How effective are financial participation schemes?

FINANCIAL PARTICIPATION

How effective are financial participation schemes?

Does sharing the prosperity of an organisation with employees really make them more productive? A new research study by the Institute for Employment Studies looks at the evidence.

What is financial participation?

The underlying principle of financial participation schemes is astonishingly simple: a part of employees' remuneration should be linked to profitability and staff should have some financial stake in the ownership of the business for which they work.

As IES points out, in essence there are three main types of scheme:

• Profit sharing — a proportion of remuneration is tied to the profits of the organisation for the year.
  

• Employee share ownership — employees are rewarded with a tranche of shares in the employing company.

• Share options — employees are given the opportunity to buy at a future date a set number of shares at an initially agreed price.

Why introduce financial participation?

Introducing financial participation focuses on the holy trinity of motivation, performance and commitment. Schemes aim to:

• increase employee involvement in the business
  

• generate greater workforce commitment

• enhance contribution to the business and a sense of responsibility

• align the interests of employees with those of shareholders

• give staff a direct interest in the financial performance of their company.

How effective are schemes?

The IES researchers decided to find out how effective financial participation schemes actually are. According to their reading of the literature these schemes can be associated with improved productivity and more positive employee attitudes.

But the authors conclude: The problem in this situation is establishing cause and effect, and the direction of causality.

• Does financial participation have an impact on business performance?

  Several major empirical studies have shown a positive association between financial participation and business performance. — The Institute for Employment Studies.

• Does financial participation affect employee attitudes, motivation and commitment?

  On balance, employee financial participation is seen to encourage strongly both intrinsic employee commitment (stemming from participation, security, job satisfaction) and extrinsic commitment (stemming from pay and other instrumental reward). The effects are never direct, however, and are strongly influenced by environmental factors. — The Institute for Employment Studies.

Peter Reilly, principal research fellow at IES and co-author of the report, said:

It may be that already successful companies with the money to invest in these schemes are merely supporting success rather than stimulating further success. Or it could be that such approaches are simply a part of wider employee-centred practices that together create the benefits.

Drawbacks

Whilst there are clearly benefits from financial participation, the IES review discovered a number of downsides:

Even good ideas can be implemented badly.

Over-centralised reward schemes can seem remote to local situations.

Some schemes can lead to short-term or narrow management targets and detract from the big picture.

Making share payment conditional on acceptable behaviour has on occasions turned the carrot into a stick.

Schemes that work too well can lock too many staff in.

Want to know more?

Title: A share of the spoils: employee financial participation, by P Reilly, J Cummings and S Bevan, The Institute for Employment Studies.

Methodology: IES conducted an extensive review of the research evidence on employee financial participation, both from the UK and around the world. This was supported by discussions with the 27 major organisations in the IES Research Club.

Availability: Contact the IES in Brighton, tel: 01273 686751.

Take a look at the press notice and report summary at . . . www.employment-studies.co.uk/press/0106.html

To find out more about the IES, visit www.employment-studies.co.uk.