Employee ownership, motivation and productivity A research report for Employees Direct from Birkbeck and The Work Foundation By Jonathan Michie, Christine Oughton and Yvonne Bennion November 2002 Page 2 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Contents About the authors/Acknowledgements Foreword, by Will Hutton Executive Summary 1. Introduction 2. Site visits and interviews 3. Follow-up surveys 4. Focus groups 5. Discussion and Conclusion References 3 4 5 6 10 18 21 30 33 Layout: Wyvern 21 Printing: JW Arrowsmith The Work Foundation.
Registered as a charity no: 290003 This issue first printed November 2002 ISBN 1-84373-003-0 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publishers. This publication may not be lent, resold, hired out or otherwise disposed of by way of trade in any form, binding or cover other than that in which is is published, without the prior consent of the publishers.
E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 3 About Employees Direct Employees Direct is a working party established in July 2001, following a report commissioned by Mutuo1 on how the government’s aim of enhancing productivity through the motivational effects of employee shareholding might best be realised. 2 Employees Direct brings together academics, practitioners and opinion formers.
Its intention is to report on the potential for employee shareholding to: first, play an active role in improving the corporate governance and accountability of firms second, to enhance employee motivation and productivity. This report has been commissioned to help inform this process. The Working Party members include Mutuo, the CBI, Job Ownership Ltd, the TUC, Unity Corporate Advisers, Cobbetts Solicitors, the Cooperative Bank, the UKCC, Balpa, Prospect, Birkbeck and The Work Foundation (formerly The Industrial Society). For more information see www. employees-direct. rg The research for this report has been undertaken for Employees Direct by staff from Birkbeck and The Work Foundation. The three authors are all members of the Employees Direct working party. Acknowledgements We are grateful to the companies and employees who arranged and participated in the site visits and interviews, and with the follow-up surveys and focus groups. We agreed not to name individuals or companies, so the thanks have to be anonymous. However, four of the companies – Coolkeeragh, Stagecoach, St Luke’s Communications and Tullis Russell – agreed to be named.
We are therefore very pleased to be able to thank from Stagecoach Derek Scott, the Company Secretary, and two bus drivers, Steve Linger and David Wheatcroft; from Tullis Russell the Chief Executive Fred Bowden, plus Gail Ellis, Pam Landells and Erik Priessman; and from Coolkeeragh Power Limited Micky Creswell, for arranging the site visit and interviews, and the subsequent focus group. ICOM, the federation of worker co-operatives, kindly provided contact details for their member companies, and several ICOM members allowed us to conduct follow-up surveys among their employees.
We are grateful, for variously providing material, discussions and advice, to Robin Blagburn of Unity Corporate Advisers; Professor Richard Freeman from Harvard University; Peter Hunt, Chief Executive of Mutuo; and John McGurk of Balpa. Yvonne Bennion would like to thank her colleagues Graham Houston, John Arbuckle, Stephanie Draper and Brooke Guenot for helping to set up and conduct the focus group meetings. Jonathan Michie and Christine Oughton would like to hank their colleagues at Birkbeck who assisted with this research, Michael Lee, Omiros Sarikas, Lee Shailer and Katie Wright. About the authors Jonathan Michie is the Sainsbury Professor of Management at Birkbeck, University of London. He has just completed a three-year research project on ‘workplace reorganisation, HRM and corporate performance’, led jointly with Professor David Guest, within the ESRC’s Future of Work programme. He is a Board member of Mutuo. Dr Christine Oughton is Reader in Management and Head of the Department of Management at Birkbeck, University of London.
She has recently completed a two-year research project on the impact of globalisation and technological innovation on growth and employment, funded by the European Commission, and also coordinates a regional innovation network funded by the DTI and The Work Foundation. Yvonne Bennion is a Policy Specialist at The Work Foundation (formerly The Industrial Society). She has been a board member of Job Ownership Research and is a member of the DTI Partnership Fund Assessment Panel. 1. Mutuo is a new publishing title belonging to Communicate Mutuality.
