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Broad-based Employee Stock Options in US 'New Economy' Firms
Abstract
This paper compares the performance of 229 'New Economy' firms offering broad-based stock options to that of their non-stock option counterparts. A simple comparison of these firms reveals that the former have higher shareholder returns, Tobin's "q" and new knowledge generation. Multivariate analysis using panel data also suggests that the adoption of a stock option plan results in higher levels of value added per employee. However, we do not find evidence that these plans result in superior growth in Tobin's "q" or new knowledge generation. Copyright Blackwell Publishers Ltd/London School of Economics 2002.
... This has implications as well for non-direct forms of compensation. A recent compensation trend common to many new entrepreneurial ventures (especially technology-based ventures) is to award key personnel stock options in lieu of more direct forms of compensation (e.g. higher salary) (Sesil et al., 2002). Undoubtedly, the objective here is to provide extrinsic motivation without increasing the direct labor costs of the firm (Sesil et al., 2002). ...
... A recent compensation trend common to many new entrepreneurial ventures (especially technology-based ventures) is to award key personnel stock options in lieu of more direct forms of compensation (e.g. higher salary) (Sesil et al., 2002). Undoubtedly, the objective here is to provide extrinsic motivation without increasing the direct labor costs of the firm (Sesil et al., 2002). The challenge, however, is that while stock options may not directly increase a venture's labor costs, they do, in most cases, dilute the value of a firm's equity, thereby potentially decreasing returns for investors (Sesil et al., 2002). ...
... Undoubtedly, the objective here is to provide extrinsic motivation without increasing the direct labor costs of the firm (Sesil et al., 2002). The challenge, however, is that while stock options may not directly increase a venture's labor costs, they do, in most cases, dilute the value of a firm's equity, thereby potentially decreasing returns for investors (Sesil et al., 2002). Thus, future-oriented compensation, such as stock options, to elicit citizenship behaviors indirectly incurs costs to the new venture. ...
Purpose
The authors advance a model theorizing how new ventures elicit citizenship behaviors to cultivate dynamic capabilities that help bolster survival in their nascent years of operations—a characteristically resource-scarce and turbulent context.
Design/methodology/approach
Drawing on and integrating research on citizenship behaviors with dynamic capabilities, the authors develop a theory that new ventures that are better able to evoke a combination of affiliative and challenging citizenship behaviors from their wider entrepreneurial team (i.e. internal, and external stakeholders) are more adept at mitigating the liabilities of smallness and newness. As these behaviors are spontaneous and not explicitly remunerated, new ventures become stronger at utilizing their limited resource base for remaining lean and agile. Further, key boundary conditions are theorized that the sociocultural norms the venture is embedded within serve to heighten/attenuate the degree to which entrepreneurs can effectively cultivate dynamic capabilities from their team's “extra mile” behaviors.
Findings
The propositions extend a rich body of research on citizenship behaviors into the new venture domain. As all new ventures face the challenge of overcoming liabilities of newness, models that help understand why some are more adept at overcoming this and why others fail, hold substantive practical utility.
Originality/value
This research is the first to unpack how citizenship behaviors manifest among an extended range of stakeholders traditionally overlooked in new venture teams research and the mechanism for how this links to venture survival.
... American "New Economy" companies (Sesil, Kroumova, Blasi, & Kruse, 2002), and especially for companies with outside block shareholders and investor effects (Conte, Blasi, Kruse, & Jampani, 1996). Specifically, O'Boyle et al. (2016) conducted a metaanalysis of 102 samples representing 56,984 firms and found a small, but positive and statistically significant relationship to firm performance. ...
... If we extend the theory from managers to employees, a similar logic could be applied, that is, broad-based EO would entitle employees with both worker and shareholder identities. This dual role will help reduce the agency cost by strengthening inside supervision and mitigating information asymmetry; therefore, firm performance could be enhanced (Sesil et al., 2002). Following this logic, scholars have empirically tested the positive impact of EO on firm performance (e.g., Sesil et al., 2002;Wu & Su, 2008). ...
... This dual role will help reduce the agency cost by strengthening inside supervision and mitigating information asymmetry; therefore, firm performance could be enhanced (Sesil et al., 2002). Following this logic, scholars have empirically tested the positive impact of EO on firm performance (e.g., Sesil et al., 2002;Wu & Su, 2008). ...
Research linking broad‐based employee stock ownership (BESO) with firm performance continues to receive considerable attention both in and outside the field of management. Despite the evidence being generally positive regarding the BESO–firm performance relationship, there has been a relative dearth of research providing insights into the circumstances surrounding the effectiveness of BESO. With this research gap in mind, we formulated and launched this special issue. This guest editor introduction begins with a look at the research on this topic, followed by a brief discussion of each article accepted for publication. We conclude by highlighting the major themes from the collective contributions of the articles and share insights regarding future research in this growing research domain.
... A majority of the research focuses on the outcomes of EO. The research has generally shown that EO is linked to higher performance, on average (Conte & Tannenbaum, 1978;Han, 2002;Kruse, 1992;O'Patel, & Gonzalez-Mulé, 2016;Richter & Schrader, 2017), even for American "New Economy" companies (Sesil, Kroumova, Blasi, & Kruse, 2002), and especially for companies with outside block shareholders (Park & Song, 1995) and investor effects (Conte, Blasi, Kruse, & Jampani, 1996). Specifically, O'Boyle et al. (2016) conducted a metaanalysis of 102 samples representing 56,984 firms and found a small, but positive and statistically significant relationship to firm performance. ...
... If we extend the theory from managers to employees, a similar logic could be applied, that is, broad-based EO would entitle employees with both worker and shareholder identities. This dual role will help reduce the agency cost by strengthening inside supervision and mitigating information asymmetry; therefore, firm performance could be enhanced (Sesil et al., 2002). Following this logic, scholars have empirically tested the positive impact of EO on firm performance (e.g., Sesil et al., 2002;Wu & Su, 2008). ...
... This dual role will help reduce the agency cost by strengthening inside supervision and mitigating information asymmetry; therefore, firm performance could be enhanced (Sesil et al., 2002). Following this logic, scholars have empirically tested the positive impact of EO on firm performance (e.g., Sesil et al., 2002;Wu & Su, 2008). ...
Employee ownership (EO) has gained increasingly significant attention from both business practitioners and policy makers in China. Through the examination of the implementation of EO by China's listed firms from 1992 to 2017 with a total of 3,396 firms and 36,559 firm‐year observations, we explored the relationship between EO implementation and firm performance. In general, we found that over time, EO firms outperform non‐EO firms in China, and the influence of EO is only different in nuanced aspect in different time periods according to the change of policies. The data from the most recent period, that is, 2014–2017, indicate that EO adopters have higher performance than matched non‐EO firms both before and after adoption, but the relative performance does not increase after adoption. We further examined the interactive effect between EO and executive stock ownership (ESO) schemes and found that the adoption of ESO weakens the positive relationship between EO and firm performance. Regarding different types of EO, we found lower performance in companies with high return rights but no control rights, and we found better performance when high return rights are combined with control rights. We suggested policy and managerial implications on the basis of the findings.
... Broad-based stock options and ESOPs are both associated with improved financial outcomes (Kaarsemaker, Pendleton, & Poutsma, 2009;Kruse, 1992;, higher productivity (Kruse, 1992;Sesil, Kroumova, Blasi, & Kruse, 2002;, increased innovation (Chang, Fu, Low, & Zhang, 2015), and more employee empowerment (Blasi, Freeman, & Kruse, 2016). Announcing such plans has short-term market benefits (C.-Y. ...
... Broad-based stock options and ESOPs intended outcomes. Equity-based PFP schemes, such as broad-based stock options and ESOPs, follow agency theory predictions, similar to perspectives on TMT PFP (Sesil et al., 2002), in that firms seek to improve firm performance through aligning shareholder interests with those of a larger number of employees (Brandes et al., 2003). These pay strategies also attempt to encourage employee risk taking (Brandes et al., 2003) and instill a sense of firm ownership (Chi & Han, 2008). ...
