significant growth, given strong financial incentives for owners and employees, coupled with a bubble of baby boomer business owners thinking about exit strategies and retirement. But that doesn't appear to be the case, at least in terms of total ESOP plans, and the reasons appear to be plentiful. For example, ESOP start-up costs can be prohibitive for a smaller firm; owners often are interested in maximizing their firm's sale value, and ESOPs can't pay more than fair market price as determined by an independent consultant. Many owners have adversarial relationships with their employees, and selling the company to them is tantamount to “letting the inmates run the asylum. ... But [owners] can't say that because [they'd] sound like jerks,” says Michael Keeling, president of the ESOP Association.
ESOPs are also complicated, technical and prone to information bottlenecks, according to numerous industry sources. When it comes to succession planning, owners rely on their accountants and lawyers for direction, and because there is little formal training available on how to establish ESOPs, these advisers tend to learn by doing. As a result, “you still have a lot of lawyers and accountants who are not familiar with ESOPs,” and they have little incentive to learn, according to Keeling. Nor are they likely to bring in an ESOP specialist and risk losing a client.
Even ESOP advocates acknowledge that this model doesn't fit every firm. “The number of companies that could [transition to an ESOP] is not as large as you might think,” Rosen says. A ballpark figure of sufficiently profitable, private companies with at least 15 employees (generally considered the threshold for an ESOP) probably numbers around 150,000, he says. The NCEO has roughly estimated the equilibrium number for ESOPs at around 15,000 to 20,000.
Yet despite very modest growth of late in the number of ESOP plans, industry sources described a situation of evolving growth for ESOPs. For example, there appears to be more churn—births and deaths—among ESOPs.
Many wrongly assume that ESOPs commonly die, or “terminate,” because of economic struggles. That impression is the public-relations legacy of ill-fated ESOPs in the 1980s, as well as more recent implosions at Enron, WorldCom and United Airlines. But ESOP terminations are more often the result of success. A handful of sources said ESOPs become very attractive after 10 to 20 years because they have paid off their transaction debt and are accumulating cash. At the same time, ESOP trustees are required to have the fiduciary interests of worker-shareholders at heart, which makes them open-minded to bids that enrich owners. “Old adage,” says one industry consultant, “bird in the hand is worth two in the bush.”
Many ESOPs are also busy upping their ownership stake, looking to become 100 percent S-corps, according to Keeling and other sources. The reason is simple: As a shareholder trust, S-corp ESOPs are exempt from paying any taxes on the profit dividends received, making them a conveyor belt of tax-free cash for companies turning a profit. With a swelling balance sheet, many S-corp ESOPs are looking to diversify and have the capital to become active buyers. As recently as six or seven years ago, Rosen says, if he asked ESOP conference attendees whether they were involved in an acquisition, “it was rare for a single hand to go up. Today, it's rare for a single hand to not go up.”
The Kevin Bacons of research
Underlying this growth is a simple, yet powerful message: Individual ESOPs must operate pretty well, and in some cases, very well.
Existing research suggests that ESOPs and other forms of employee ownership perform well along a number of parameters. In 2002 testimony before the U.S. House Subcommittee on Employer-Employee Relations, Douglas Kruse of Rutgers University told congressional members that “25 years of research shows that employee ownership often leads to higher-performing workplaces and better compensation and worklives for employees.”
Much of what we do know comes, directly or indirectly, from Kruse and Joseph Blasi, aco-worker at Rutgers. Trace the lineage of almost any study on ESOPs or employee ownership, and you are sure to come across Kruse and Blasi—call them the Kevin Bacons of employee ownership research, minus about three degrees of separation. Says Rosen, “If it wasn't for Joseph Blasi and Douglas Kruse being interested in this idiosyncratic subject, there would hardly be any research on this.”
According to a 2003 National Bureau of Economic Research (NBER) working paper authored by Blasi, Kruse and five others, research to date showed that “employee ownership firms tend to match or exceed the performance of other similar firms on average.” The authors suggest that average productivity could be as much as 5 percent higher at employee-owned firms. They are careful to acknowledge that most studies “do not establish a statistically significant positive link between employee ownership and performance,” but taken as a whole, research points toward a positive link overall because “there are far more positive results than would be expected if there is in fact no true relationship.”
