FINANCIAL PARTICIPATION
Share schemes require urgent reform
The government has demonstrated through its launch of the share incentive plan (SIP) and generous tax breaks for companies introducing employee share schemes that it sees equity ownership playing a significant part in closing the UK's productivity gap with other industrialised countries. But does giving employees a stake in the business really make a difference? New research by the Work Foundation and Birkbeck, University of London warns that public money may be being squandered because the chancellor's tax subsidised schemes discourage collective participation.
Tax boost to share ownership
Over a series of Budgets, Gordon Brown, the chancellor of the exchequer, has unveiled a raft of measures aimed at encouraging employee share ownership. The theory is simple: owning shares will provide employees with financial incentives that will make them more committed to the organisation and more motivated at work. If the company is more profitable, employees will gain financially through dividend payments and an increased share price. Greater motivation will have a direct effect in improving productivity through greater effort and possibly innovation.
Employee share ownership must be coupled with participation mechanisms
The authors of the report, Jonathan Michie and Christine Oughton, both of Birkbeck and the Work Foundation's Yvonne Bennion, found persuasive evidence that management practices that succeed in creating a sense of commitment do appear to improve performance.
But the most obvious conclusion to emerge from their research is that employee share ownership schemes with tax subsidies are being introduced that do little or nothing to enhance commitment or boost productivity.
In short, employee ownership on its own makes little difference to performance. It has to coupled with participative styles of management. The researchers discovered that a combination of sound employee involvement practices and employee ownership may ultimately have a beneficial effect on motivation and performance. Companies with high levels of employee ownership and representative partcipation invariably outperform others.
Collective participation
The report makes a strong case for the "collective voice" of employee workers and shareholders being integral to realising the full potential of employee ownership. As the researchers point out, the effort of any one employee can hardly be expected to alter corporate profitability. The effort needs to be collective.
So, if employee shareholdings are pooled to create a collective voice this may itself boost employees' commitment and motivation. The researchers discovered that when employee share ownership was seen to represent a collective voice, so that employees thought they really did have a say, and where that ownership was combined with consultation and participation, then employees and employers reported both improved motivation and productivity.
Institutional reform required
Yet this collective voice is not encouraged in Inland Revenue-approved schemes. The government's new scheme is "individualised", so the researchers reckon it will not deliver productivity gains because it discourages collective participation.
The report concludes that reform is needed if the chancellor's tax-favoured employee share ownership schemes are to deliver higher commitment and motivation and hence improved productivity.
A final word
"Practices which promote active employee participation are vital, and indeed that, without this, employee share ownership may have no beneficial performance outcomes whatsoever. Both managers and employees repeatedly made it clear that they would not expect employee ownership to have any effect on productivity unless it was combined with policies of participation and involvement to boost commitment and motivation. And indeed that, in cases where this combination had not been achieved, neither had the hoped-for performance outcomes." - Jonathan Michie, Christine Oughton and Yvonne Bennion.
Want to know more?
Title: Employees Direct Report, by Jonathan Michie, Christine Oughton and Yvonne Bennion, November 2002.
Methodology: The research is based on three main source of information:
Availability: Contact the Work Foundation, 3 Carlton House Terrace, London SW1Y 5DG, tel: 020 7004 7100 or visit www.theworkfoundation.com.
Employees Direct is a working party established in July 2001, following a report commissioned by publishing title Mutuo on how the government’ s aim of enhancing productivity through the motivational effects of employee shareholding might best be realised.
It brings together academics, practitioners and opinion formers. Its intention is to report on the potential for employee shareholding to:
Working party members include Mutuo, Confederation of British Industry, Job Ownership Ltd, Trades Union Congress, Unity Corporate Advisers, Cobbetts Solicitors, the Co-operative Bank, the UKCC, Balpa, Prospect, Birkbeck and the Work Foundation (formerly the Industrial Society).
For more information visit www.employees-direct.org.
Posted 17 January 2003