... Broad-based stock options and ESOPs are associated with higher employee empowerment (Blasi et al., 2016), and firms with broad-based stock options tend to outperform their competitors (Gerhart & Milkovich, 1990). The effects seem to be driven by employee productivity gains, particularly when PFP is available to most employees (Sesil et al., 2002). Furthermore, research has shown that ESOPs improve credit ratings (Lee, 2008). ...
Rewarding collective outcomes has become an increasingly important strategic motivational tool for driving collective success, reflecting the insight that paying employees for individual contributions does not always optimize performance in collective endeavors. Research into different types of collective pay for performance (PFP), or pay that is contingent on collective outcomes, has been studied in diverse academic fields (e.g., economics, strategy, psychology), but the compartmentalization between these academic disciplines hinders conceptual coordination. To advance this research and its related insights, this article provides a review of the theory and evidence pertaining to the relationships between different collective PFP types and collective outcomes. We also provide a meta-analysis that shows that collective PFP has desirable outcomes (e.g., meta-analysis shows an overall ρ = 0.11; p < .001), substantiating the value of studying collective PFP separately from individual PFP. The review also reveals a lack of empirical and theoretical development and highlights the need for a comprehensive theory of collective PFP. Our cross-disciplinary review of 106 empirical articles builds a foundation for advancing common pursuits, integrating knowledge, and creating theory. The consolidated perspectives point to promising directions for future research.
... Academic studies have discussed the motivations and consequences of implementing ESOPs. They provided evidence for not only the bright sides [8][9][10][11][12][13][14][15] but also the dark sides of ESOP [16][17][18][19][20]. Meanwhile, a number of problems relating to the planning and implementation of ESOP have surfaced in practice [1]. ...
... On the bright side, the literature emphasizes that the positive effects of employee ownership on corporate performance are primarily due to enhanced work attitudes [8,27]. In the long run, ESOP may improve corporate governance, promote innovation and productivity, decrease corporate financialization, and reduce the cost of equity capital [9][10][11][12][13][14]. Thus, the capital market reacts positively to the adoption of ESOP, and the announcement return is affected by the characteristics of ESOP, corporate financial performance, and corporate governance structure [28][29][30]. ...
Based on a sample of Employee Stock Ownership Plans announced by Chinese listed companies, this paper explores whether managers learn from the market in the decision relating to the termination of the Employee Stock Ownership Plan. Results show that: Managers listen to the market and terminate Employee Stock Ownership Plans following market expectations. The more negative the market reaction to the initial announcement, the more likely management is to terminate it, and this effect is more pronounced for firms with non-overconfident managers and in lower market share rank. Moreover, the initial announcement return is reversed by the termination announcement return. When managers follow market expectations to terminate the Employee Stock Ownership Plan with a negative market reaction to the initial announcement, the market reaction to the termination is more positive. Further research finds that compared with the terminations of Employee Stock Ownership Plans that are not consistent with market expectations, the terminations that follow market expectations improve business performance more significantly.
... Ryan and Wiggins(2002)는 스톡옵션의 부여로 기업이 성장하며, R&D 투자를 증대시키고 부채비율은 낮아진다고 하였다. Sesil et al.(2002) (정기웅, 2010). 특히, 성과연동형 스톡옵션 부여와 기업가치에 관한 연구 (김수정, 설원식, 2010), 우리사주제도(ESOP)와 기업가치의 관계와 관련한 연구 (박경서, 정찬식, 2010), 임원급여와 기업성과와의 관계 연구 (황선웅, 신우용, 2015), 경영자 보상과 기업가치에 관한 연구 (송동엽, 김영환, 2018) (Defusco et al., 1991;Mehran, 1995;Anderson et al., 2000;Ryan and Wiggins, 2002;Sesil et al., 2002;Core et al., 2003). ...
... Sesil et al.(2002) (정기웅, 2010). 특히, 성과연동형 스톡옵션 부여와 기업가치에 관한 연구 (김수정, 설원식, 2010), 우리사주제도(ESOP)와 기업가치의 관계와 관련한 연구 (박경서, 정찬식, 2010), 임원급여와 기업성과와의 관계 연구 (황선웅, 신우용, 2015), 경영자 보상과 기업가치에 관한 연구 (송동엽, 김영환, 2018) (Defusco et al., 1991;Mehran, 1995;Anderson et al., 2000;Ryan and Wiggins, 2002;Sesil et al., 2002;Core et al., 2003). ...
... Because employees can profit from company shares at a future price-net of the exercise price (which is usually the market price at the time of the stock option grant)-broad-based stock options (defined in this study as stock options granted to at least half the workforce, which is a widely used definition of "broadbased"; e.g., Sesil et al. 2002 andHochberg andLindsey 2010) will effectively create reward interdependence that motivates employees to maximally achieve the collective performance targets of the company during the vesting period (usually one to four years). After the vesting period, provided that the current stock price is higher than the exercise price, employees can exercise their options and sell the shares to profit from the difference. ...
... This was measured by a dummy variable that indicated whether at least 50% of existing employees received stock options in the culture audit survey. The majority coverage is a reasonable criterion for determining the inclusive adoption of stock options, because the majority coverage may reflect the possible, discontinuously stronger employee perception (versus the case of minority coverage) that stock options are widely available to most employees, and it has been popularly used by previous studies in both management and finance literatures (e.g., Sesil et al. 2002Sesil et al. , 2007Oyer andSchaefer 2005, Hochberg andLindsey 2010). ...
Despite substantial scholarly attention to workforce demographic diversity, existing research is limited in understanding whether or in what contexts firm-level racial diversity relates to performance and workforce outcomes of the firm. Drawing on social interdependence theory along with insights from social exchange and psychological ownership theories, we propose that the use of broad-based stock options granted to at least half the workforce creates the conditions supporting a positive relationship between workforce racial diversity and firm outcomes. We examine this proposition by analyzing panel data from 155 companies that applied for the “100 Best Companies to Work For” competition with responses from 109,314 employees over the five-year period from 2006 to 2010 (354 company-year observations). Findings revealed that racial diversity was positively related to subsequent firm financial performance and individual affective commitment and was not significantly associated with subsequent voluntary turnover rates, when accompanied by a firm’s adoption of broad-based stock options. However, under the nonuse of broad-based stock options, racial diversity was significantly related to higher voluntary turnover rates and lower employee affective commitment, with no financial performance gains. By documenting the beneficial effects of financial incentives in diverse workplaces, this paper extends theory asserting the value of incentives for performance.
... Core and Guay (2001) [12]credited stock options as a mechanism of motivating employees and improving firm value. Sesil, Kroumova, Blasi, and Kruse (2002) [53]pointed out that issuance stock options by the new economy firms (i.e., software, hightechnology manufacturing, pharmaceuticals and semiconductor) results in better performance. On similar lines, Ittner, Lambert, and Larcker (2003) [27] too, evidenced that new economy firms (i.e., telecommunications, computer, software and Internet) have been increasingly making use of esops in their compensation plans; higher than the companies from traditional sectors and thus showing enhanced performance post issuing stock options. ...
... Core and Guay (2001) [12]credited stock options as a mechanism of motivating employees and improving firm value. Sesil, Kroumova, Blasi, and Kruse (2002) [53]pointed out that issuance stock options by the new economy firms (i.e., software, hightechnology manufacturing, pharmaceuticals and semiconductor) results in better performance. On similar lines, Ittner, Lambert, and Larcker (2003) [27] too, evidenced that new economy firms (i.e., telecommunications, computer, software and Internet) have been increasingly making use of esops in their compensation plans; higher than the companies from traditional sectors and thus showing enhanced performance post issuing stock options. ...
... Most early studies indicate that the implementation of ESOPs has the potential to significantly enhance corporate performance [23]. However, several studies have identified that ESOPs have no discernible impact on corporate performance [24], while a few studies have also reported a negative impact of ESOPs on corporate performance [25]. ...