It is a partnership between organisations that wish to show the value and potential of the mutual sector to a modern society. You can find out more about Mutuo by visiting www. mutuo. co. uk 2. See Michie and Oughton (2001). Page 4 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Foreword Employee-owned companies exist for a variety of reasons, from the personal vision of an owner to management and employee buy-outs, a way out of family succession problems or employees responding to closure threats.
The evidence is that companies with high levels of employee ownership outperform others, and the government has demonstrated through the introduction of the Share Incentive Plan that it sees employee share ownership playing a significant part in its policy to increase the UK’s productivity. This interim report addresses the question of whether the government’s approach will bear fruit. The majority of companies may admire the track record of the best-known employee-owned businesses, but have never regarded employee ownership as more than marginal to their own practices.
Yet there is a fascination to know whether employee-owned businesses have the essence of a commitment and enhanced performance that is not otherwise accessible. These are risky times for shareholders, but there is no better time to put the spotlight on employee ownership. People are at the heart of the productivity challenge. The skills, flexibility and ability to adapt of workers are key components of broader economic performance. Creative, knowledge-rich, innovative, highly productive work requires a high trust, people-driven organisation.
The UK’s productivity balance sheet suggests that our businesses are failing to create such Will Hutton environments and to get the best out of the UK workforce. Employee ownership by definition challenges traditional management attitudes towards employees. At the very least it creates an expectation of achieving a genuine balance in the interests of the company and employees. This research shows that the interrelationship of sound employee involvement practices with employee ownership has a positive effect on motivation and performance.
It does not ignore the hard work necessary over time to achieve this, nor the disenchantment of employees when they cannot see employee ownership changing the company’s style or benefiting them directly. Employee ownership may imply collective practices but this does not always happen. The government’s new scheme, being based on tax incentives, is individualised. The report, however, makes a case for the collective voice of employee owners and shareholders being integral to realising the full potential of employee ownership and its potential contribution to productivity.
I appeal to the government to give urgent consideration to these interim findings. E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 5 Executive summary Raising productivity is a key government objective. Skills, motivation and commitment are vital to how productive people are at work. This is the context in which tax incentives were introduced for employee shareholding. Will it work? That is the question the report addresses. Chapter 1 discusses current research on the causal links, grouped within three categories.
First, the Chancellor assumes share ownership will be seen by employees as a financial incentive, leading them to be more committed and motivated. Research supports this, with a caveat that employees are aware that an increase in their individual effort at work will not have a significant enough impact. Any such effect would require increased effort from the workforce collectively. Second, the Chancellor assumes that increased commitment and motivation will lead to increased productivity and profitability.
There is a large body of literature supporting this. Third are additional effects to those assumed by the Chancellor, namely that share ownership may lead to employees having a collective voice, with a positive effect on commitment and motivation. In Chapter 2 the ‘qualitative’ links between these various factors – of share ownership, consultation and participation, motivation and commitment, and performance outcomes – are explored by interviewing management and employees from ten selected companies.
The businesses were as follows: the generation and supply of electricity (Coolkeeragh) a leading UK airline a leading business consultancy, IT and outsourcing company an independent Scottish papermaker (Tullis Russell) a partnership of fuel efficiency experts a national bus and rail company (Stagecoach – bus interests only) an advertising agency (St Luke’s Communications) a family-owned department store a telecommunications company a computing consultancy firm. Next, we wanted to explore further the motivational effects of employee share ownership by surveying companies where such policies had been pursued for some time.
Chapter 3 reports on a survey of ICOM member companies, the federation of worker cooperatives, followed up with a questionnaire to employees. We also followed up our interviews with the airline employees, receiving further responses from flight crew members. The ICOM survey and the airline employee responses provide Institutional reform There is much to be gained by companies pursuing policies for employee involvement, and in this context employee share ownership can play a significant role.
