Financial participation

This chapter looks at the extent of the use of financial participation schemes and employers' goals in introducing them. It also discusses how successful companies have been in achieving these goals and the impact of profit-sharing and share ownership schemes on individual and business performance.

KEY POINTS

  • financial participation is on the increase in many countries, including the UK, the US, Japan, Sweden and France;

  • a host of new financial participation initiatives, including schemes at British Airways, Levi Strauss and Vodafone, have emerged to coincide with the new millennium;

  • Management Review's research found that almost 86% of survey respondents offered one or more of the common forms of financial participation;

  • tax efficiency was by far the most common reason for introducing profit-related pay among companies surveyed by Management Review, cited by more than 78% of organisations with such schemes;

  • research suggests, however, that significant numbers of employers are attracted to financial participation for reasons other than tax efficiency or cost effectiveness;

  • the evidence for financial participation's effect on employee involvement and commitment, organisational performance and attitudinal change among staff is mixed;

  • the impact of financial participation on the financial performance of companies appears to be broadly positive, although there are problems in establishing cause and effect; and

  • the positive effect of financial participation is significantly greater when it is found in conjunction with participatory management practices.

    In 1995-96, 740,000 UK employees were covered by Inland Revenue-approved profit-sharing schemes and 610,000 were granted share options under registered Save-As-You-Earn share option schemes.1 A 1998 study by Proshare, the not-for-profit organisation established to promote wider share ownership, found that more than two-thirds of UK companies, including 90% of plcs, offered some form of employee share ownership scheme.2 Major companies such as Asda, Barclays Bank, Bass, BAT, British Aerospace, BT, GlaxoWellcome, Marks & Spencer, NatWest, Sainsbury's and Tesco offered one or the other, or both types of financial involvement.3

    Elsewhere, US employees controlled around 8.3% ($663 billion) of total corporate equity through employee stock option plans (ESOPs), 401(k) (see glossary) and profit-sharing schemes and other broad stock ownership measures in 1997.4 American companies with such schemes include the parcel delivery business UPS, in which employees own more than half of company stock through a 401(k) plan, and United Airlines, the world's largest air carrier, the majority of whose staff purchased a controlling 55% of corporate equity via an ESOP in 1994.5 The list of US corporations offering stock options to all their employees includes Amgen, Cisco Systems, First Tennessee Bank, General Mills, W L Gore, Great Plains Software, McCormick, Merck and Procter & Gamble.6

    In Japan, 91% of all companies listed on the Japanese stock market in 1988 had an ESOP, including almost all those in the air transport, financial services and retail sectors.7 In Sweden, 20% of private sector white-collar staff and more than 12% of manual workers were covered by profit-sharing arrangements in the late-1980s.8 In France, the number of employees subject to immediate profit sharing (intéressement des salariés) and deferred profit sharing (la participation des salariés aux résultats de l'enterprise) was more than five million in 1995.9

    A host of new financial participation initiatives (see summary of different types in figure 2.1 ) have emerged to coincide with the new millennium. British Airways is offering its worldwide workforce the opportunity to participate in "the world's biggest Save-As-You-Earn" scheme, which matures in the year 2001. BA employees can buy discounted shares at the January 1998 price with the proceeds of their savings or opt to take the money, plus a tax-free bonus in cash.10 Vodafone, the mobile telephone business, announced the introduction of share options, internally referred to as the Millennium share options, for all its 6,500 UK employees in 1998. Every member of staff was to receive options to the value of at least half of their basic salary in July 1998, which can be exercised from July 2001.11 Another innovation is that of Levi Strauss, the world's leading jean manufacturer, whose 37,000 worldwide workforce are in line for a one-off bonus payment, known as the Global Success Sharing Programme, equivalent to roughly a year's salary (as of 1996), should the company reach its $7.6 billion cash flow goal by the end of fiscal year 2001.12

    Figure 2.1: Types of financial participation

  • Profit sharing

    Profit-related pay (PRP)

    Other profit - or revenue-linked remuneration

    Some forms of performance-related pay

  • Individual share schemes

    Profit-sharing schemes

    Save-as-you-earn (SAYE) share option plans

    Company share option plans

    Employee share ownership plans (ESOPs)

    Employee buyouts

    Source: Adapted from Hyman J and Mason B (1995), Managing employee involvement and participation (Sage, London), p.98.

    Management Review's own research found that almost 86% of survey respondents offered one or more of the common forms of financial participation (see figure 2.2 ). Aside from profit-related pay, which was the most popular form, in use by more than 68% of employers offering financial participation, we found the following schemes in operation:

  • Inland Revenue-approved savings-related share option schemes, also known as SAYE or share-save, in 37% of companies;

  • unapproved profit-related cash bonuses (that is, taxable in the normal way) in 35% of businesses;

  • special/one-off or ad hoc bonuses in almost 15% of companies;

  • productivity-related cash bonuses in nearly 13% of companies;

  • IR-approved company share option plans, formerly called executive share option schemes, which, though normally reserved for senior executives, may be used to the benefit of all employees, in use by just over 11% of respondents;

  • IR-approved profit-sharing schemes and corporate Personal Equity Plans (PEPs), each in 7.5% of organisations;

  • gainsharing in fewer than 4% of businesses, as were non-statutory ESOPs (ESOP in the UK stands for "employee share ownership plan"); and

  • statutory ESOPs in fewer than 2% of companies.

    Figure 2.2: Financial participation schemes in 54 organisations

    Sector/organisation

    Employee nos.