Within this body of literature, employee ownership (including ESOPs) has been linked to faster employment growth and higher survival rates among firms. In terms of workers, employee ownership has been linked to higher motivation and job satisfaction and greater employment stability. Anecdotes suggest that wages, benefits and retirement savings are at least as good, if not better, than at comparable firms not owned by employees, and research indicates that employees do not sacrifice pay or benefits in exchange for their share of ownership. Among ESOPs, company performance appears to be tied to an open culture of information sharing and employee participation in decision making.
For existing ESOPs, these positive findings are simply preaching to the choir. Almost all of them support their plans. A 2006 survey by the Employee Ownership Foundation found that 91 percent of 426 responding companies said creating their ESOP was a good business decision that helped the company; almost three-quarters also reported that their company stock outperformed three major stock indexes in 2005. A year earlier, the EOF survey found that 82 percent of respondents said the ESOP improved worker motivation and productivity.
Of course, economic theory would suggest that ESOPs, in particular, should be outperforming the competition because imbedded tax incentives give them an artificial advantage. If ESOPs require tax advantages to both start up and operate, well, that's not a strong argument for the ESOP business model. Where tax breaks are involved, better performance should be expected; if ESOPs perform only on par with non-ESOPs (which aren't subsidized), then scarce public resources have been spent (or revenues forgone) for no net gain or improvement.
Indeed, for all the cheerleading and feel-goodisms behind ESOPs, it's an open question whether there would be any ESOP-type firms today were it not for the 1974 ERISA law, which is widely lauded by advocates for kick-starting the ESOP movement. What enthusiasts call an incentive, an economist would call a subsidy, or worse in this case, a tax dodge.
Prove it to me
Still, taking the supposed performance advantage at face value, we know less about the traits and performance of ESOPs and other forms of employee ownership than the existing research might imply to the newcomer. The lack of basic ESOP data at the firm level is the proverbial tip of the iceberg of what we don't know.
ESOPs are not the only form of employee ownership, of course. But whether you're talking about ESOPs or broad-based stock options or profit sharing, there are big knowledge gaps regarding all forms of employee ownership, despite the fact that its various forms touch tens of millions of workers.
According to recent literature reviews, there are at most 120 studies on employee ownership and its various components. That might sound like a lot, until you realize it's a field that's 30 years old, and there are limitless topics to investigate with workers, owners, firms, sectors and the broader economy, not to mention the different ownership forms themselves.
Even Blasi and Kruse acknowledge that employee ownership remains outside the mainstream in academia, and economics specifically, as well as in business circles and the business press. By contrast, Blasi points out, there are hundreds of experts—not studies, experts—on executive compensation alone and considerable media and public attention paid to the topic. And Kruse, via e-mail, says, “I think it's true that it remains somewhat on the fringe of academic research, and should be the subject of broader study.”
Why employee ownership stays on the fringe—despite some evidence of potential rewards for both workers and firms—traces back to economic theory that, until recently, researchers had failed to tackle head on. The efforts of Blasi, Kruse and a handful of others notwithstanding, economic theory has long been skeptical about the efficiency and efficacy of employee ownership.
For starters, employee ownership suffers from a significant principal-agent problem—a misalignment of the interests of workers (the agents) and owners (the principals). Employee ownership sounds like perfect alignment—workers are owners, so they reap the rewards or suffer the consequences of their output, right?—but, in fact, the multiplicity of owners introduces the vexing problem of shirking.
Where group work takes place, the workload tends to be shared unevenly, with some workers not carrying their weight (free-riders). Compounding the matter is the lopsided cost-benefit of intervening with that interloper. The cost of intervention is borne solely by the whistle-blowing worker, but the rewards of that intervention are shared by all workers. As a firm gets bigger, a worker has less incentive to confront a free-rider because the worker will reap less of the reward for getting the free-rider's nose back to the grindstone.