However, for this potential to be fully tapped, the government’s current policy initiative needs to be further developed to include the collective voice aspect as a key component. How government policy can best be developed in this area will be addressed by the Employees Direct working party in their Final Report, in January 2003. Feedback on this report is therefore welcome, to: Professor Jonathan Michie School of Management & Organisational Psychology Birkbeck, University of London Malet Street, London WC1E 7HX Email: j. [email protected] ac. k Telephone: 020 7631 6761 Fax: 020 7631 6769 support from both the employer and employee returns for a number of the links. To explore these qualitative relations in greater depth, we revisited seven of our ten companies to conduct focus group discussions with a wider range of employees, reported in Chapter 4. The government recognises that productivity gains are more likely when share schemes ‘are combined with modern management practices which promote active employee participation’. Our own interviews, surveys and focus group discussions reported in Chapters 2, 3 and 4 respectively support this view.
Within this framework of enhanced employee commitment and motivation, employee share ownership appears capable of playing an important role: employee share ownership may make it more likely that companies will introduce policies of participation and involvement such policies may be pursued more seriously by management against a backdrop of employee share ownership employees may take such policies more seriously within a context of employee share ownership if the employee shareholdings are pooled to create a collective voice, this will reinforce the above three processes such a collective voice may itself boost commitment/motivation the financial incentive requires the whole workforce to act, since one employee along cannot affect profits. This can work in the right culture. Page 6 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 1. Introduction Raising productivity in UK firms to match levels in other European countries and the US is a key objective of this government’s economic policy agenda. This is, of course, a major and long-standing issue.
There is a range of factors involved, each of which require action on a number of fronts. There are no simple solutions. Closing the productivity gap will require increased investment in research and development, capital and people, improved education and training, and a modernised, productive infrastructure including transport. The problem of short-termism in British industry needs to be resolved; and within companies continuous improvements are needed in management practice, corporate governance and organisational design. But as productivity is fundamentally about how productive people are at work, their skills, motivation and commitment are key. 1 training for their workforce.
Less commented on – in either academic literature or public policy discussions – is the fact that the payback from investment in product and process innovation depends crucially on the tacit knowledge accumulated by the workforce, so reduced labour turnover can increase the long-term payback from such investments. This effect may not only increase productivity and profitability, it may make the difference between the firm deciding whether or not to proceed with the proposed investment. There is a large amount of literature on both the theory and practice of these processes which will be touched on only briefly in this report,2 but what we need to try to test can be illustrated in simple terms along the lines depicted in Figure 1. Figure 1: Linkages from share ownership to organisational effects, impact on employees, and organisational outcomes
This is the context in which the government has introduced a number of new arrangements, including tax incentives in the 2000 and 2001 budgets, to encourage employee commitment through employee shareholding, with the aim of improving Britain’s productivity: ‘Share ownership offers employees a real stake in their company… I want, through targeted reform, to reward long-term commitment by employees. I want to encourage the new enterprise culture of teamwork in which everyone contributes and everyone benefits from success. ’ Gordon Brown, Chancellor of the Exchequer, 1999 budget speech Will this work? What is the theory behind it, and is there any evidence in support? These are the questions that the current report seeks to address.
The results suggest that in economic terms there is certainly a rich seam to be tapped here, and indeed that by further developing government policy in this area, still more could be achieved. We need to ascertain whether any of these causal arrows actually exist in the real world and if so, how significant they are. Reduced labour turnover 1. Share Ownership 2. Effects 3. Impact 4. Outcomes Increased productivity and profitability Employee Share ownership Financial incentives Motivation and commitment The evidence The theory The theory is that 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. There may be a further benefit, alluded to in the Chancellor’s comments, if greater commitment to the firm results in reduced labour turnover. This will make it more worthwhile for firms to invest in Capital Strategies produces an Employee Ownership Index (EOI) of the share prices of firms that have a ‘significant degree’ of employee share ownership. Over the period 1992–2000 this index outperformed the FTSE All-Share Index by 173%. What, though, are the causal mechanisms at work?