    Current remuneration practice (date of introduction, where known)

    CHEMICALS

    Robert McBride

    2,500

    PRP, SAYE (1995), CSOP (1993), corporate PEPs (1995), profit bonus (c.1980)

    ELECTRICITY, GAS & WATER

    Essex & Suffolk Water

    758

    PRP (1994)

    Mid Kent Holdings

    522

    PRP (1994), statutory ESOP

    Magnox Electric

    3,500

    Gainsharing (1998)

    Northumbrian Water

    1,800

    PRP (1995), CSOP (1998)

    Scottish Power

    16,000

    PRP (1995), SAYE, corporate PEPs, profit bonus

    ENGINEERING & METALS

    Draka UK

    20

    PRP

    Hosiden Besson, Hove

    548

    Profit bonus

    IMI Norgren

    400

    IR profit-sharing, SAYE, corporate PEPs

    T&D Industries

    1,300

    PRP (1996), profit bonus, productivity bonus

    Weir Pumps

    1,850

    PRP (1996), SAYE (1982), productivity bonus (1979)

    FINANCE

    Alex Lawrie Factors

    750

    PRP (1994), SAYE, productivity bonus

    Bank of Scotland

    11,000

    PRP, IR profit-sharing, SAYE, CSOP

    General Accident, Perth

    6,500

    IR profit-sharing, SAYE

    HSBC Asset Management, London

    300

    PRP, SAYE, profit bonus, special bonus

    London & Manchester

    2,000+

    PRP, SAYE

    Norwich Union

    10,500

    PRP (1998), SAYE (1998), profit bonus (1998)

    Provident Personal Credit

    3,000

    PRP (1996), SAYE (c.1985), profit bonus (1994), productivity bonus (1987)

    Scottish Provident UK

    1,200

    Profit bonus (1995)

    Scottish Widows Fund

    2,400

    Productivity bonus, special bonus (1997)

    Smith and Williamson

    520

    PRP, special bonus

    Visa International, London

    600

    Profit bonus (1997)

    FOOD, DRINK & TOBACCO

    Guinness GB

    1,000

    IR profit-sharing (1981; 1994 in current format), SAYE, corporate PEPs, special bonus

    GENERAL MANUFACTURING

    Cablenet, London

    215

    PRP

    Amcare, Newark

    70

    PRP (1994), profit bonus (1995)

    E A Clare & Son

    86

    PRP (1997)

    Gundry Netting, Bridport

    63

    Productivity bonus (1997)

    PLM Redfearn, Barnsley

    900

    PRP

    GENERAL SERVICES

    EDS

    12,000

    PRP (1997), special bonus (1997), non-stat ESOP

    Hewitt Associates, St Albans

    170

    Profit bonus

    Logica UK

    2,700

    PRP, SAYE

    Mitle Group

    18,000

    SAYE, CSOP

    Oracle Corporation UK

    3,000

    PRP, profit bonus, productivity bonus, special bonus

    Ove Arup Partnership

    4,000

    PRP

    Sovereign Housing Association

    270

    PRP (1996/97)

    UM Group

    1,500

    SAYE, profit bonus

    William King

    215

    PRP

    PAPER & PRINTING

    Liverpool Daily Post & Echo

    1,000

    PRP (1997), SAYE (1991), profit bonus (c.1989)

    North Wales Newspapers

    352

    PRP (1998/99), productivity bonus

    PUBLIC SERVICES

    Natural Environment Research Council

    2,700

    Special bonus (1988), gainsharing (1995)

    RETAIL & WHOLESALE

    BCA

    1,000+

    PRP

    Dixons Stores Group

    19,000

    PRP, SAYE, CSOP, profit bonus, productivity bonus

    Flanagans Supermarket Direct

    80

    Non-stat ESOP

    Pearsons, Enfield

    520

    PRP (1998/99), productivity bonus

    Safeway Stores

    75,000

    PRP, SAYE, CSOP

    William Morrison

    12,000

    PRP

    TRANSPORT & COMMUNICATION

    Britannia Airways

    4,250

    PRP, profit bonus

    Eurotunnel

    1,300

    Profit bonus, special bonus

    Gatwick Express

    300

    PRP, SAYE

    London Central Bus Co

    1,680

    PRP (1995), SAYE

    Merseyrail Electrics, Liverpool

    1,000

    PRP

    Nippon Express (UK)

    c.450

    Profit bonus

    Nokia Mobile Phones, Camberley

    600

    Profit bonus

    Thomas Cook Group

    9,000

    PRP (1997)

    Key:

    PRP= Inland-Revenue registered Profit-Related Pay scheme

    CSOP = Inland Revenue-approved company share option plan

    SAYE = Inland Revenue-approved savings-related share option scheme, also known as SAYE or sharesave

    IR profit-sharing = Inland Revenue-approved profit-sharing scheme

    PEPs = Corporate personal equity plan(s)

    Profit bonus = Profit-related cash bonus (not IR-approved or registered, eg taxable in the normal way)

    Productivity bonus = Productivity-related cash bonus (not IR-approved or registered, eg taxable in the normal way)

    Special bonus = Special/one-off bonus eg Millennium bonus etc

    Gainsharing

    Statutory ESOP = Statutory employee share ownership plan

    Non-statutory ESOP = Non-statutory employee share ownership plan

    MORE THAN A MONETARY REWARD?

    It seems clear that in many instances financial participation schemes are little more than additional worker incentives whose attraction is the accompanying tax concessions. A 1996 study sponsored by actuaries and consultants Bacon & Woodrow supports this view. It found that employee profit-sharing and share ownership schemes among a sample of companies in the FTSE 100 index were "not being used as part of strategic human resources policies", leaving the authors to conclude that financial participation's "potential for improvements in motivation and productivity are not being tested".13 It was noted in chapter one that IR-registered PRP schemes have commonly been introduced to take advantage of the tax reliefs rather than wider company benefits such as greater employee motivation and commitment or perceived macroeconomic gains.

    Our own findings reinforce this conclusion. Tax efficiency was far and away the most common reason for introducing PRP among our surveyed companies, cited by more than 78% of organisations with such schemes (see figure 2.3). The aim of increasing employee stakeholding/commitment to the organisation shared second place with the objective of reducing paybill costs (27% of respondents). Only 16% of employers surveyed actually hoped to increase profits through using PRP.

    Figure 2.3: Employers' reasons for introducing profit-related pay

    n = 37; respondents were able to give more than one answer.

    Nevertheless, this is not the whole picture and the wider aims remain significant in many companies.

    Aside from the tax incentives, there are four broad themes underpinning employers' reasons for establishing profit-sharing and employee share ownership schemes - participatory, philanthropic, incentive and opportunistic.

    Participatory

    There is the view that those who help to contribute to business success should share some of the rewards and, perhaps more significantly, that if employees accept this offer they should also be prepared to shoulder some of the risk. Profit sharing and share ownership can also increase business awareness among employees, who typically take a greater interest in the company's performance, and in some cases, most notably privatised organisations which were previously relatively immune to the pressures of profit making, financial participation can be important in achieving cultural change.