The determination of the capital structure is a critical component of a company’s financial decision-making process. The question of how to optimize a firm’s capital structure to increase its value has been a significant topic of interest within the financial community. The employee stock ownership plan (ESOP) has developed rapidly in China’s capital market over the past decade, providing a suitable context for studying the impact of employee equity incentives on capital structure decisions. This paper employs cross-sectional ordinary least squares regression models and unbalanced panel fixed effect models to investigate the impact of employee stock ownership plans (ESOPs) on firms’ capital structure decisions. The analysis is conducted on a sample of Chinese A-share listed companies on the Shanghai and Shenzhen Stock Exchanges. The research considers both static capital structure choice and dynamic capital structure adjustment. We find that the implementation of an ESOP reduces the level of corporate debt and accelerates the dynamic adjustment of capital structure, suggesting that employee equity incentives play a role in optimizing firms’ capital structure decisions. We also find that the impact of ESOPs on the dynamic adjustment of capital structure is asymmetric. Specifically, the implementation of ESOPs markedly accelerates the downward adjustment of capital structure, yet has no impact on the upward adjustment of capital structure. Further analysis demonstrates that the impact of ESOPs on capital structure decisions is contingent upon the macroeconomic environment, industry characteristics, corporate governance, and ESOP contract designs. First, the optimization of ESOPs on capital structure decisions is more pronounced in an economic boom environment, in a poor market climate, or in competitive industries. Second, the reduction effect of ESOPs on corporate debt is more pronounced in non-state-owned companies, high-tech companies and those with lower ownership concentration. In contrast, the acceleration effect of ESOPs on capital structure adjustment is more pronounced in state-owned companies, non-high-tech companies and those with higher ownership concentration. Ultimately, ESOPs financed by loans from a firm’s major shareholders—or with a longer lock-up period, smaller shareholding size or executive subscription ratio—demonstrate a more pronounced optimization effect on capital structure decisions. This paper not only contributes to the existing literature on the relationship between equity incentives and capital structure decisions, but also provides guidance for listed companies on the reasonable design of their ESOPs and the optimization of their capital structure decisions.
... (2) Performance consequences. Most of the early studies find a positive impact of ESOP on corporate performance [43][44][45], while some studies find no correlation between ESOP and corporate performance [46], and a few studies find a negative impact of ESOP on corporate performance [47]. In recent years, based on ESOP in the new era in China, scholars have reexamined the relationship between ESOP and corporate performance and also found contradictory conclusions. ...
Enterprise innovation is a key driver of national economic growth. How to stimulate employees’ innovation vitality to improve the company’s innovation input and output has always been a hot topic. Employee Stock Ownership Plan (ESOP) is one of the effective means to stimulate employees’ innovation vitality by linking employee wealth with firm value. The purpose of this paper is to examine the effect of ESOP implementation and contract design on enterprise innovation investment in the context of the recent booming development of ESOP in China. First, we use a treatment effect model to examine the impact of ESOP implementation on innovation investment, taking firms that implement ESOPs as the treatment group and firms that do not implement ESOPs as the control group. Second, we use multivariate regression models to test the impact of ESOP contract design (including fund source, stock source, lockup period, duration, shareholding scale, executive subscription ratio, participation degree, and management mode) on innovation investment using the treatment group. The results indicate that the implementation of ESOP is helpful in increasing enterprise innovation investment, and the impact of ESOP on innovation investment varies significantly with the design of incentive contracts.
... Hochberg and Lindsey [45] argued that the value of ESOPs as a group incentive plan is demonstrated by employees working together; this enhances cooperation among employees which can also lead to mutual monitoring among colleagues. Furthermore, Sesil et al. [46] argued that, owing to the complexity of the firm's mission, shareholders may not have the adequate conditions to monitor the decisions of managers and employees. However, employees may be better qualified than shareholders to monitor the quality of each other's contributions at work. ...
Few studies have discussed the relationship between employee stock ownership plans (ESOPs) and corporate social responsibility (CSR). Using a sample of 895 A-share public firms in China, this research examines the effects of ESOPs on CSR, and the moderating effects of wedge structure and firm size on this relationship. This research mainly used the OLS model to test the research hypotheses, and all regressions were performed in Stata15. The results show that the ESOPs of Chinese public firms provide external economic incentives and internal psychological incentives for employees, increase their motivation to engage in CSR activities, and ultimately contribute to CSR. At the same time, this research finds that this relationship is stronger for firms without wedge structure and small firms. This research provides insights for understanding the relationship between ESOPs and CSR and has important managerial implications for firms to pay attention to the interests of employees to achieve sustainable development.
... Several existing literatures support the view that the executive stock options enhance corporate performance and productivity. They advocated that the stock-based incentive plans improve mutual monitoring, retain talented executives and bring quality employees to the organization (Kim & Ouimet, 2014;Hochberg & Lindsey, 2010;Oyer, 2004;Ittner et al., 2003;Sesil et al., 2002, Jones & Kato, 1995Lazear, 1986). The findings of Sesil et al. (2001) show that those American companies issue ESOPs, perform better than their industry peer companies. ...
The study attempts to investigate the effect of employee stock option plans (ESOPs) on the financial performance of Indian non-finance companies. The study employed the quantile regression (QR) model to examine the effect of ESOP on the financial performance of sample companies. The empirical findings suggest that the effect of equity-based payment is positive at the higher performance levels. This indicates that the firms adopted stock-based compensation schemes in their early stage of growth may cause a declining financial performance in compared to the matured firms. Moreover, the findings indicate that the industry plays a significant role in deciding the equity-based compensation and depict a positive impact of ESOP on firm performance. The employee based compensation is also found to be positively associated with the company performance, while the performance is measured through market measures. The findings may be attributed due to the direct linkage of equity-based option schemes to the market performance measures.
... Kruse suggests that only the most profitable and most productive firms offer profit-sharing schemes to align both the firms' and the workers' interests, and through this alignment to reach new, higher levels of profitability and market share. Sesil et al. (2002) study 229 US major New Technology firms (like pharmaceuticals, semiconductors etc.) that offer broad-based profit-sharing schemes. Comparing to their rivals that do not offer profit-sharing schemes, those firms' productivity increases by 4%, total shareholder returns increase by 2%, and profit level increases by 14%. ...
en We study the incentives of firms and unions to bargain over a profit-sharing scheme in a unionized differentiated goods Cournot oligopoly. Under both firm-specific unions and a sector-wide union, universal profit-sharing arises in equilibrium as long as the bargaining power of the union(s) is not too high. Universal profit-sharing is more prevalent under coordinated than under decentralized bargaining. Under decentralized bargaining, a hybrid regime may arise in equilibrium in which ex ante symmetric firms use different remuneration schemes and become ex post asymmetric in the market. Our welfare analysis suggests that policy-makers should institutionalize decentralized bargaining and encourage profit-sharing schemes.
Résumé
fr Participation stratégique aux bénéfices dans un oligopole syndicalisé avec biens différenciés. Dans un oligopole de Cournot avec biens différenciés, nous évaluons l’intérêt que peuvent avoir les entreprises et les syndicats à négocier un régime de participation aux bénéfices. Que l’on soit en présence de plusieurs syndicats spécifiques aux entreprises ou d’un seul syndicat spécifique à tout un secteur, le partage universel des bénéfices représente un équilibre tant que le pouvoir du ou des syndicats n’est pas trop important. Lorsque les négociations sont coordonnées, le partage universel des bénéfices est plus fréquent que lorsque les négociations sont décentralisées. Dans le cadre de négociations décentralisées, un régime hybride peut émerger et offrir un équilibre au sein duquel les entreprises symétriques ex-ante peuvent utiliser différents systèmes de rémunération et ainsi devenir asymétriques ex-post sur le marché. En matière de bien-être, notre analyse suggère que les décideurs politiques devraient institutionnaliser les négociations décentralisées et encourager les régimes de participation aux bénéfices.
... Although such a dummy variable is widely used in employee ownership research, the effectiveness of employee ownership varies depending on its extensiveness, for example, the number of employee owners 6 The numbers in the below slopes tests indicate the slope numbers in Figure Third, while we controlled for HPWP in Study 1, we could not control for other variables more relevant to employee ownership. For example, stock options are another form of shared capitalism similar to employee ownership, and they also influence firm productivity (e.g., Hanlon, Rajgopal, & Shevlin, 2003;Sesil, Kroumova, Blasi, & Kruse, 2002). As another example, executive ownership is related to firm productivity (Connelly, Hoskisson, Tihanyi, & Certo, 2010), and it may signal the future of the firm and influence the degree of employee ownership. ...