McNabb and Whitfield (1998), using the 1990 Workplace Industrial Relations Survey (WIRS) data, found financial participation positively related to financial performance. But they also show that strong interaction effects mean that the influence of financial participation schemes cannot be analysed independently of other types of 1. ‘On the most recent comparative measure of output per person employed, UK productivity was found to be around 39% below that of the USA, 15% below France and 7% below Germany. There is a whole host of reasons for the productivity gap, but with specific regard to the workplace the problem seems to be one of uneven application of effective manage- ment techniques and training and development opportunities. Philpott (2002, p 15). 2. Some of this literature was reported and discussed in Michie and Oughton (2001). See also Michie (2001). E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 7 employee participation schemes, and that the effects of problem-solving schemes, for example, are dependent on the linkage with a financial participation scheme, while downward communication tends to have a positive effect regardless. However, using the 1998 Workplace Employee Relations Survey (WERS) data, Addison and Belfield (2000) find different results, for example discerning no significant association between downward communication and firm performance.
McNabb and Whitfield (2000) confirm that the two datasets generate different results, concluding that while there are enduring links between employee participation and financial performance, the precise nature of these requires more careful investigation than has thus far been possible. Also using the 1998 WERS data, Conyon and Freeman (2001) found that firms and establishments with shared compensation arrangements perform better than other firms in productivity and financial performance. The stock price of firms with shared compensation practices also outperformed those of other firms. Conyon and Freeman (2001) then surveyed 1,518 UK listed companies and found that, of their 299 returns, those with approved profit sharing or all-employee share schemes outperformed the FTSE All Share index by 40%.
They also found that firms and establishments with some form of shared compensation, particularly those with deferred profit sharing and employee share ownership are more likely to establish formal communication and consultation channels with workers than other establishments. This raises the question of what is actually causing the improved performance; it may be through increased commitment and motivation, but what is causing this? Is it just the financial incentive, or is it the improved communication and consultation which appears to be associated with employee share ownership? Certainly there is a large body of literature suggesting that employee commitment and motivation can be enhanced through a range of progressive human resource management practices, including but not restricted to employee share ownership.
It may be that the key effect of employee share ownership on performance is through making it more likely that firms introduce these other HRM practices – of communication, involvement and participation. In addition, where such practices are pursued, the existence of employee share ownership may underpin and enhance the positive effect that these have on commitment and motivation, by increasing employees’ faith that such involvement and participation is genuine and long term. Surveying employee share ownership across the EU, Pendleton et al (2001) concluded that: ‘There is a relationship between financial participation arrangements and other forms of employee participation (direct and/or representative) – enterprises that have financial participation are more likely to also have other participation and communications arrangements in place.
This supports research findings that financial participation works best when it is integrated with other participative, information and consultation arrangements, for example, in supporting ‘high performance’ work organisations’ (p 5, emphasis in the original). The ‘collective voice’ aspect of participation at work has been found to have a significantly positive effect on motivation and commitment. Where this collective voice takes the form of an employee shareholding trust, this may again make the introduction of progressive HRM policies both more likely and more effective. These considerations introduce a number of additional causal links that need to be explored, as illustrated in Figure 2: Figure 2: Further links from share ownership to organisational outcomes 1. Share Ownership 2. Effects 3. Impact 4. Outcomes 1
Financial incentives 2 Employee share ownership 3 Collective voice 6 Involvement and participation 4 Motivation and commitment 8 11 9 5 Increased productivity and profitability 10 7 Reduced labour turnover The causal links can be grouped within three categories, the first two of which are being assumed by the Chancellor, and upon which his policy depends for its efficacy. The third category are the additional effects just described, which if found to have substance would suggest Page 8 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 that the Chancellor’s policy agenda in this area may have the potential for delivering more than he had hoped.
However, to benefit from these additional effects the policies themselves may need to be further developed. First, the Chancellor is assuming that employee share ownership will be seen by employees as representing a positive financial incentive (Arrow 1), and that this will lead them to be more committed and motivated (Arrow 2). The existing academic literature, as well as our own research, provides supporting evidence for both assumptions, with one caveat – namely, that employees are aware that an increase in their own individual effort at work will not have a significant enough impact on productivity and profitability to alter the dividend they receive on their shares, nor on the share price.