Economists have also frowned theoretically on employee ownership because of the lack of financial diversification for worker-owners, whose immediate and retirement income become dependent on the fortunes of a single company. Blasi readily acknowledges the difficulties posed by these theoretical issues. “Unless you can resolve those two big problems,” he says, “it's not worth major effort” in other areas of research.
What's in the box?
So in 2000, Blasi and a handful of peers decided that research on employee ownership had to be taken to a higher level. Despite the cumulative body of research, “studies we had done had not measured a lot of the variables that researchers tend to think are important,” Blasi says, which meant the entire research approach in this field “had to be rewired.”
That year, Blasi and his team received almost $1 million from the Russell Sage and Rockefeller foundations to tackle a much more in-depth study on the incidence of employee ownership and its influence on the workplace. The program was dubbed the Shared Capitalism Research Project to encompass both direct ownership (stock and stock options) and compensation schemes (like profit sharing) that give workers some claim on company profits.
Under the auspices of the NBER, the Shared Capitalism project set out to study the incidence of employee ownership programs and related workplace traits and behaviors among a broader, more scientific sample of workers. “We basically went off the radar for six years. We said, 'Until we do it right, we're not going to say anything,'” says Blasi.
Surveys were conducted at 14 firms with different forms of shared capitalism, the majority of which were ESOPs. Over 40,000 surveys were completed at more than 320 worksites. In the researchers' words, “The survey can be viewed as a random sample of workers from a non-random sample of firms.” To construct a control group, the 2002 General Social Survey (GSS) included a module on employee ownership and tallied 1,145 worker responses from a representative sample of for-profit firms.
Though some initial results filtered out several years ago, Blasi and his co-researchers released more complete results in the fall of last year in preparation for a national conference sponsored by Russell Sage and the NBER. (It is now being prepped for peer-reviewed journals.) The research supports employee ownership along a number of lines, including a direct repudiation of the supposed shirking problem.
Blasi points out that shirking is generally controlled or influenced three ways: by close supervision, through the presence of a corporate culture that actively encourages and supports hard work (called “bonding) and, finally, with financial or other incentives. The Shared Capitalism project found that employees at firms with shared capitalism programs are more likely to speak up about shirking—to the worker or manager—than at workplaces without those features.
“The research clearly confirmed what we had expected all along,” Blasi says. “[E]mployees are more likely to respond under conditions of high bonding and high incentives”—conditions that previous research has shown, not coincidentally, are present at many successful employee-owned firms. “The combination of supportive corporate culture and trusting employee relationships with various shared capitalism [forms] reduced the chance of doing nothing [to shirkers] and significantly increased the chance of intervening" to change worker behavior, Blasi says. “We believe we have looked inside the black box.”
And make no mistake, the financial incentives of employee ownership are tangible and lend support to earlier research that found correlations between employee ownership and enhanced productivity and firm performance. In a conference paper, Blasi, Kruse, Richard Freeman of Harvard University and Christopher Mackin of Ownership Associates (a consulting firm) looked more closely at survey results for the behavioral effect of financial incentives. “Most workers report that cash incentives, stock options, ESOP stock, and ESPP participation motivate them to work harder,” the authors report. There was not much effect on absenteeism, but there were beneficial effects on turnover and loyalty, among other things.
The Shared Capitalism project is also providing insights into retirement savings diversification. A paper for the annual conference of the Labor and Employment Relations Association by Robert Buchele of Smith College, Loren Rodgers from NCEO and Adria Sharf of the University of Washington uses data from the Shared Capitalism project to look at ESOP retirement savings. They note that “while far from adequate from the standpoint of financing retirement, the median pension wealth of ESOP participants is over four times higher than the median household pension wealth, and that company stock ownership in ESOPs, while highly concentrated, is considerably less concentrated than stock ownership” in the broader economy. Translation: ESOP retirement savings might not be perfect, but a diversification problem is much better than a no-savings problem.
There is also independent evidence that many ESOPs, as they evolve, are sponsoring other retirement savings plans, typically separate 401(k)s. Slightly more than half of ESOPs did so as of 2003, according to IRS 5500 forms. That doesn't mean that ESOP participants are diversifying their holdings, merely that they have the opportunity to do so. Many ESOPs do not offer matching contributions to 401(k)s, and data from 5500 filings suggest total assets in these plans is comparatively tiny.