Many studies have examined the relationship between employee ownership and firm productivity. However, research is lacking on how this relationship is strengthened or weakened by environmental characteristics. This is a critical oversight in the employee ownership literature because industry characteristics can significantly influence employees’ expected gains from their firm ownership. Thus, based on agency theory and expectancy theory, we develop a multilevel contingency model of employee ownership with industry growth and instability as boundary conditions. We test the proposed model with a sample of 573 firms in South Korea (Study 1: 1,415 firm years) and a sample of 892 firms in 28 European countries (Study 2: 4,768 firm years). In both studies, we find that employee ownership does not significantly contribute to firm productivity on its own. However, we find a significant three-way interaction effect of employee ownership, industry growth, and industry instability on firm productivity. Specifically, employee ownership is most effective at improving firm productivity when both industry growth and industry instability are high. We discuss the theoretical and practical implications of the findings.
... Firm performance. 1 We used three performance indicators. Following past research (e.g., Sesil et al. 2002), we used value added per employee (VAD), which was measured as the log of 1 To avoid dropping firms with zero or negative performance value before the logarithm from our sample, we shifted all non-log performance values to the positive side by adding a constant, and then performed the logarithm. We added 8060, 1, and 8136 to VAD, sales per employee, and gross margin per employee, respectively to have the lowest values sales minus cost of goods sold plus labor expenses [numerator] divided by the total number of employees [denominator]. ...
Did publicly traded European firms with employee ownership (EO) realize higher firm performance during or after the Great Recession? Contributing to the growing interest in exploring the association between EO and firm performance during and after the 2008 economic crisis, we draw on a longitudinal sample of 4,259 firm‐years representing 892 publicly traded firms from 28 European countries. The results show that compared to firms without EO, those with EO experienced higher firm performance during or after the recession, albeit with small effect size. Consistent with past findings, we found that firms with EO were less likely to lower their employee count during or after the recession. Findings are robust to controlling for contemporaneous endogeneity and alternate specifications. Our results indicate that publicly traded European firms with EO, on average, realized higher firm performance in the face of the Great Recession.
... Another view is that there is ample evidence to prove that employee ownership has positive effects such as optimizing management, boosting revenue, motivating employees, attracting investment, and stimulating innovation (e.g., Chang, Fu, Low, & Zhang, 2015;Cheng & Hua, 2016;Sesil, Kroumova, Blasi, & Kruse, 2002;Sun, Zhang, & Zhou, 2017;Wang, Dai, & Kong, 2017;Zabojnik, 2014). The proportion of employee stocks should be determined by the contribution of the employees rather than by their positions to prevent ordinary employees from holding a proportion of stocks that is too low (Zhang & Hu, 2015). ...
We examine the optimal proportion of employee stocks in two kinds of duopoly markets: The first market includes two mixed‐ownership state‐owned enterprises (SOEs), and the second market includes one mixed‐ownership SOE and one private enterprise. We introduce the particularities of employee stock ownership plans in SOEs in China to the subjective function and cost function. We find that partial holding, full holding, or non‐holding can be optimal, and the optimal proportion depends on the types of rival firms, the efficiency gap in different kinds of shares, and employee behavioral tendencies. Moreover, the optimal proportion of employee stocks is subject to external institutional environment.
... Numerous literature reveals that incentives programs help facilitate reciprocal observing (Hochberg and Lindsey, 2010;Jones and Kato, 1995;Kim and Ouimet, 2014;Sesil et al., 2002) entice high caliber personnel (Lazear, 1986) and also maintain value personnel (Ittner et al., 2003;Oyer, 2004). Other literature investigates the impact of the stock option on managing incentives, and the majority of the equity incentive plan that concentrates on whether stock option enhances manger"s appetite about risk. ...
This paper examined the effects of the managerial stock options of the listed Chinese firms on the firm performance. Based on our knowledge, it is the first empirical evidence describing the market"s reaction of stock option implementation in China. The results revealed that the firm performance was influenced by working machinery and external factors. One of the factors was a stock option that has a significant negative impact on firm performance; however, the level of impact decreases year by year in a long-term. In addition, the study showed that duality CEO and board size also have a significant negative impact on the performance of the firms but the independent boards and state-ownership positively increase firm performance. Moreover, there was a little impact of the international financial crisis on firm performance in Chinese stock markets during 2007-2009 was uncovered.
... In economic theories of employee ownership alignment of principal agent relationship is suggested as a benefit of employee ownership Sesil et al., 2002) which is in their mutual benefits. Employee ownership is discussed under different names and forms (Kaarsemaker et al., 2010) which would be surprising if it had similar effects. ...
In Islamic law, al-syuf’ah affords the co-proprietors of undivided shares in a property the preferential right to purchase the shares of other co- proprietors before the shares can be offered to outsiders. In the context of Malaysian land law, the study on al-syuf’ah has its own significance as it is closely related to the concept of co-proprietorship of land (CPL) under the National Land Code, 1965 (NLC). It is well known that many issues are confronting the CPL. Most of the problems accrue from unhealthy relationships among the owners which then develop into developmental and economical aspects of the land. On the above facts, this study examines the potential of al-syuf’ah in addressing these problems as well as the possibility of employing the rules of al-syuf’ah alongside the country’s land law. To undertake the research, the data is collected from the library-based literature which then analysed using inductive, deductive as well as comparative methods. The study finds that there are leeways that allow for the implementation of the rules of al-syuf’ah alongside the existing land law. The rules of al-syuf’ah if implemented would be able to solve some of the existing problems and to prevent the problems from recurring in the future.
... In economic theories of employee ownership alignment of principal agent relationship is suggested as a benefit of employee ownership Sesil et al., 2002) which is in their mutual benefits. Employee ownership is discussed under different names and forms (Kaarsemaker et al., 2010) which would be surprising if it had similar effects. ...
The paper examines the mediation impact of employee loyalty in the relationship of employee ownership and financial performance of state-owned entities of Pakistan. Employee ownership is measured as percentage holding in state-owned entities, and financial performance is assessed trough profitability ratios; net profit margin and return on assets. Employee loyalty is determined through questionnaire circulated among the employees covered under the scheme. Meanwhile, secondary data is collected from already published sources. The study reveals that employee loyalty partially mediates the impact of employee ownership on the financial performance, which will support the policy makers to design corporate policies.
... This paper is not a new empirical study. Recent empirical findings on employee ownership in the US have been presented on employee ownership in general Sesil et al., 2002;Kruse and Blasi, 2000) and on broad-based stock options (Sesil et al., , 2001bBlasi et al., 2000). The most up-to-date analysis is in a forthcoming book by two of the authors (Blasi et al., 2003). ...
The United States has developed a varied and widespread employee ownership sector. This sector has two distinct sub-sectors, the public stock market and small privately-held firms. There is a significant gap in the incidence and development of employee ownership between the European Union (EU) and the US when both sectors are examined. Socioeconmic system differences between the EU and the US suggests that EU employee ownership will be more likely to develop if the EU expands citizen participation in its public stock markets and creates legislative support for selling smaller family businesses to employees. Second, US employee ownership is deficient in direct employee participation in corporate governance. If employees are to have reasonable rights to protect their investment risk, the US will have to converge with the EU in terms of its appreciation of the co-determination rights of workers. The development of employee ownership in the US can be better understood by appreciating the subtleties of how the argument that ownership causes superior performance of employee owned firms is presented. Most employee ownership firms will use the pull model of employee ownership where the firm never makes the extreme commitments of cultural transformation that are necessary to drive better corporate performance. We expect that the push model of employee ownership will continue to be the basis of a more “utopian” image of employee ownership. The pull model of employee ownership is based on the notion that the structure of compensation has changed in modern society and corporations are increasingly looking for ways to provide modest fix wage commitments and pay AFTER performance has taken place. The collapse of the fixed wage system plays a key role in the emergence of employee ownership in the US. Research on the wealth effects of employee ownership supports the perception that employee ownership firms are more generous. It is only this evidence that creates the basis of broad public support of the idea. This last observation helps explain why employee ownership has become so popular in the United States despite the fact that it violates a common precept of investment, namely, that a diversified basket of investments are the most rational market investment. Too much US employee ownership was “bogus employee ownership” based on workers purchasing stock with their savings. To the extent the EU wants to learn about employee ownership from the US, it should not imitate these mistakes.