    Philanthropic

    Some businesses, including the notable example of the John Lewis Partnership (JLP), offer profit sharing and employee ownership for idealistic or philanthropic reasons. The philosophy underpinning JLP's ownership structure is that "partners see themselves as holding the business in trust from one generation to the next".14

    Incentive

    Other businesses introduce financial participation schemes mainly for, or are influenced by, purely pragmatic business reasons. One of these is recruitment and retention. Asda's all-employee share option plan, for example, is designed to reward loyalty, because, unlike its profit-sharing predecessor, only staff who stay for the full duration of the three-year scheme receive the options under the scheme.15 Similarly, Vodafone's share scheme is primarily about staff retention, particularly among the company's IT staff. Unlike its other employees, these will receive share options worth up to twice their salaries in the interests of encouraging loyalty.16 British Aerospace's 1997 annual report acknowledges that its SAYE schemes and new profit-sharing arrangement help to bring "fresh minds" to the company and can "attract the very best people, in all disciplines".17 CMG, the part employee-owned computer management company, also sees its employee ownership as something with which to attract new recruits. The company's job advertisements include the statement: "Cited as one of the top 100 companies to work for in the UK by McGraw Hill and named as one of the top three examples of successful employee ownership by think-tank Demos, 1997."18 According to one US consultancy, the offer of share options in tight labour markets "can make a significant difference as employers compete to recruit and to keep a high-quality workforce".19

    Opportunistic

    Share schemes which principally promote wider share ownership, such as employee share ownership plans (ESOPs), have specific business advantages in certain circumstances. ESOPs can create an internal share market in unlisted private companies or allow independent owners to realise some or all of their investment, or act as a mechanism for them to exit the business. They can also prevent a dilution of equity.20 Employee buyouts also often rely on the ESOP mechanism to fund and distribute shares.21

    That some employers are attracted to financial participation for reasons other than tax efficiency or its cost effectiveness is supported by research. Proshare's survey of 528 companies, for example, found that the four most commonly cited reasons for introducing employee share ownership schemes were: "to give employees a sense of involvement in the business" (64%); "to share rewards with employees" (58%); "to link employees and shareholder interests" (44%); and "to encourage employees to stay" (42%).22 In an earlier study of employers' reasons for establishing approved profit-sharing and SAYE share option schemes, jointly commissioned by the Inland Revenue, the Employment Department (now the Department for Education and Employment) and the Treasury (IR/ED/HMT), the three most important factors in descending order were: to increase employee involvement; to support recruitment and retention; and to increase the overall reward package.23

    The need for commitment, loyalty and motivation, the desire to attract and retain the right people and the need to align the interests of directors and shareholders are often the reasons given to justify the remuneration packages of the top management team.24 It would appear that organisations are increasingly applying the same thinking to the rest of their workforce.

    WHAT'S THE RETURN?

    For employees, the rewards of financial participation can be substantial. Over the past three years, for example, Midland Bank's top performing staff - those rated as "good performers" or above - have received additional profit-sharing payments worth a cumulative 21% of salary (see figure 3.5, in Profit sharing).25 Asda's Colleague Share Ownership Plan allocated its first tranche of shares on 20 July 1998 under an option scheme established in 1995. Over the three-year period, the share price has doubled, from 96p to around 206p, giving the 26,000 eligible staff an average free shareholding worth roughly £900.26 A Lloyds Bank (now Lloyds TSB) employee participating in a five-year £35 a month Save-As-You-Earn (SAYE) share option scheme beginning in 1993 would have made a profit of more than £9,500, if he or she had sold the shares after the exercise date in June 1998 - based on a 1993 share price, less a 20% discount, of 155p. The latter price compares with a 14 July 1998 share value of around 862p. In addition, the employee would have received a tax-free saving's bonus of £437.50 from the 60-month SAYE contract.27

    Elsewhere, too, should Vodafone's share value over the next three years perform as well as it has done over the past decade, increasing on average by 25% each year, employees who take advantage of the company's Millennium share options will stand to gain significantly. Likewise, Levi's workforce could share some $750 million from the company's Global Success Sharing Programme. The recent rise in profit-sharing payments to staff of the John Lewis Partnership over the past decade is illustrated in figure 3.2 (in Profit sharing). It shows that a record sum equivalent to 22% of annual salary was paid to all the company's 37,500 "partners" (permanent employees) in 1998.28

    For employers, on the other hand, aside from the attractions of the tax incentives available on all Inland Revenue-approved schemes, the evidence as to benefits of financial participation - in terms of employee involvement and commitment, organisational performance and attitudinal change among staff - is somewhat mixed. This is particularly true of employee commitment and attitudinal change, with the signs suggesting that significant behavioural change is "open to some doubt".29 The evidence of financial participation's impact on the financial performance of companies tends to be broadly positive, although there are cause and effect problems.

    Leadbetter outlines six main claims made for employee share ownership and profit-sharing schemes:

  • Cooperation - financial participation creates a common interest between workers, employers and shareholders which reduces conflict and "us and them" attitudes;

  • Productivity - giving employees a stake in the business helps to raise productivity, improve quality and promote a culture of continuous improvement;

  • Patience - employees are more knowledgeable about the company and tend to be more patient than external shareholders, so there is less short-termism;

  • Loyalty - employees are more committed and there is less labour turnover and absenteeism;

  • Flexibility - employees understand the need for rewards that match the ups and downs of company performance; and

  • Risk taking - employees understand the nature of the risks taken by owners of capital and how markets work.30

    The findings of some of the major studies into the impact on employees of share and profit-sharing schemes are summarised in figure 2.4, and a model illustrating how financial participation connects internal and external organisational factors and the outcomes it may produce can be found in figure 2.5.