Were blind, now we see
Additional results from the 2006 General Social Survey—recently tabulated and as yet unpublished, but provided by Blasi and Kruse—show that participation in some form of shared capitalism rose from 2002 to 2006, from 43 percent to almost 47 percent of respondents. Other trends are emerging: Profit sharing and gain sharing became more widespread during this period, while direct ownership of both company stock and stock options declined, which Kruse attributes in part to the recent requirement for stock option expensing on company balance sheets.
More important than the point-in-time results, these latest findings are beginning to establish a public database that will allow researchers to investigate the longitudinal trends and the benefits and shortcomings of various forms of employee ownership. The cumulative effect “provides a substantial amount of critical mass” to the field of employee ownership research, Blasi says. “The level of objective national measures has not been acceptable. But we've made some good strides in turning that around.”
Blasi is also hoping the topic of employee ownership will be taken up by the Federal Reserve's own Survey of Consumer Finance, which is conducted every three years. Blasi believes this to be a natural extension from the GSS in understanding ownership at the household and individual level. He has not broached the topic yet with any Federal Reserve officials because he is waiting “to get two periods of GSS data under our belts” in order to establish that both the incidence and level of ownership are high, and thus a topic of relevance to people's short- and long-term finances.
Blasi and others believe that the employee ownership model has always been a robust one. But a confluence of factors-anxieties over job security, a yawning income gap between workers and executives, the shift away from traditional pensions, President Bush's “ownership society” speech in 2004 (which ironically didn't expressly mention employee ownership) and the growth of more rigorous research-has many believing that the profile of employee ownership might well be on the rise.
Says Blasi, “I think we're at a fork in the road as far as economists taking another look.”
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admin
631 Posts |
Posted - 04 Sep 2007 : 09:22:04
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Research Briefing: Employee Ownership and Corporate Performance
Over the years, the US National Centre for Employee Ownership (NCEO) has reported on new research on employee ownership and corporate performance. Now that a substantial body of work exists on the subject, the NCEO has thought that it would make sense to summarize it all in one place.
The research comes to a very definite conclusion: the combination of ownership and participative management is a powerful competitive tool. Neither ownership nor participation alone, however, accomplishes very much.
For the briefing from the NCEO on all the latest research relating to ESOPs and corporate performance, see:
http://www.nceo.org/library/corpperf.html
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admin
631 Posts |
Posted - 08 Sep 2007 : 05:13:39
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New Research on ESOP Terminations
Attractive Offers Primary Reason for ESOP Terminations in US
The NCEO estimates that in recent years approximately 600 to 700 new ESOPS have been set up each year; at the same time, approximately 2% to 4% of all existing ESOPS are terminated each year, leaving a net growth of 200 to 300 new plans per year.
In an effort to explore the causes of ESOP termination, the Employee Ownership Foundation commissioned the NCEO to do a two-stage research project. The first phase, now complete, relies on in-depth interviews with executives of companies that have terminated ESOPS.
Although this phase does not provide a statistically reliable snapshot, two overall trends seem fairly clear. First, just over half the companies the NCEO asked said their plans were terminated because the company was acquired, usually because there was an offer with a high premium. Sixteen of the eighteen interviewed companies that were acquired reported that their performance was “strong or very strong” before the acquisition. Most of them were majority owned by their ESOPs.
Among the interviewed companies, the second most common reason for ESOP termination was a current or projected inability to handle the repurchase obligation. While some observers fear that ESOP repurchase obligation causes a significant percentage of ESOPs to terminate, the relatively low rate of ESOP terminations overall suggests this fear is overstated. Interviewees had disparate views about repurchase obligation, with some calling it the driving factor for their decision to terminate their ESOPs and others calling it irrelevant.
Other causes mentioned by interviewees included the desire to provide a more diversified employee retirement benefit, worries about ESOP fiduciary liabilities, the need for outside investment and lack of support by current or incoming managers.
Because this was not a random study it would be inappropriate to generalize from these data. Still, this research does suggest which potential causes of ESOP termination are worthy of further study. The second phase will include data gathered from consultants about the companies they work with or have worked with.