... There is also an extensive empirical literature on the usage and the effects of profitsharing schemes. Sesil et al. (2002) study 229 US major New Technology firms (pharmaceuticals, semiconductors etc.) that offer broad-based profit-sharing schemes. Comparing to their rivals that do not offer PS, those firms' productivity increases by 4%, total shareholder returns increase by 2%, and profit level increases by 14%. ...
... There is an increasing body of research which shows that stock options are associated with greater firm performance when broadly distributed to employees (Core/Guay 2001;Gerhart/Milkovich 1990;Ittner/Lambert/Larcker 2003;. Much of this research, however, focuses on the use of broad-based stock options in high-technology industries, where they may play a special role encouraging knowledge-sharing and promoting innovation (Ittner et al., 2003;Sesil et al. 2002). The extent to which broadbased stock options have effects among other types of firms remains unknown. ...
... A number of studies suggest that stock option plan may enhance firm value. For example, Sesil, Kroumova, Blasi and Kruse (2002) report that U.S. corporations that provide stock options are likely to enhance productivity, accounting performance and market returns, even though it does not automatically improve the outcome. Hillegeist and Penalva (2004) also report the effect of stock option plans on performance using a variety of performance measures target groups during the period 1996 to 1999 and find a positive relationship across the sample. ...
... ABS data show that from 1979 to 2004 the percentage of employees receiving shares as an employment benefit increased from 1.3 per cent to 5.9 per cent 11 Australian Taxation Office (2015) https://www.ato.gov.au/General/Employee-share-schemes/ 12 Treasury (2015) 13 Australian Taxation Office (2015) https://www.ato.gov.au/General/Employee-share-schemes/Indetail/Key-ESS-changes-in-detail/ 14 Guest et al. (2000); Conyon & Freeman (2001); Black & Lynch (2004); Sesil et al. (2002);Sesil et al. (2004); ; Jana & Petr (2013) 15 Kroumova & Sesil (2006); Chang et al. (2015) 16 Michie & Sheehan (1999a&b;2003b); Sesil et al. (2004);Chang et al. (2015) This data series has been discontinued since 2009. Australian empirical research into the link between employee share ownership, employee turnover and productivity is limited. ...
... Indeed, Table 1 shows that the definition of total compensation that boards of directors had to determine CEO compensation has started to include long-term incentives in 2000, when the most comprehensive definition of total compensation changed from total cash (salary + annual bonus) to total direct compensation (salary + annual bonus + long-term incentives). This coincides with the pinnacle of the dotcom bubble where many companies from the so-called "new economy" started to provide long-term incentives to a broad population of employees, essentially through stock option plans (Oyer & Schaefer, 2005;Sesil et al., 2002). This has certainly forced boards of companies from the "old economy" to consider long-term incentives more consistently for competitive purposes, hence the rigorous apparition of long-term incentive data in the survey and the soaring number of compensation statistics. ...
This paper draws from a unique database spanning over 35 years of Canadian CEOs’ compensation to explore
the interplay among: the information available to boards of directors of Canadian companies for making
executive pay decisions, the Canadian business environment, and the compensation that Canadian CEOs
received. We find a very strong correlation between Canadian CEOs’ compensation and the amount of
information on CEO compensation available to boards of directors. We further note that the evolution of the
Canadian business environment has shaped the information produced and made available to boards of directors
regarding CEO compensation.
Research Question/Issue
The allocation of return and control rights to employees has been somewhat overlooked in governance literature, but it has garnered interest from scholars across various fields. Our analysis of five decades of research integrates and juxtaposes theory and evidence from three independent yet intertwined domains: employee ownership, financial participation, and decision‐making. Our work synthesizes an extensive body of past and current findings and introduces a multilevel contingency framework to formulate novel theoretical, methodological, and contextual remedies.
Research Findings/Insights
We conducted a multilevel analysis of 184 articles published in reputable journals. Our results reveal complementary and substitutive relationships between employee financial participation and decision‐making and show that various contextual variables operating at different levels (i.e., individual, company and country) jointly impact employees behaviors and firm outcomes. Our findings help explain the mixed or ambiguous results of previous studies and offer novel theoretical and methodological pathways for future research.
Theoretical/Academic Implications
Our study invites scholars to further investigate the antecedents and consequences of employee ownership, financial participation and decision‐making. Specifically, we recommend adopting theories and methods that illuminate the complex nature of the employee ownership construct, develop a multilevel understanding of the phenomenon, and analyze the moderating effects of various contextual variables.
Practitioner/Policy Implications
Insights from our review can assist practitioners and policymakers in designing plans that allocate either one or both of ownership rights to employees, enhancing their understanding of the role and impact of diverse contextual factors operating at various levels.
While the compressed workweek (CWW) has gained traction in recent years, its impact on firms' financial performance is not well understood. This study addresses this gap in the literature by examining the effect of the CWW on shareholder value. Drawing on social exchange theory and its norm of reciprocity, we introduce a conceptual model on the main effect of the CWW on shareholder value, and the moderating roles of the anticipated type and degree of employee reciprocation. To test the model's predictions, we exploit the announcement of Belgium's mandatory adoption of a CWW in February 2022 as the setting for a policy event study analysis. We find positive average stock price reactions of Belgian listed firms to the CWW's announcement, consistent with investors expecting the CWW to result in favorable employee reciprocation. Stock price reactions are more positive for firms with a lower ex ante employee productivity, suggesting employees are predicted to reciprocate with higher efforts. Stock price reactions are also more positive for firms with a higher reliance on knowledge workers, consistent with these employees deriving a greater utility from flexible working arrangements. Robustness tests, including a placebo analysis and an event study of international firms with Belgian subsidiaries, corroborate our results. Our study offers several theoretical contributions and has practical implications for HR managers and policymakers.
We examine the sorting role of broad-based equity pay using detailed employee-level data. We propose trust in management as an important characteristic over which equity pay sorts employees, as such pay typically leaves employees with concentrated positions in employer stock and therefore more exposed to the outcomes of management’s actions. Consistent with this conjecture, we find that the relation between employees’ perceptions of management’s credibility and voluntary turnover intentions is significantly stronger in the presence of a broad-based equity plan. Our findings provide insight into how broad-based equity pay can improve firm performance despite theoretical challenges regarding its incentive effects.
This paper was accepted by Suraj Srinivasan, accounting.
This study constructs an oligopoly model in public utilities sector to explore the optimal privatisation policy and the factors affecting equilibrium outcomes and explores the optimal proportion of state-owned shares. We also offer empirical evidence of China’s public utilities from 1985 to 2019 to prove the applicability of model results. The results show that, depending on product differentiation, cost variance, technical level, nationalisation, partial or full privatisation can be optimal. Improving capital efficiency increases social welfare in Model PP, but not in Model PS. Product differentiation improves social welfare at the expense of profits in SS model. In Model PM, technical improvements boost private enterprise profits but induce a decrement in social welfare. A high proportion of state-owned shares fail to improve social welfare in Model SM. In a word, the value range of parameters and competition modes in public utilities sector affect market players’ welfare distribution, which identifies with the empirical analysis of China’s public utilities development.
Purpose
The purpose of this paper is to give an updated overview of the research on employee ownership. What does the scientific literature reveal about advantages and disadvantages? What can be learned from different models used in Italy, France, Mondragon (Spain), UK and US with many employee-owned firms in contrast to Denmark.
Design/methodology/approach
A structured review of the literature on employee. The paper identifies different mechanisms leading to effects on productivity, job stability, distribution, investment etc., and reviews the empirical evidence. The main barriers and drivers are identified and different models for employee ownership in Italy, France, Mondragon (Spain), UK and US are reviewed to identify potential models for a country like Denmark with few employee-owned firms.
Findings
The article gives an overview over the theoretical predictions and the main empirical evidence of the effects of employee ownership. The pros are greater employee identification with the firm and increased productivity reinforced by increased participation. Employee-owned firms have more equal distribution of wages and more stable employment, and they have greater mutual control between employees and fewer middle managers. The motivation effects may be smaller for large firms and lack of capital may lead to lower levels of investments and capital per employee.