    Figure 2.4: Impact of profit-sharing and share ownership schemes on employees and employers: summary of 21 studies

    Source

    Theme of study

    Conclusions or % agreeing (excluding "Don't knows")

    Long R J (1978a), "The effects of employee ownership on organisational identification, employee job attitudes and organisational performance: a tentative framework and empirical findings", Human Relations, vol 31, pp.29-48; Long R J (1978b), "The relative effects of share ownership vs. control on job attitudes in an employee-owned company", Human Relations, vol 31, pp.753-763

    Organisational integration, eg, "what is good for the company is good for me" - difference between shareholders/non-shareholders

    Employee shareholders report more integration than non-shareholders

    Russell R et al (1979), "Participation, influence and worker-ownership", Industrial Relations, vol 18, pp.330-341

    "I don't care what happens to my company so long as I get paid" - difference between shareholders/non-shareholders

    No significant difference between shareholders and non-shareholders

    Hammer T H and Stern R N (1980), "Employee ownership: implications for the organisational distribution of power", Academy of Management Journal, vol 23, pp.78-100

    Perceptions of company ownership - difference between shareholders/non-shareholders

    Shareholders report more integration than non-shareholders

    Long R J (1980), "Job attitudes and organisational performance under employee ownership", Academy of Management Journal, vol 23, pp.726-737

    Organisational integration, eg, "what is good for the company is good for me" - difference between shareholders/non-shareholders

    Employee shareholders report more integration than non-shareholders

    Long R J (1982), "Worker ownership and job attitudes: a field study", Industrial Relations, vol 21, pp.196-215

    Organisational integration, eg, "what is good for the company is good for me" - difference between shareholders/non-shareholders

    No change in managers' pre- v post-shareholding scores; significant decline in non-managers' scores 18 months after shareholding

    Bell W D and Hanson C G (1984), Profit-sharing and employee shareholding attitude survey (IPA, London)

    Profit-sharing creates a better atmosphere in the firm - shareholders;

    77%

    Profit-sharing strengthens people's loyalty to the firm - shareholders

    57%

    Kruse D (1984), Employee ownership and employee attitudes: two case studies (Norwood)

    "At Galaxy, I feel a sense of ownership" - shareholders

    19%

    Klein K J and Rosen C (1986), "Employee stock ownership in the United States", in Stern R and McCarthy S (eds), The organisational practice of democracy (Wiley)

    "I feel like a real owner in the company" - shareholders

    42%

    Rosen C, Klein K and Young K M (1986), Employee ownership in America (Lexington)

    "Because of employee ownership managers treat workers more like equals" - shareholders

    31%

    Dewe P, Dunn S and Richardson R (1988), "Employee share option schemes: why workers are attracted to them", British Journal of Industrial Relations, vol 26, pp.1-20

    "Share schemes will make workers feel part of the company" - all employees

    70%

    "Share schemes will reduce 'them and us' attitudes" - all employees

    24%

    "Share schemes will build up team spirit" - all employees

    37%

    Fogarty M and White M (1988), Share schemes - as workers' see them (Policy Studies Institute)

    "Because of the share scheme, I feel like a partner in the company" - shareholders

    49%

    "The scheme has reduced 'them and us' outlook in the company" - shareholders

    27%

    Boateng P (1989), "The impact of privatisation on worker attitudes", unpublished (University of Kent)

    Organisational commitment and identification - shareholders/non-shareholders

    Shareholders report less commitment than non-shareholders and decline in both groups post-shareholding

    Baddon L et al (1989), People's capitalism? a critical analysis of profit-sharing and employees share ownership (Routledge); Ramsay H et al (1990), "Options for workers: owners or employee?", in Poole M and Jenkins G (eds), New forms of ownership (Routledge)

    "Management and employees basically have common aims and objectives" - shareholders v non-shareholders

    26% v 21%

    "Management and employees are basically on opposite sides" - shareholders v non-shareholders

    11% v 17%

    "Workers should never strike but should remain loyal to the company" - shareholders v non-shareholders

    21% v 16%

    Poole M and Jenkins G (1990), New forms of ownership (Routledge)

    "Share and profit-share schemes have successfully increased employees' sense of commitment to the company" - all employees

    15%

    "Share and profit-share schemes have successfully made employees feel part of the company" - all employees

    17%

    "Share and profit-share schemes have increased the sense of cooperation between management and workforce" - all employees

    25%

    Dunn S, Richardson R and Dewe P (1991), "The impact of employee share ownership on worker attitudes: a longitudinal case study", Human Resource Management Journal, vol 1 (30), Spring, pp.1-17

    "The share scheme has made workers feel more part of the company" - non-shareholders

    36%

    "The share scheme has not reduced feelings of 'them and us'" - non-shareholders

    77%

    "Since joining the scheme, I can see management's point of view more" - shareholders

    18%

    "Being in the scheme has made me feel more of an equal to management" - shareholders

    32%

    Nichols T and O'Connell Davidson J (1992), "Employee shareholders in two privatised utilities", Industrial Relations, vol 23 (2), pp.107-119

    "Share ownership gets rid of 'them and us' feelings between management and workers" - shareholders

    15%

    Smith G (1993), "Employee share schemes in Britain", Employment Gazette, April, pp.149-154

    Increases experienced in employee involvement over preceding three-year period- companies with schemes v companies without schemes

    60% v 22%

    Employee Share Ownership Centre (1994), Non-quoted companies with ESOPs: an analysis of responses from UK managers (ESOP, London)

    Employers saying ESOP has had either a positive or very positive effect on employee motivation and productivity

    82%

    Wilkinson A, Marchington M, Ackers P and Goodman J (1994), "ESOP's fables: a tale of a machine tool company", International Journal of Human Resource Management, vol 5 (1), pp.121-143

    "Share ownership has increased employee commitment" - sample of employees

    25%

    "Share ownership has improved company performance - sample of employees

    25%

    "Share ownership has provided more information about company performance" - sample of employees

    23%

    "Share ownership has led to a greater understanding of management decisions" - sample of employees

    9%

    CBI (1995), "Financial participation - CBI survey findings", Employment Affairs Report 64, June, pp.19-21

    Positive impact on employee motivation - companies

    75%

    Positive impact on focusing employees on key business objectives - companies

    67%

    Positive impact on helping to retain key employees - companies

    59%

    Sloan R and Jackson N (1996), Sharing in success? employee and executive financial participation in FTSE 100 companies (Bacon & Woodrow)

    Approved profit-sharing schemes - companies

    57% said expectations matched

    Approved SAYE schemes - companies

    68% said expectations matched

    Profit-related pay - companies

    60% said expectations matched

    Proshare (1998), Employer perceptions of employee shareholding (London)

    "Aim of giving employees a sense of involvement in the business" - companies

    68% said desired impact achieved (66% of plcs and 72% of Ltds)

    Source: Based on Kelly J and Kelly C (1991), "'Them and us': social psychology and 'the new industrial relations'", British Journal of Industrial Relations, vol 29 (1), March, pp.25-48.