Any such effect requires increased commitment and effort from the workforce collectively – the sort of teamwork that the Chancellor refers to. Second, the Chancellor is assuming that increased commitment and motivation will lead to increased productivity and profitability, both directly through increased ‘effort’ (Arrow 5) and also indirectly through reducing labour turnover (Arrow 9) and hence increasing the payback that firms enjoy from investment, both in training and in new products and processes (Arrow 10), with a concomitant tendency for firms to increase such investments accordingly. 3 These links have been tested for in what might be termed the ‘High Commitment Work Systems’ literature.
As with any such statistical work on large datasets, measuring what are inevitably very different firms in changing circumstances, with managements and workforces that are not homogenous either within or between firms, the results from different studies differ, but most do find such a causal link from motivation to outcomes. That literature also tends to find a positive link from progressive HRM practices that encourage involvement and participation, through to increased motivation and commitment (Arrow 8). Thus there is a large body of literature already providing support for these links in the Figure 2 model. The third group of arrows are additional effects to those assumed by the Chancellor. Employee share ownership may lead to employees feeling that they have a collective voice in the company (Arrow 3). This feeling of having a collective voice may have a direct, positive effect on commitment and motivation (Arrow 4).
That collective voice may encourage the adoption of progressive HRM policies involving involvement and participation (Arrow 6). Employee share ownership itself may also make the adoption of such practices more likely (Arrow 7). Finally, and perhaps most important of all, the positive effect that involvement and participation policies have on motivation and commitment may be enhanced and made more effective and significant if they are underpinned by and combined with employee share ownership (Arrow 11 – ie, enhancing Arrow 8). The interviews, surveys and focus groups reported on seek to shed light on how important managers and employees believe any of these effects to have been.
The existing literature Before turning to these interviews and focus groups, we will put them in context by reporting on the academic research addressing these questions. Grouping the effects into their three categories, there is evidence to support the Chancellor’s view that financial participation is positively related to financial performance (McNabb and Whitfield, 1998). As also reported above, that work does suggest that these factors are inextricably linked to other types of employee participation schemes,. This supports the broader view we have sketched, whereby different progressive HRM policies may reinforce each other and indeed be linked causally.
This is related to another finding from the ‘High Commitment Work Systems’ literature, that the effect of introducing progressive HRM policies may depend on how these are combined (or ‘bundled’). There are both theoretical reasons and empirical evidence for believing that such practices may be more than the sum of their parts if implemented appropriately. Conversely, pursuing one or more policies may be a waste of effort if other symbiotic policies are not also being implemented. It may be a waste of resources to train an employee if they don’t have the motivation to contribute, or if there is not the appropriate work organisation to allow them to make a greater contribution. Likewise, motivation itself may be insufficient if other factors are not in place.
As regards the second grouping of effects, of participation and involvement on motivation and commitment, and from there to increased productivity and profitability, the bulk of the research to date has been in the US, and on manufacturing. That work generally finds significantly positive linkages. 4 The work in the UK, using the 1990 Workplace Industrial Relations Survey (WIRS) and 1998 Workplace Employee Relations Survey (WERS) datasets has found similarly posi- 3. The idea that the future of work would mean ‘flexibility’ in the form of reduced tenure, increased turnover,‘portfolio’ working and the rest has increasingly been seen to be superficial, not grounded in any serious analysis or research, and misleading as a guide to policy; see the welcome statements to this effect from the Minister for Trade and Industry and, for report of the relevant research from the ESRC’s Future of Work programme, Nolan (2002). 4. See, for example, Appelbaum et al (2000) which also refers to much of the previous literature (as do most of the other papers cited in the footnotes that follow). E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 9 tive linkages to outcomes,5 including on increased innovation. 6 However, there are limits to how much those datasets can reveal. Drawing upon data from a ten-year study of over a hundred small and medium-sized manufacturing enterprises in the UK, Patterson et al (1997) found that HRM practices were the most powerful predictors of company performance.