Originality/value
Comprehensive and updated literature review on the effects and successful formats of employee ownership to identify models for implementation in countries with few employee-owned firms.
Using the pension database obtained from Form 5500 from 2000 to 2014, we provide the first comprehensive analysis of the determinants of employee ownership in retirement pension plans. By investigating various motivations simultaneously using the horse racing method, we find that firms with higher idiosyncratic risk, weak governance, a greater marginal tax rate, and greater union intensity are more likely to offer employee ownership. This study provides valuable insights to investors that they should properly understand the impact of employee ownership on the firm and appropriately evaluate firms with employee ownership by taking into account diverse motives.
This study examine earnings management behavior related to compensation in the form of stock options during implementation of the grant program (vesting period). The study also examine and identify the differences in behavior during the execution of stock options. Companies as a sample in this study is a company listed in the Indonesia Stock Exchange, which has adopted the Executive Stock Option Plan and restricted to the companies that publish financial statements as of December 31 for the year 2007 to 2009. Final sample of this research into as many as 21 sample companies and the number of observations are 63 observational studies. The result of testing H1 shows that the more stock options offered to employees, the managers more motivated to manage earnings down prior to offering stock options. The results are consistent with previous studies of the behavior of managers who expect the share price decline before the date of grant, so the manager to pay compensation for stock options with a relatively cheap price. The results of testing H2a and H2b show that the more stock options offered to employees, the managers more motivated to manage earnings upward after offering stock options. Results show that an early stage implementation of executive stock option plans, executives trend to behave increasing income until vesting period final
Purpose
This study aims to disclose how the nature of corporate ownership, stock efficiency and wage level affect the optimal proportion of employee stock.
Design/methodology/approach
This paper studies three duopoly markets: two private enterprises, two state-owned enterprises (SOEs) and a private enterprise and an SOE. The competitions between the two parties are taken as a two-stage dynamic sequential game and studied through back-induction.
Findings
The results reveal that the enterprise ownership has a directly bearing on the optimal proportion of employee stock and determines whether to implement the employee stock ownership plan (ESOP) and the specific level of the plan. The optimal proportion of employee stock is positively correlated with its contribution to enterprise efficiency. There are many influencing factors on the effect of wage level on the optimal proportion of employee stock, namely, the ownership nature of ESOP implementer and efficiency difference of different nature stocks.
Social implications
The results of this study provide policy recommendations for companies preparing to implement ESOP.
Originality/value
The research findings provide policy implications for enterprises to prepare a suitable ESOP and the reform of national equities, especially the mixed-ownership reform in China.
During its tenure as the leader of the United States, the Obama administration promoted the
country’s participation in the Paris Agreement and enacted the Clean Power Plan. However, under the
Trump administration, the U.S. has withdrawn from the Paris Agreement and plans to defund the
Clean Power Plan.
Established against the backdrop of the increasing attention that the United Nations (UN),
climate summits, and the media are paying to the role that anthropogenic CO2 emissions play in the
greenhouse effect, global warming, and extreme climates, the Paris Agreement is the first
multinational treaty aimed at addressing global warming. However, debate over the existence of
global warming is still ongoing. A total of 31,487 U.S. scientists (9,029 of whom have PhDs) have
signed the Oregon Petition to demand that the U.S. government reject global warming agreements,
and the International Conference on Climate Change (ICCC) has identified numerous studies that
show no direct link between CO2 emissions and global temperature increases.
Despite the consensus in the employee share ownership (ESO) literature for the need to explore contexts that influence ESO outcomes, studies examining two important factors, national context and status of the economy, are limited. In this study, the authors compare the outcomes of ESOs in Britain and South Korea during economic expansion and downturn. The results demonstrate that, during an economic expansion, the effect of ESOs in increasing employee commitment is stronger in South Korea, while their effect in decreasing employee turnover is stronger in Britain. However, during an economic downturn, the authors find no evidence for these effects in both societies. The findings lend support to the contingency perspective in managing ESOs and provide meaningful implications and guidance to the literature.
The wide‐spread use of rank and file equity‐based compensation suggests that executives believe that rank and file employees can affect firm outcomes, and some research supports this view. If equity‐based incentives influence rank and file employees’ productive efforts, they might also influence their earnings management decisions. We find that increases in rank and file employees’ option‐based compensation—our proxy for equity‐based compensation—are associated with increases in earnings management and that this relation is attributable to real activities (as opposed to accrual) earnings management. Cross‐sectional tests indicate that the relation is stronger when rank and file option compensation is likely to generate greater performance incentives and attenuated in the presence of more intense monitoring. Finally, we explore the role of cash constraints and overvaluation as potential alternative explanations for this relation and find that neither accounts for our results. This article is protected by copyright. All rights reserved
Résumé Les stock-options sont devenues une composante essentielle de la rémunération des dirigeants en France. Cette étude dresse, pour la période allant de 1997 à 2003, un bilan de l’usage de cette rémunération très controversée au sein des sociétés incluses dans le SBF 120 et compare son adoption au sein des sociétés de la haute technologie et des télécommunications par rapport aux autres sociétés. L’analyse des pratiques d’attributions de stock-options au sein des sociétés cotées en France montre une hétérogénéité entre les entreprises et les industries. Par ailleurs, l’usage de cet outil de rémunération est plus important et prononcé au sein des sociétés dites de la « nouvelle économie ».
The company is a contract between the owner of the company (principal) and management (agent) which is called the agency relationship. In this connection, there is often a conflict of interest. One of the principal ways to minimize differences in interests is to provide compensation to employees in the form of a share ownership program (ESOP). This study aims to determine the effect of giving ESOP on company performance and its implications for firm value. Samples obtained based on the purposive sampling method are 48 observations. Data collection uses non-participant observation methods. The data analysis technique used is path analysis. The results showed that ESOP had a positive effect on company performance, company performance had a positive effect on company value, ESOP had no effect on company value, and ESOP had an effect on firm value through company performance.
Keywords: Employee stock option plan, company performance, company value
This paper studies the agency problem between a firm and its research employees in a dynamic optimal contracting setting. We implement the optimal contract by a risky security, which can be created using the equity of the firm, and a sequence of performance-based holding requirements. This result provides a rationale for using performance-vested equity-based compensation in R&D-intensive start-up firms.
The onus of employee ownership towards organizational performance is growing among researchers and practitioners. This study examines the relationship between employee ownership and organizational performance, which is categorized in two segments; financial performance and productivity. Where, employee satisfaction has been identified as mediator of the relationship. Financial performance is measured through profitability ratios, and productivity is measured through average nominal productivity per person. The positive impact of employee ownership is reward for employees in financial terms, and right to participate in the decision making. Employees appraise, and feel contempt with the objects which belong to them. As most of the existing studies are based on developed countries, so this study is organized distinctively about the contribution of employee ownership in the developing countries like Pakistan, because this area has never been explored, therefore, this study is unique and one of its kind. The study proposes that; employee ownership positively impacts organizational performance, and work satisfaction mediates the relationship. Therefore, it can be argued confidently that insertion of employee ownership scheme in macroeconomic policies will also help to reduce the free rider problem and eventually will add to national productivity.
Purpose
The purpose of this paper is to provide novel and rigorous evidence on the productivity effect of varying attributes of performance-related pay (PRP) and shows that the details of PRP indeed matter.
Design/methodology/approach
In doing so, the authors exploit the panel nature of the Finnish Linked Employer–Employee Data on the details of PRP.
Findings
The authors first establish that the omitted variable bias is serious, which makes the cross-sectional estimates on the productivity effect of the details of PRP biased upward substantially. Relying on the fixed effect estimates that account for such bias, the authors find: (first, group incentive PRP is more potent in boosting enterprise productivity than individual incentive PRP; second, group incentive PRP with profitability as a performance measure is especially powerful in raising firm productivity; third, when a narrow measure (such as cost reduction) is already used, adding another narrow measure (such as quality improvement) yields no additional productivity gain; and fourth, PRP with greater power of incentives (the share of PRP in total compensation) results in greater productivity gains, and returns to power of incentives diminishes very slowly.