    Figure 2.5: Impact of financial participation schemes

    Source: Adapted from Poole M and Jenkins G (1990), The impact of economic democracy: profit-sharing and employee-shareholding schemes ( Routledge, London ) p.22

    Employee involvement

    The mainstream view of employee involvement in the fortunes of the company is that it sends staff a positive message: that their input matters. Employers hope that improved employee involvement will generate a reciprocal commitment to organisational success. Indeed, in the UK, the quest for employee involvement has become akin to the search for the Holy Grail since it was identified as a key element of the Japanese management philosophy, especially in relation to quality.31 Current human resource management thinking also makes employee involvement central to the new workplace environment, encouraging workers to take their own decisions and act autonomously in empowered teams.32

    Successive UK governments have highlighted enhanced employee involvement as a key factor in improving business competitiveness. As former Chancellor Kenneth Clarke put it:

    "We need to do away with old-fashioned 'us and them' attitudes in industry. Successful companies in a modern economy need to involve their employees . . . share ownership, profit-related pay, employee share ownership plans, cooperatives - they can all help us to achieve the essential goals of competition and cooperation: competition in our economy and cooperation within our companies."33

    This promotion of employee involvement was even backed with a legal obligation on larger companies (250-plus staff) to include a statement in their annual report about the action the company had taken over the preceding 12 months to further it. A 1996 survey of 100 companies' annual reports found that of the 98 statements on non-financial involvement 10 could be judged "substantial" - twice as many as in a similar 1991 survey.34

    Glass manufacturer Pilkington's 1996 directors' report and accounts contained the following statement on employee involvement:

    "The company has a long established and well recognised policy of encouraging employee involvement through communication and consultation on a wide range of issues. Wherever possible, employees are invited to participate in multi-discipline quality and process improvement teams."35

    Financial participation schemes imply a corresponding level of employee involvement. Share ownership schemes, for example, confer on individual members of staff a "legitimate right to participate in decision-making".36 According to Poole and Jenkins, financial participation is part of a "managerial strategy to influence . . . the level of joint decision-making between management and employees".37 Employee shareholders can participate directly in the organisation by, for example, voting for the board of directors at annual general meetings or by taking part in quality circles, and indirectly through the development of greater communication with management and by exercising independent judgment in day-to-day activities.38

    Certainly, the majority of organisations with financial participation schemes see them as a way of enhancing wider employee involvement. It was noted earlier that both the Proshare survey and the IR/ED/HMT study identified greater employee involvement as the main aim for companies in introducing profit-sharing and employee share ownership schemes. British Aerospace (BAe) is an example. The aim of its company-wide profit-sharing scheme is, according to the employee booklet outlining the arrangement, to "involve everyone even more directly in improving the performance of the company".39

    The Proshare and the IR/ED/HMT surveys both found that financial participation had led to improved employee involvement. The Proshare study reported that 68% of respondents said that their schemes had achieved the "desired impact", while the IR/ED/HMT survey found that in the proceeding three years 60% of companies with approved profit-sharing and SAYE share schemes had increased employee involvement, compared with only 22% of organisations not operating such schemes.40

    Some studies not surprisingly indicate that the greater the proportion of shares owned by staff the higher the level of involvement.41 For example, FI Group, in which employees and employee trusts hold a 46% equity stake, has a management style that allows people to "participate in decisions and helps to shape future strategy".42 One study of the level of employee participation and corporate governance in majority employee-owned firms, mainly UK bus companies, concluded that staff involvement in decision-making focused on "strategic rather than task-related decisions".43 It found a significant difference between employee-owned and conventional firms when it came to investment decision taking and such areas as marketing and management selection.

    Employee commitment

    Employee commitment tends to signify a person's "affective attachment and identification" to, and with, a organisation.44 And it is generally believed that it can be enhanced by profit sharing and share ownership. Poole and Jenkins suggest that because financial participation increases the employee's stake in the company, it can generate a greater desire on the part of staff to "direct their individual and collective behaviour towards the corporate goal of increased profits rather than to the traditional worker's goal of higher wages and improved conditions of work".45

    An employee's commitment to his or her employing organisation can usually be identified by three key qualities:

  • "a strong belief and acceptance of the organisation's goals;

  • a willingness to exert effort on behalf of the organisation; and

  • a strong desire to maintain membership of the organisation."46

    Research indicates, however, that employees tend to take an instrumental view of such matters and that commitment to an organisation will only be enhanced if the individual's expectations are realised.47 An Australian study supports this assertion, claiming that improvements in employee commitment which result from financial participation schemes are positively related to profitability and will be abandoned if the company's performance declines.48 A US commentator makes a similar point, estimating that more than 90% of employees in high-technology companies tend to exercise their share options and sell the shares on the same day.49

    Further evidence is provided by BT and VSEL. When BT was privatised in 1984, a proportion of company equity was distributed among employees. But, even though 96% of employees held shares, the majority of staff still took industrial action in January and February 1987, one picket declaring that share ownership "made no difference at all. It's just another kind of bonus".50 Similarly, VSEL, the Cumbria-based shipbuilder, suffered strike action in 1988 even though its workforce acquired more than a quarter of the company's shares when it was privatised in 1986.51

    Other studies present a slightly more positive picture of financial participation's impact on levels of employee commitment (see figure 2.4). For example, Poole and Jenkins found that, in terms of employees' perspective on their work and career, their research did "lend support to the view that employee attitudes are affected by financial participation and, in particular, that commitment to the company develops as a consequence".52 A 1992 survey reported that 47% of employees said that their commitment to the company had increased as a result of financial involvement.53

    A CBI survey of employers' views on financial participation reported that 59% of respondents said that it helped to retain key employees.54 Similarly, a study of 52 UK engineering companies meanwhile found that firms with financial participation schemes "exhibited significantly lower quit rates" than those with no such arrangements55.

    The proportion of shares going to staff may affect how they perceive financial participation. A US survey of more than 3,500 employees in 45 companies conducted by the National Center for Employee Ownership (NCEO) reported that "the more shares they [employees] owned, the more committed they were to the company, the more satisfied they were with their jobs, and the less likely they were to leave"56.