Conducting our own surveys, we also found significantly positive linkages, particularly with innovation as an outcome, and with the causal links sketched above seeming to correctly describe the underlying processes at work. However, our latest survey 7 studies indicate the importance of firm-level employee relations, human resource policies, and other circumstances. ’ Kruse and Blasi report that there has been little study of the salient organisational mechanisms that might help explain the actual connection between employee ownership and performance. They call for further research on complementary HRM policies and practices, and ESOPs, which might jointly produce positive effects on corporate performance. Logue and Yates (2001) discuss much of the existing (US) literature, and also analyse survey data.
They argue that there are, potentially, strong positive links from collective employee shareholding to corporate outcomes, but only where these are combined with policies of participation and involvement. For the UK, Conyon and Freeman (2001) analysed the 1998 WERS data, linking the financial performance and labour productivity of each establishment to the percentage of non-managerial workers covered by the Inland Revenue-approved employee ownership schemes. Their analysis took account of differences in number of employees, age of establishment, industry, distribution of workforce by skill and gender, and the degree of competition in the sector. The relationship between employee share ownership and economic performance (financial performance and labour productivity) was found to be positive. inds rather mixed results when looking at productivity and profitability, with the regression coefficients on many of the links shown in Figure 2 not being statistically significant. 8 The ‘third group’ of effects might lead to a greater boost to productivity as a result of government policy than would be forthcoming from the simple ‘financial incentive’ mechanism alone, at least if those policies were developed to capture these additional benefits. Here the existing literature is weakest. Whether the existence of employee share ownership will lead to employees feeling that they have a collective voice will depend on whether the shares are held collectively in a trust or some other such arrangement.
The literature does suggest that a collective holding may encourage a teamwork culture and a co-operative company spirit that would deliver productivity benefits which would not follow from individual employee share holding because of the ‘free rider’ problem (ie, where individual effort and reward cannot be clearly identified and where to improve productivity and hence financial return requires a collective rather than just an individual effort (Conyon and Freeman, 2001)). 9 Quantitative and qualitative research These quantitative studies, analysing large datasets, are inevitably limited to the questions asked in the surveys and the quality of the responses given.
The WIRS and WERS datasets are impressive in scope, but are of limited use in attempting to go beyond testing for the sorts of statistical correlations reported above. To discover the causal mechanisms, in order to design policies that can take advantage of these, requires an exploration of people’s motivations and behaviour. This requires an interactive process whereby responses can be questioned and explored – ie, interviews and discussion. The existing quantitative work reported above was therefore built on in the current project by asking both managers and employees about motivations, attitudes and behaviour in the workplace. This was done first by visiting a number of workplaces, described in Chapter 2.
We also conducted our own surveys, primarily among companies already committed to the idea of employee ownership, to test whether the preconceptions of the individuals concerned had been borne out in practice. Finally, as reported in Chapter 4, we revisited most of the workplaces to conduct focus group discussions with selected groups of employees. In 1987, the US General Accounting Office study found that Employee Stock Ownership Plans (ESOPs) had an inconclusive impact on outcomes, except when employee ownership was coupled with employee participation in management decision making (GAO, 1987, pp. 30–31) – ie, the link depicted by Arrow 11 (the enhanced Arrow 8). Since then research findings have suggested a more positive link.
Kruse and Blasi (1995) review ‘the accumulated evidence concerning the prevalence, causes, and effects of employee ownership, covering 25 studies of employee attitudes and behaviours, and 27 studies of productivity and profitability (with both cross-sectional and pre/post comparisons)’. They find that:‘Perceived participation in decisions is not in itself automatically increased through employee ownership, but may interact positively with employ
In case you have a similar assignment feel free to ASK FOR HELP. Generally, essayproresearchers.com has the best academic writers with extensive experience in handling diverse types of orders including case studies, argumentative essays, PowerPoint presentations, admission essays, blog articles, market research, thesis, project proposal, literature review, among other forms of writing.