Originality/value
Much of the empirical literature on PRP focuses on a question of whether the firm can increase firm performance in general and enterprise productivity in particular by introducing PRP and if so, how much. However, not all PRP programs are created equal and PRP programs vary significantly in a variety of attributes. This paper provides novel and rigorous evidence on the productivity effect of varying attributes of PRP and shows that the details of PRP indeed matter.
Employee stock-ownership plans (ESOPs) offered by multinational enterprises (MNEs) present an attractive investment for employees. Puzzlingly, participation rates are often low, raising the question what drives ESOP participation on a global scale. Grounded in the knowledge-based view of expatriate research, we build on the notion of expatriates as implicit knowledge transferors within MNEs. We hypothesize a positive effect of expatriate ESOP participation on subsidiary-employee ESOP participation, which is even higher when a subsidiary-employee's distance toward the program and the firm is greater. Empirical results confirm our hypotheses suggesting that expatriates can be a mechanism to bridge the distance within MNEs.
This article seeks to: a) introduce new models of incentives, including those that completely solve the problems of “Back-dating” and “Re-pricing” of employee stock options and equity-based incentives; b) introduce new theories of unwarranted wealth-transfers and Disruption Costs inherent in the use of Equity-based Incentives (“EBIs”). Several recent detailed studies found that there is widespread ESO/EBI-related fraud and non-compliance, which could have damaging effects on public confidence in financial systems and increase market volatility.
While stock options have traditionally been reserved to top management employees, in recent years there has been strong growth of plans making stock options available to a broader group of employees. This paper analyses data on 490 companies with broad-based stock option plans, matched to data from Compustat in order to compare their characteristics and performance to that of other public companies. Major findings are that 1) companies with broad-based plans have higher levels of productivity, Tobin's Q, and employment and sales growth than otherwise-similar firms, 2) average compensation levels are higher among such companies both before and after the introduction of broad-based plans, indicating that stock options appear to come on top of other compensation, and 3) increases in average productivity appear to counterbalance the dilution effect so that average total shareholder returns are unaffected by the introduction of broad-based stock option plans.
To control risk-related incentive problems, equity holders are expected to manage both the convexity and slope of the relation between firm performance and managers’ wealth. I find stock options, but not common stockholdings, significantly increase the sensitivity of CEOs’ wealth to equity risk. Cross-sectionally, this sensitivity is positively related to firms’ investment opportunities. This result is consistent with managers receiving incentives to invest in risky projects when the potential loss from underinvestment in valuable risk-increasing projects is greatest. Firms’ stock-return volatility is positively related to the convexity provided to managers, suggesting convex incentive schemes influence investing and financing decisions.
Partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie. But in organizations of any significant size, the free-rider effects would seem to choke off any motivational forces. This analysis explores how peer pressure operates and how factors such as profit sharing, shame, guilt, norms, mutual monitoring, and empathy interact to create incentives in the firm. The argument that Japanese firms enjoy team spirit because compensation is linked to overall profitability is analyzed. An explanation for the prevalence of partnerships among individuals in similar occupations is provided. Copyright 1992 by University of Chicago Press.
This paper estimates the determinants of incentive schemes. Using Australian data, we analyze a relatively large variety of incentive systems (i.e., individual piece rates, workgroup performance bonuses, workplace level systems and profit sharing) using both the new economics of personnel and the literature on strategic choice to generate hypotheses. We find that monitoring issues, job security, product market competition, and the industrial relations climate rank among the most crucial determinants of incentive use, though this pattern varies across incentive schemes.
The authors report the first results for Japanese firms on the effects of employee stock-ownership plans (ESOPs) and bonuses by estimating production functions using new panel data. They find that the introduction of an ESOP will lead to a 4-5 percent increase in productivity; this productivity payoff takes three to four years. There is a modest productivity gain from the bonus system. The authors also find evidence that the productivity effect of bonuses is enhanced by the existence of ESOPs, suggesting that ESOPs may create a climate conducive to profit-sharing by enhancing long-term commitment and peer monitoring. Copyright 1995 by American Economic Association.
The authors investigate the productivity effects of innovative employment practices using data from a sample of thirty-six homogeneous steel production lines owned by seventeen companies. The productivity regressions demonstrate that lines using a set of innovative work practices, which include incentive pay, teams, flexible job assignments, employment security, and training, achieve substantially higher levels of productivity than do lines with the more traditional approach, which includes narrow job definitions, strict work rules, and hourly pay with close supervision. Their results are consistent with recent theoretical models which stress the importance of complementarities among work practices. Copyright 1997 by American Economic Association.
According to some accounts, compensation practices have recently been undergoing marked changes, with an increasing number of firms said to be substituting lump-sum payments for regular pay increases, allowing for greater variability of remuneration across individuals or groups, and making greater use of profit sharing or stock options. Many of these practices are outside the scope of the typical measures of economywide compensation growth. Moreover, intensified use of these schemes ought to heighten the responsiveness of overall compensation costs to business conditions and could also, in theory, boost productivity. We find that the spreading use of these practices could be leading to an understatement of the annual growth rate of actual employment costs (relative to the published employment cost index) that is not insignificant--perhaps on the order of three-tenths of a percentage point currently. Moreover, the changes have apparently helped to increase the flexibility of pay both across time and across workers. In addition, by linking pay more closely to performance, the firms we contacted seemed to think that their employees were working more efficiently and with an eye to enhancing the "bottom line" of the company.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
This study compares the corporate performance in 1990/91 of two groups of public companies: those in which employees owned more than 5% of the company's stock, and all others. The results of the analysis, which looks at profitability, productivity, and compensation, are consistent with neither negative nor highly positive views of employee ownership, but where differences are found, they are favorable to companies with employee ownership, especially among companies of small size. The circumstances in which employee ownership was used - specifically, whether it was part of a wage/benefit concession package and whether it was involved in a takeover threat - do not appear to have had a significant effect on the 1990 performance levels or 1980-90 performance growth of the firms. Although the authors caution that the data do not permit clear tests of causality, these results are broadly consistent with those of past studies.
In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
A common view is that there is little correlation between firm performance and CEO pay. Using a new fifteen-year panel data set of CEOs in the largest, publicly traded U. S. companies, we document a strong relationship between firm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980, largely because of increases in stock option grants.
▪ Abstract This essay reviews research on the type and degree of fragmentation of firm ownership with an emphasis on the consequences of ownership organization for firm performance. We use a property rights approach to synthesize sociological, organizational, legal, and economic research that has examined the effect of ownership organization on firm performance. Agency theorists generally assume that shareholders are homogenous and that their influence on firm performance is directly proportional to the percentage of equity they hold. However, empirical research following this approach has failed to produce definitive evidence. Class analysis perspectives interpret these inconclusive results as demonstrating that, regardless of ownership organization, firms are run to serve the capitalist class. An alternative interpretation is that shareholders are not homogeneous but that certain types of shareholders use their formal authority, social influence, and expertise to “capture” property rights and strongly i...
This article assesses the theory and evidence for the adoption and use of financial participation. It reports finding of a comparison of the characteristics of workplaces with profit sharing, employee share schemes and those with no schemes at all, using data from WIRS3
The authors thank three anonymous referees for valuable comments and the Australian This paper estimates the determinants of incentive schemes. Using Australian data, we analyze a relatively large variety of incentive systems using both the new economics of personnel and the literature on strategic choice to generate hypotheses. We find that monitoring issues, job security, product market competition, and the industrial relations climate rank among the most crucial determinants of incentive use, though this pattern varies across incentive schemes. The Choice of Payment Schemes: Australian Establishment Data
Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and employee retention. We gather data from three sources on firms’ stock option grants to middle managers. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. We also conduct a cross-sectional regression analysis of firms’ option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.
This paper describes the exercise behavior of over 50,000 employees who hold longterm options on employer stock at eight corporations. Employees typically exercise options years before expiration, commonly sacrificing half of the Black-Scholes value. Exercise is strongly associated with recent stock price movements, the market-to-strike ratio, proximity to vesting dates, time to maturity, volatility, and the employee's level within the company. These findings have implications for compensation planners, the FASB as it develops a new accounting standard for options, and financial statement users and preparers who apply and interpret the new FASB standard.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
Profit and equity sharing benefit some firms through improvements in innovation, production quality, retention of key employees and specific human capital formation. The analysis predicts high share contract incidence in the high tech sector, a hypothesis supported by survey data collected from small and large high tech firms. However, externalities associated with this sector's market entry mechanism imply that the optimal level of profit and equity sharing may not have been achieved.