    Financial performance

    A company's financial performance can be evaluated using a raft of measures, including productivity, profitability, share value and turnover. Most of the research into the impact of financial participation schemes on financial performance suggests that profit-sharing and share ownership schemes can boost performance (the findings are summarised in figure 2.6).

    Figure 2.6: Impact of financial participation schemes on corporate performance: summary of 17 studies

    Source

    Theme of study

    Conclusions

    Conte M and Tannebaum A J (1978), "Employee-owned companies: is the difference measurable?", Monthly Labour Review, vol 101, pp.23-28

    Profitability of employee-owned companies compared with conventionally-owned ones

    Companies with employee-ownership 1.5 times more profitable than conventional firms of comparable size

    Marsh T and McAliister D (1981), "ESOPs tables: a survey of companies with employee stock ownership plans", Journal of Corporation Law, vol 6 (3), pp.557-569

    Productivity in 128 US ESOP companies compared with average figure in a weighted national sample of companies

    Productivity in ESOP companies increased by 0.78% a year compared with a 0.74% fall in weighted sample

    Tannenbaum A, Cooke H and Lohmann J (1984), A research report: the relationship of employee ownership to the technological adaptiveness and performance of companies (University of Michigan)

    Survey of 100 companies with employee ownership schemes

    No significant difference in performance of companies with financial participation and others, although the former had a higher survival rate

    Quarrey M and Rosen C (1987), "Employee ownership and corporate performance", Harvard Business Review, September-October

    Performance of 45 employee-owned companies pre-and post-ESOP compared with five conventionally-owned competitors

    Sales growth 1.89% higher pre-ESOP and 5.3% post; employment growth 1.21% higher pre-ESOP and 5.05% post; among all ESOP companies, those with participatory management systems improved by between 8% and 11% more than others post-ESOP

    Richardson R and Nejad A (1986), "Employee share ownership schemes in the UK: an evaluation", British Journal of Industrial Relations, vol 24 (2), pp.233-250

    Analysis of share values in the UK retail sector

    Financial participation significantly improved stock market performance

    Bell D and Hanson C (1987), Profit-sharing and profitability (Kogan Page, London)

    Large-scale survey of UK companies

    Companies with financial participation schemes performed better than companies with no schemes on a range of measures

    US General Accounting Office study (1987)

    Productivity and profitability in 110 companies

    Productivity growth rates in employee ownership companies with participatory management systems increased by 52% a year - indicating that a 3% productivity uplift would be 4.5% in ESOP companies

    Cable J and Wilson R (1989), "Profit-sharing and company performance: some empirical evidence for the UK", Economic Journal 99, pp.366-375

    Study of the UK engineering industry

    Profit-sharing companies more productive than non-profit-sharing firms

    Michigan Centre for Employee Ownership and Gainsharing (1990)

    Employee ownership's impact on sales, profits and productivity etc - executives' responses

    Positive results; majority employee-owned companies performed best

    Wagner I, Report to the New York stock exchange on the performance of publicly held employee ownership companies, quoted in Poole M and Jenkins G (1991), "The impact of profit-sharing and employee shareholding schemes", Journal of General Management, vol 16 (3), Spring, pp.52-72

    Performance of publicly held employee ownership companies

    Firms with at least 10% employee ownership performed equally well on overall return on investment; companies with employee ownership outperformed others by between 62% and 75% on net operating margin, sales growth, book value/share and return on equity

    Jones D and Kato T (1993), "Employee stock ownership plans and productivity in Japanese manufacturing firms", British Journal of Industrial Relations, vol 31 (3), pp.331-346

    The effect of ESOPs on productivity in Japanese manufacturers

    Net effect of introducing an ESOP is to increase productivity by almost 7%

    The effect of ESOPs on productivity in Japanese manufacturers, North-east Ohio Employee Ownership Centre (1993)

    Employment growth compared with competitors

    49% performed better than competitors and 50% performed the same

    Winther G et al (1993), New York and Washington studies

    Performance of 28 employee-owned companies pre-and post-ESOP compared with 112 conventionally-owned firms

    Washington State employee-owned companies with participatory management systems increased employment by 10.9% a year and sales by 6% a year post-ESOP

    Employee Share Ownership Centre (1994), Non-quoted companies with ESOPs: an analysis of responses from UK managers (ESOP, London)

    Profitability growth faster thancompetitors - employers' responses

    50%

    Improved employment levels compared with competitors - employers' responses

    77%

    "More competitive because of ESOP?"- employers' responses

    58%

    Collat D (1995), Public ESOPs and corporate performance

    Study of 91 companies which had established ESOPs between 1988 and 1990

    Companies not threatened by takeover perform 2.1% better than the industry norm

    Blasi J, Kruse D and Conte M/American Capital Strategies (ongoing study), ESOPs and stock market price

    Stock market price comparisons between US quoted companies with at least a 10% employee shareholding and conventional firms

    An investment in a basket of securities in quoted ESOP companies would, between 1992 and 1997, see a return of 106% compared to 83% for the Dow and 70% for S&P500

    Capital Strategies Employee Share Ownership Index™, April 1998

    Measures relative share price performance of UK quoted companies with at least a 10% employee shareholding

    Index of companies with employee shareholdings continually outperforms the FTSE All-Share index

    Sources: National Centre for Employee Ownership (Oakland, California); Poole M and Jenkins G (1991), "The impact of profit-sharing and employee shareholding schemes", Journal of General Management, vol 16 (3), Spring, pp.52-72; Leadbetter C (1997), A piece of the action: employee ownership, equity pay and the rise of the knowledge economy (Demos, London).

    The Capital Strategies' UK Employee Ownership Index, which tracks the relative share price performance of UK quoted companies where employees (other than directors) own at least 10% of the ordinary share capital, has outperformed the FTSE All-Share index in 12 of the 23 quarters since 1992, to stand 70% higher in cumulative terms.57 The company's US sister organisation reports similar findings for America.58 Companies, too, report substantial improvements in performance following the implementation of financial participation schemes. For example, FI Group has reported profit increases of 40% or more in each year between 1993 and 1997, while United Airlines has recorded the following improvements:

  • 11% increase in efficiency;

  • 50% reduction in staff complaints;

  • 7.5% increase in profit margins;

  • 120% increase in the value of shares;

  • 7% increase in revenue; and

  • 7,000 new jobs.59

    Among our case study organisations, Tim Watts, chair of Pertemps Recruitment Partnership, has no doubt that employee financial participation has been a key influence on its financial performance over the past four years (see case study 3, Case studies).

