Stock options do not necessarily encourage workers

July 31, 2012

Free Market Foundation

Eight million U.S. workers participate in Employee Stock Ownership Plans (ESOPs) designed to link worker compensation to company performance. These plans include profit-sharing, stock options and gain sharing. The National Bureau of Economic Research finds that ESOPs are not, by themselves, capable of increasing worker performance: Stock options and profit sharing plans have mixed results.

According to NBER:

On average, there may be a 4 to 5 percent gain in productivity with the introduction of an ESOP, but there is a wide variation of results.

For example, employee ownership of United Airlines failed to prevent its bankruptcy.

In contrast, multiple forms of employee ownership and profit sharing at Science application International Corp. have led to its continued success.

NBER analyses data from a survey of employees and managers in 11 relatively small ESOP firms over the period 1996 to 2002. NBER constructed an index of human resource policies, determining whether employees felt valued and productive. Their results show:

The size of the stake of all employees in an ESOP company had no impact on performance.

Performance improves if workers perceive they are being treated fairly, have good supervision, and have input and influence in the firm.

However, if ESOP was used as a tool to create a better work environment, then workplace performance increased.

NBER conclude that ESOPs are only one tool in the arsenal of human relations.

Source: David R. Francis, Motivating Employees with Stock and Involvement, NBER Digest, May 2004; based upon Douglas Kruse et al., Motivating Employee-Owners in ESOP Firms: Human Resource Policies and Company Performance, National Bureau of Economic Research, Working Paper, No. 10177, December 2003.

For text http://www.nber.org/digest/may04/w10177.html

For abstract http://papers.nber.org/papers/w10177

For more on Economic Issueshttp://www.ncpa.org/iss/eco/

FMF Policy Bulletin/12 October 2004