A common view is that there is little correlation between firm performance and CEO pay. Using a new fifteen-year panel data set of CEOs in the largest, publicly traded U.S. companies, we document a strong relationship between firm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980, largely because of increases in stock option grants. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
This study compares the corporate performance in 1990/91 of two groups of public companies: those in which employees owned more than 5% of the company's stock, and all others. The results of the analysis, which looks at profitability, productivity, and compensation, are consistent with neither negative nor highly positive views of employee ownership, but where differences are found, they are favorable to companies with employee ownership, especially among companies of small size. The circumstances in which employee ownership was used-specifically, whether it was part of a wage/benefit concession package and whether it was involved in a takeover threat-do not appear to have had a significant effect on the 1990 performance levels or 1980-90 performance growth of the firms. Although the authors caution that the data do not permit clear tests of causality, these results are broadly consistent with those of past studies. (Abstract courtesy JSTOR.)
According to some accounts, compensation practices have recently been undergoing marked changes, with an increasing number of firms said to be substituting lump-sum payments for regular pay increases, allowing for greater variability of remuneration across individuals or groups, and making greater use of profit sharing or stock options. Many of these practices are outside the scope of the typical measures of economy-wide compensation growth. Moreover, intensified use of these schemes ought to heighten the responsiveness of overall compensation costs to business conditions and could also, in theory, boost productivity. We find that the spreading use of these practices could be leading to an understatement of the annual growth rate of actual employment costs (relative to the published employment cost index) that is not insignificant--perhaps on the order of three-tenths of a percentage point currently. Moreover, the changes have apparently helped to increase the flexibility of pay both across time and across workers. In addition, by linking pay more closely to performance, the firms we contacted seemed to think that their employees were working more efficiently and with an eye to enhancing the "bottom line" of the company.
This paper examines the relationship between common stock and option holdings of managers and the choice of investment and financing decisions by firms. The authors find support for the hypothesis of a positive relationship between the security holdings of managers and the changes in firm variance and in financial leverage. This conclusion is based on samples of acquiring and divesting firms. The findings are consistent with the hypothesis that executive security holdings have a role in reducing agency problems.
The New Economy Index : Understanding America's Economic Transformation
- R D Atkinson
- R H Court
Atkinson, R. D. and Court, R. H. (1998). The New Economy Index : Understanding
America's Economic Transformation. Washington : Progressive Policy Institute.
Managerial incentives and corporate investment and financing decisionsHigh-performance work systems : giving workers a stake The New Relationship
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Profit Sharing: Does it Make a Difference? Upjohn Institute for Employment ResearchEmployee ownership, employee attitudes, and firm performance: a review of the evidence
- D Kruse
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Kruse, D. (1993). Profit Sharing: Does it Make a Difference? Kalamazoo, Mich.: W. E. Upjohn Institute for Employment Research. — and Blasi, J. (1997). 'Employee ownership, employee attitudes, and firm performance: a review of the evidence'. In D. Lewin, D. Mitchell and M. Zaidi (eds.), Handbook of Human Resources, Greenwich, Conn.: JAI Press, pp. 113–41.
Current Practices in Stock Option Plan Design
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- E Carberry
- S Rodrick
Weeden, R., Carberry, E. and Rodrick, S. (1998). Current Practices in Stock Option
Plan Design. Oakland, Cal. : National Center for Employee Ownership.
Strategies for High Performance Organizations: Employee Involvement, TQM, and Reengineering Programs in Fortune 1000 Corporations
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- G E Ledford
- Jr
Lawler, E., Mohrman, S. A. and Ledford. G. E., Jr (1998). Strategies for High Performance Organizations: Employee Involvement, TQM, and Reengineering Programs in Fortune 1000 Corporations. San Francisco: Jossey-Bass.
The impact of employee involvement and group incentives in UK high technology establishments
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Sesil, J. (1999). `The impact of employee involvement and group incentives in UK
high technology establishments'. In R. Oakey, W. During and S.-M. Mukhtar
(eds.), New Technology-Based Firms in the 1990s. New York : Pergamon, pp. 298-308.
Sharing ownership via employee stock ownership' . World Institute for Development Economics Research (WIDER) Discussion Paper no
- D Kruse
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Kruse, D. and Blasi, J. (2001). `Sharing ownership via employee stock ownership'.
World Institute for Development Economics Research (WIDER) Discussion
Paper no. 2001/25, United Nations University.
Intangibles : Management, Measurement and Reporting
- B Lev
Lev, B. (2001). Intangibles : Management, Measurement and Reporting. Washington :
Brookings Institution.
National Association of Stock Plan Professionals 1996: NASPP Stock Plan Design Survey Report. Concord, Cal.: National Association of Stock Plan Professionals Is There is a New Economy
- London
London: Prentice-Hall International. National Association of Stock Plan Professionals (1997). 1996: NASPP Stock Plan Design Survey Report. Concord, Cal.: National Association of Stock Plan Professionals. Organisation for Economic Co-operation and Development (2000). Is There is a New Economy? First Report on the OECD Growth Project. Paris: OECD.
High-performance work systems: giving workers a stake The New Relationship: Human Capital in the American Corporation
- E Appelbaum
- P Berg
Appelbaum, E. and Berg, P. (2000). 'High-performance work systems: giving workers a stake'. In M. M. Blair and T. A. Kochan (eds.), The New Relationship: Human Capital in the American Corporation. Washington: Brookings Institution, pp. 102–44.
Stock Options, Corporate, and Organizational Change. Oakland, Cal.: National Center for Employee OwnershipMotivation and control in the Mondragon experiment
- — Kruse
- D Sesil
- J Kroumova
- M Carberry
- E Bradley
- K Gelb
— Kruse, D., Sesil, J., Kroumova, M. and Carberry, E. (2000). Stock Options, Corporate, and Organizational Change. Oakland, Cal.: National Center for Employee Ownership. Bradley, K. and Gelb, A. (1981). 'Motivation and control in the Mondragon experiment'. British Journal of Industrial Relations, 19: 211–31.
Evaluating ESOPS, Profit-Sharing and Gainshairing Plans in US Industries: Effects on Worker and Company Performance
- L A Bell
- D Kruse
Bell, L. A. and Kruse, D. (1995). Evaluating ESOPS, Profit-Sharing and Gainshairing
Plans in US Industries: Effects on Worker and Company Performance. Washington:
Office of the American Workplace, US Department of Labor.
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Annual Review of Sociology, 25: 121–44.
The HR Scorecard: Linking People, Strategy and Performance
- B Becker
- M Huselid
- D Ulrich
Becker, B., Huselid, M. and Ulrich, D. (2001). The HR Scorecard: Linking People,
Strategy and Performance. Boston, Mass. : Harvard Business School Press.
Stock Options, Corporate, and Organizational Change
- D Kruse
- J Sesil
- M Kroumova
- E Carberry
Kruse, D., Sesil, J., Kroumova, M. and Carberry, E. (2000). Stock Options,
Corporate, and Organizational Change. Oakland, Cal. : National Center for
Employee Ownership.
High-performance work systems : giving workers a stake
- E Appelbaum
- P Berg
Appelbaum, E. and Berg, P. (2000). `High-performance work systems : giving
workers a stake'. In M. M. Blair and T. A. Kochan (eds.), The New Relationship :
Human Capital in the American Corporation. Washington : Brookings Institution,
pp. 102-44.
Evaluating ESOPS, Profit-Sharing and Gainshairing Plans in US Industries : Effects on Worker and Company Performance . Washington : Office of the American Workplace
- L A Bell
- D Kruse
Bell, L. A. and Kruse, D. (1995). Evaluating ESOPS, Profit-Sharing and Gainshairing
Plans in US Industries : Effects on Worker and Company Performance. Washington :
Office of the American Workplace, US Department of Labor.
Why do some firms give stock options to all employees? An empirical examination of alternative theories
- P Oyer
- S Scheafer
Oyer, P. and Scheafer S. (2001). `Why do some firms give stock options to all
employees? An empirical examination of alternative theories'. Working Paper,
Stanford University.