    However, some caution is necessary. There are problems in distinguishing a causal relationship between financial performance and financial participation. Profitability, for example, is affected by a host of external and internal forces over which employees have no control, and productivity gains are often the result of technological advances, new machinery or changes in processes. Hanson and Watson say of their survey of UK companies:

    "The observed improvement in performance may be a reflection of generally good corporate management and industrial relations practices. That is, profit sharing may be merely one element of an integrated business strategy which leads to improved performance, rather than profit sharing possessing any causal influence of its own."60

    Some commentators have even spoken of potential dangers posed by financial participation. The pitfalls of concentrated employee ownership include maximisation of employee self-interest, a depletion of managerial energies and managerial influence, and corporate apathy.61 For these reasons, and to prevent share value dilution and protect existing shareholders, the investment protection committee of the Association of British Insurers recommends that "no more than 10% of the issued ordinary share capital from time to time should be set aside for all the company's schemes in any rolling 10-year period". It also suggests that the "prior approval of shareholders should be sought for any ESOP arrangement where the ESOP/ESOT may hold more than 5% of the company's ordinary share capital".62

    BEST PRACTICE

    Participatory management

    The summaries of studies examining the impact of financial participation on corporate performance in figure 2.6 (on p.12) highlight that where the schemes are run in conjunction with participatory management systems the positive effect is much more pronounced. For example, Quarrey and Rosen suggest that companies applying participatory techniques, such as self-directed teamworking, quality circles and employee task forces, experience performance improvements of between 8% and 11% after the introduction of employee ownership schemes.63 The US National Centre for Employee Ownership (NCEO) comments that:

    "Studies on participative management alone find a small positive impact on performance, but not nearly enough to explain the synergy between ownership and participation these other studies have found."64

    CMG, the computer management company, is an example of an enterprise that is benefiting from a participatory management style running alongside substantial employee share ownership. The company engages all staff in the decision-making process through "regular staff, management and policy-forming meetings".65

    And it has been highly successful: its share price rose by 68% in the first quarter of 1998, and one report suggested that this was in part due to the "degree of employee involvement, accountability and ownership".66

    Equitable schemes

    Kelly and Kelly suggest that where financial participation fails to generate attitudinal change among employees this may be because of the "perceived inequality in distribution, with a majority [of studies] reporting managers to be the main beneficiaries of such schemes".67 However, more and more companies now operate all-employee share option schemes. Asda's Colleague Share Ownership Plan (see above) and automotive components manufacturer Unipart's share option scheme are notable examples, as is PepsiCo's SharePower scheme, which, when it was introduced in June 1989, was the first broad-based stock option programme to be offered by a large business to all its staff.68

    At Tullis Russell, the Share Council, which provides employees with a voice in the running of the group's share schemes and represents their interests as shareholders to the board, successfully overturned the existing salary-based share allocation system and replaced it with equal distribution for all.69

    Communication

    Communication is widely accepted to be a key element of successful financial participation. Steve Kelly, remuneration manager at NPI, believes that ongoing communication is crucial to ensure staff acceptance and support for financial participation (see case study 1, Case studies). Initially, staff will need to understand the intricacies of the various schemes and the potential benefits of financial involvement. Later, participants in profit-sharing and share ownership schemes, for example, will want to be kept informed of company performance and the impact of fluctuations on their stake in the business. PepsiCo realised that the success of its stock option programme would depend on an "effective communications process that would educate as well as motivate employees".70 Likewise, Sainsbury's considers that "communications is an essential ingredient" of its profit-sharing and share ownership schemes and "each year the company carries out a major communications exercise with employees about the business performance of the company".71

    A novel approach to the communication of financial information is provided by NPI, which has installed software on the computers of all its staff enabling them to click on a so-called "reward icon" and receive updated details of company performance and their own level of reward based on the figures (see case study 1, Case studies). Pertemps Recruitment Partnership also acknowledges the importance of communication and every year each member of staff receives a copy of the annual accounts, which contains an alphabetical list of everyone's remuneration. And Pertemps highlights an important aspect of the dissemination of financial data: the process generates a desire for ever more information (see case study 3, Case studies).

    1     Inland Revenue Statistics.

  • 2     Proshare (1998), Employee share ownership research (London).

    3     IRS (1998), "We're in this together: profit-sharing schemes", Pay and Benefits Bulletin 444, March, pp.2-8.

    4     National Centre for Employee Ownership (1997), ESOPs, stock options and 401(k) plans now control 8.3% of corporate equity (NCEO, California).

    5     National Centre for Employee Ownership (1997), The Employee Ownership 100 (NCEO, California); "Employee-owners help bolster the bottom line", HR Magazine, February 1997.

    6     "The 100 best companies to work for in America", Fortune, 12 January 1998.

    7     Jones D C and Kato T (1993), "Employee stock ownership plans and productivity in Japanese manufacturing firms", British Journal of Industrial Relations, vol 31 (3), September, pp.331-346.

    8     Kjellberg A (1992), "Sweden: can the model survive?", in Ferner A and Hyman R (eds), Industrial relations in the new Europe (Blackwell, Oxford), pp.88-142.

    9     IRS (1997), "Company profit-sharing results for 1995", European Industrial Relations Review 278, March, pp.21-22.

    10    The Guardian, 24 January 1998.

    11    Vodafone press release, 19 March 1998.

    12    Levi Strauss press release, 13 June 1996.

    13    Sloan R and Jackson N (1996), Sharing in success? Employee and executive financial participation in FTSE 100 companies (Bacon & Woodrow, London).

    14    "Partnership brings material gains at John Lewis", IPA magazine, December 1996.

    15    "ESOPs fable becomes a reality", Management Today, November 1997, pp.112-114.

    16    "Vodafone shares its options with IT staff", Personnel Today, 9 April 1998.

