Companies with employee share schemes outperform rivals

FINANCIAL PARTICIPATION

Companies with employee share schemes outperform rivals

Shared compensation plans such as profit sharing, profit-related pay, SAYE schemes and share option plans can increase company performance by providing direct financial incentives to employees, although the effects vary between plans, according to research published by the US National Bureau of Economic Research. They are also associated with greater communication and consultation with employees.

The report by Martin Conyon, assistant professor of management at the Wharton School, and Richard Freeman, professor of economics at Harvard University and co-director of the Centre for Economic Performance at the LSE, adds to the growing body of evidence showing a positive link between company performance and employee share ownership.

Key findings

The researchers sifted through three large-scale data sets, seeking to discover whether UK companies that adopt employee share schemes perform better than others. These are the key findings:

• As many as half of workplaces in the UK have some form of shared compensation plan.
• Firms with such reward arrangements are more likely to establish formal communication and consultation channels than other establishments.
• Most tellingly, these firms tend to outperform establishments in productivity and financial performance.
• Companies with company share option or profit sharing schemes had much greater productivity compared with companies that did not.

Impact of employee share ownership on productivity, 1995-98

Inland Revenue scheme	Productivity effect
Profit sharing	17% higher
Company share option plan	12% higher
Profit-related pay	4% higher
SAYE	3% lower

Source: Martin Conyon and Richard Freeman, 2001.

Want to know more?

Title: Shared modes of compensation and firm performance: UK evidence , National Bureau of Economic Research, Working paper no. W8448, 2001, by Martin Conyon and Richard Freeman.

Methodology: The research examines the effect of Inland Revenue share schemes on company productivity, drawing on information from a number of data sets:

• a 1999 survey of share compensation plans used by a sample of 299 UK listed companies between 1995 and 1998
• the 1998 workplace employment relations survey (WERS), covering more than 2,000 UK establishments
• the 1990-98 longitudinal WERS panel survey of 882 workplaces.

Availability: Visit the National Bureau of Economic Research web site . . .

http://papers.nber.org/papers/W8448

Posted 1 March 2002