The full report is available at www.nceo.org/files/ESOP_termination.pdf .
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admin
631 Posts |
Posted - 20 Sep 2007 : 06:50:16
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Share incentives are not enough to boost employee performance
Offering share incentives that attract generous tax reliefs is not enough to bolster employee performance, an HM Revenue & Customs-commissioned study has found
Nicholas Neveling, Accountancy Age, 30 Aug 2007
Tax reliefs offered on shares, share options and various other employee incentive schemes cost the taxman £800m in tax and national insurance takings every year, a cost that the government absorbs on the basis that these schemes boost employee productivity, which ultimately grows the economy and overall tax takings.
The new study into the area, conducted by Oxera, however, found that the tax breaks offered on such remuneration schemes, on their own, were not enough to stimulate productivity.
Using HMRC data and financial information on thousands of companies, Oxera looked into whether incentive plans with tax reliefs boosted productivity and found that other benefits were required to make employee participation worthwhile.
'Tax-advantaged share schemes on their own do not appear to be sufficient to improve performance. And companies that only have a tax-advantaged scheme do not appear to have significantly higher productivity,' Oxera said in the report.
When such schemes are run together with similar schemes that do not offer tax breaks, however, Oxera found that productivity increased by 5.2%.
The use of schemes with tax benefits mainly appeared to boost productivity in listed companies and companies with a turnover in excess of £36m.
'For tax-advantaged schemes to be effective in increasing productivity, other factors such as schemes that are not tax advantaged, company size, and being a listed company are required for a significant productivity effect to be identified,' the report said.
The report also looked into the benefits of tax-advantaged schemes across different sectors, with utilities, manufacturing and financial services the most likely to see productivity increases.
Real estate, transport, retail, wholesale and hospitality were least likely to benefit.
The consultancy did not go so far as to suggest a total reform of the tax incentives available for employee share and profit sharing schemes, but did question the importance of the tax reliefs in the package of incentives made available to business by the government.
'Whether it would be necessary for the government to provide tax incentives to improve performance is not clear, since there is some evidence indicating that productivity is enhanced in companies with both types of scheme (those with and without tax benefits) and not those with tax advantaged schemes only,' the Oxera study said.
The study added that HMRC could be well served by targeting the tax incentives at companies in the sectors and of the scale where tax-advantaged schemes appeared to provide the biggest boost to productivity.
The full research report (in three parts) called "Tax advantaged employee share schemes: an analysis of the productivity effects" (August, 2007) can be seen at: http://www.hmrc.gov.uk/research/ .
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admin
631 Posts |
Posted - 05 Oct 2007 : 06:45:51
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New Study Reports on Growth of Employee Ownership in Europe
Two recent surveys find that employee ownership, while still comprising a small part of the European economy, is growing. The 2007 report from the European Foundation for the Improvement of Living and Working Conditions, Financial Participation of Employees in the European Union: Much Ado About Nothing? reports on two surveys, the CRANET study from Cranfield University of European companies with more than 200 employees, and the European Working Conditions Survey (EWCS) of more than 16,000 employees. Both were done in 2005. The CRANET study was by email and had a 15% response rate; the EWCS study was based on face-to-face interviews.
Among large companies in the CRANET study, about 40% offer at least some employees stock plans in the U.K., France, and the Netherlands, while 32% do in Ireland, Belgium, and the Scandinavian countries. Plans are much less common elsewhere. There are no data on how many of these are broad-based. Larger companies are more likely to offer plans, negating the widely held economic theory that the bigger the company, the less rational it is to offer company-based incentive plans. Companies with stock plans are significantly more likely to be open about various aspects of the company as well as to be more participative in day-to-day work practices.
In the EWCS study, among companies with more than 250 employees, the highest rate of participation was 8% of employees in Ireland, 7% in France, 5% in Belgium and Sweden, 4% in the U.K., and 3% or less in all other countries. While these numbers are small, they have grown by at least 2% in every country except the U.K. since 2001.
From: Employee Ownership Update (NCEO, US) for September 28, 2007
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Research agenda for ESO