    17    British Aerospace Annual Report 1997, p.18.

    18    CMG job advertisement, Evening Standard, 29 July 1998.

    19    William M Mercer (1998).

    20    Employee Share Ownership Centre (1998), ESOPs made simple (ESOP Centre, London).

    21    IRS (1995), "Employee ownership: we're the bosses now", IRS Employment Review 587, July, pp.4-9.

    22    Proshare, see note 2, above.

    23    Smith G (1993), "Employee share schemes in Britain", Employment Gazette, April, pp.149-154.

    24    See, for example, Arthur Andersen (1997), Executive remuneration and equity incentives on flotation (London); Monks Partnership (1997), Long term rewards: choosing the right plan (Saffron Walden).

    25    IRS (1997), "Finance deals static at 4%", Pay and Benefits Bulletin 424, May, pp.7-11; IRS (1998), "Finance deals dip to 4%", Pay and Benefits Bulletin 449, June, pp.7-12.

    26    Asda news release, 15 July 1998.

    27    "Share in your firm's success", Sunday Times, 10 May 1998.

    28    IRS (1998), "John Lewis Partnership: 22% partnership bonus announced", Pay and Benefits Bulletin 446, April, p.13.

    29    Ramsay H, Leopold J and Hyman J (1986), "Profit-sharing and employee share ownership: an initial assessment", Employee Relations, vol 8 (1).

    30    Leadbetter C (1997), A piece of the action: employee ownership, equity pay and the rise of the knowledge economy (Demos, London), p.19.

    31    IRS (1996), Quality through continuous improvement, IRS Management Review 1, April.

    32    Marchington M (1995), "Involvement and participation", in Storey J (ed), Human resource management: a critical text (Routledge, London), pp.280-305.

    33    Kenneth Clarke, speech to Industrial Society Conference, Employment Gazette, May 1987.

    34    IRS (1996), "What about the workers? Employment policy statements in 100 top annual reports", IRS Employment Review 619, November, pp.6-11.

    35    Pilkington UK, Directors' report and accounts 1996.

    36    Long R J (1979), "Desires for and patterns of worker participation in decision-making after conversion to employee ownership", Academy of Management Journal, vol 22 (3), pp.611-617.

    37    Poole M and Jenkins G (1990), The impact of economic democracy: profit-sharing and employee-shareholding schemes (Routledge, London), pp.15-16.

    38    Mitchell D (1987), "The share economy and industrial relations", Industrial Relations, vol 26 (1), pp.1-17.

    39    The new British Aerospace profit-sharing scheme: an equal share in our success (BAe, 1997), p.1.

    40    Proshare, see note 2, above, p.21; Smith, see note 23, above, p.152.

    41    Long R J (1980), "Job attitudes and organisational performance under employee ownership", Academy of Management Journal, vol 23 (4), pp.726-737.

    42    Capital Strategies (1998), Case study: FI Group plc (London).

    43    Pendleton A, McDonald J, Robinson A and Wilson N (1996), "Employee participation and corporate governance in employee-owned firms", Work, Employment & Society, vol 10 (2), pp.205-226.

    44    Coopey J and Hartley J (1991), "Reconsidering the case for organisational commitment", Human Resource Management Journal, vol 1 (3), pp.18-32.

    45    Poole and Jenkins, see note 37, above, pp.15-16.

    46    Makin P, Cooper C and Cox C (1996), Organisations and the psychological contract (British Psychological Society, Leicester), p.80.

    47    Rosen C, Klein K J and Young K M (1985), Employee ownership in America: the equity solution (Heath, Lexington).

    48    Goldstein S (1978), "Employee share ownership and motivation", Journal of Industrial Relations, September, pp.311-330.

    49    National Centre for Employee Ownership (1998), Incentive compensation for employee ownership companies (NCEO, Oakland).

    50    Financial Times, 27 January 1987.

    51    Financial Times, 5 May 1989.

    52    Poole and Jenkins, see note 37, above, p.64.

    53    Marchington M et al (1992), New developments in employee involvement, ED Research Series 2 (HMSO).

    54    CBI (1995), "Financial participation - CBI survey findings", Employment Affairs Report 64, June, pp.19-21.

    55    Wilson N, Cable J R and Peel M J (1990), "Quit rates and the impact of participation, profit-sharing and unionisation: empirical evidence from UK engineering firms", British Journal of Industrial Relations, vol 28 (2), July, pp. 197-213.

    56    National Centre for Employee Ownership (1998), An overview of ESOPs, stock options and employee ownership (NCEO, Oakland).

    57    "One year old and the UK Employee Ownership Index still powers ahead of the FTSE All-Share", Capital Strategies news release, 24 April 1998.

    58    Financial Times, 29 April 1998.

    59    "ESOPs fable becomes a reality", Management Today, November 1997; IRS (1998), "Employee-ownership is only part of the industrial relations strategy at United Airlines", IRS Employment Review, forthcoming.

    60    Hanson C and Watson R (1990), "Profit-sharing and company performance: some empirical evidence of the UK", in Jenkins G and Poole M (eds), New forms of ownership (Routledge, London).

    61    Maaløe E (1993), "How to become a successful worker-owner: a study of long-term individual change after employee buyouts", Economic and Industrial Democracy, vol 14, pp.133-148.

    62    Association of British Insurers (1995), Share option and profit sharing (ABI guidance notes).

    63    Quarrey M and Rosen C (1987), Employee ownership and corporate performance, Harvard Business Review, September-October.

    64    National Centre for Employee Ownership (1998), A statistical profile of employee ownership (NCEO, Oakland, California).

    65    People and companies; employee involvement in Britain (1989, Department of Employment, HMSO), pp.48-49.

    66    Price Waterhouse Corporate Register, March 1998.

    67    Kelly J and Kelly C (1991), "'Them and us': social psychology and 'the new industrial relations'", British Journal of Industrial Relations, vol 29 (1), p.39.

    68    "PepsiCo shares power and wealth with workers", Personnel Journal, June 1995, pp.42-49.

    69    IRS (1995), "A share in the firm", IRS Employment Review 589, August, pp.12-16.

    70    "PepsiCo shares power and wealth with workers", Personnel Journal, June 1995, pp.42-49.

    71    People and companies; employee involvement in Britain (1989, Department of Employment, HMSO), p.35.