The Future of Employee Share Plan Participation

Transcription

1 SESSION P.2 The Future of Employee Share Plan Participation Joseph Blasi Rutgers University and NBER Pierre-Antoine Kremp Princeton University and HEC Paris

2 The Future of Employee Share Plan Participation Joseph Blasi Rutgers University and NBER Pierre-Antoine Kremp Princeton University and HEC Paris Outline Employee equity prevalence and demographics Employee equity and organizational performance Bubble and bust Conclusion

3 Outline Employee equity prevalence and demographics Employee equity and organizational performance Bubble and bust Conclusion Employee Equity Prevalence and Demographics How widespread is employee stock ownership? Who are these employee stock owners? Differential adoption among firms/industries/sociodemographic groups.

4 Employee Equity and Shared Capitalism Data from the General Social Survey 2006; national representative sample. * Including stocks held directly (ESOPs, ESPPs, exercised options, publiclytraded shares bought on the stock market) and indirectly (401(k) and retirement plan) How Much Employee Equity Is There? Employee-owners hold about $32,000 in company stock on average. The median employee-owner has about $10,000 invested in his/her company stock.

5 How Much Employee Equity Is There? Employee-owners hold about $32,000 in company stock on average. The median employee-owner has about $10,000 invested in his/her company stock. Not an insignificant amount: median total wealth holding of employee owners just over $150K. Employee Equity by Industry Percent Employees Owning Company Stock / Stock Options

6 Employee Equity by Firm Size Percent Employees Owning Company Stock / Stock Options Employee Equity by Occupation Percent Employees Owning Company Stock / Stock Options

7 Employee Equity by Income Level Percent Employees Owning Company Stock / Stock Options Employee Equity by Education Percent Employees Owning Company Stock / Stock Options

8 Employee Equity by Age Percent Employees Owning Company Stock / Stock Options Employee Equity Demographics: Summary Patterns of diffusion of employee stock ownership between firms within firms Individual preferences and attitudes of employees (risk tolerance, financial literacy) Differences in the likelihood of participating in these plans across socio-demographic groups.

9 Stock Option Expensing: Reality Check on What Happened? Case study on how government policy affects broadbased equity 2002 survey done before expensing and 2006 survey after A huge 50% decrease in workers holding stock options in computer services From 57% holding options in 2002 to 28% in 2006 A huge 40% decrease in workers owning company stock in computer services From 58% owning company stock in 2002 to 31%in 2006 Nationwide: a 30% drop in option holding and 20% drop in employee ownership Outline Employee equity prevalence and demographics Employee equity and organizational performance Bubble and bust Conclusion

10 Shared Capitalism at Work The National Bureau for Economic Research Study With Richard Freeman of Harvard & Doug Kruse of Rutgers The largest study ever of individual worker dynamics: 8 years, international Over $ 1 m: Russell Sage Foundation and Rockefeller Foundation and others 14 corporations: several multinationals and Fortune 500 Detailed surveys of 45,000 out of 120,000 workers

11 A Large National Laboratory The General Social Survey National Opinion Research Center, University of Chicago Face-to-face interviews over the kitchen table Over a thousand in-depth surveys done at random The findings of the 14 corporations were tested in this lab Inside The Black Box? Evidence of better performance but how and why? U.S. General Accounting Office study of firms by the Congress in 1987 Review of most studies find better productivity and usually better TSR but there is wide variation Definitive UK Treasury Study of 17,000 firms: 2007 What separates success from failure?

12 The Better Employers Adopt A sign of the better employers A disproportionate number of the 100 Best Companies Offer more participation in decision-making Workers are less closely supervised Fixed pay and total compensation is higher than the market Workers see their firms as fairer with better management-worker relations and more attentive to safety What We Measured? Presence and intensity of employee share ownership, cash or deferred profit sharing, gain sharing, and stock options: Shared Capitalism Every possible demographic detail about the worker A wide range of worker attitudes and behaviors including work practices Key Outcomes: expected turnover, loyalty, willingness to work hard, innovate, and intervene with shirkers, absenteeism, frequency of suggestions

13 What Explains Better Performance? Combining shared capitalism with a bundle of high performance work practices, namely, high training, high job security, and involvement in participatory teams Fixed pay at or above the market Low supervision of workers Note: High performance work practices alone reduce absenteeism. Note: Close supervision alone increases absenteeism and reduced suggestions Give Me Some More Details? Simply having cash profit sharing has larger effects but it is the PROPORTION of base pay that is linked to lower turnover, loyalty, and willingness to work harder. Simply having employee share ownership has large effects on loyalty and suggestions but it is the PROPORTION of pay of ESOPs that is linked to willingness to work harder. Note: Potential stock option profits as a percent of pay is linked to lower turnover. Note: Stock option impact generally depends on culture.

14 Free-riding? What Actually Happens With Worker Groups? Free riding and shirking has been the main objection so our study was designed to look at it carefully. Actually, more shared capitalism increases intervention with a shirker. When combined with high performance work practices, low supervision, fair fixed wages, and employer fairness anti-shirking behavior just skyrockets. More overlapping skills means more anti-shirking. More anti-shirking in smaller workplaces. Note: Profit/gain sharing as a % of pay is linked. Note: Holding of company stock or options is linked.

15 Does Shared Capitalism Help Innovation? Workers with any company stock and increasing proportion of pay in profit/gain sharing say their company has a more innovative culture. Both shared capitalism and high performance work practices are powerfully linked to a willingness to contribute innovative ideas to the organization. Note: Shared capitalism has the biggest impact on willingness to innovate when HPWP are low. Note: The practices matter most in the immediate workgroup. Is Share Participation Too Risky? Economists Benartzi and Thaler found workers put 42% in company stock and split the rest between stock and bonds and end up 72% invested in equities: too much Workers economic insecurity wipes out the effects of share participation. Note: There is a need to address workers with high economic insecurity, e.g. pushing them into 401k plan. Note: Markowitz study suggests a diversified portfolio is optimal with 10-15% in ungifted company stock.

16 Outline Employee equity prevalence and demographics Employee equity and organizational performance Bubble and bust Conclusion Bubble and Bust Until 2008, stocks looked like a pretty good deal

17 Diffusion of Stock Ownership Evolution of stock ownership rates coincides with the stock bubble (source: SCF, Federal Reserve Board). The Problem Earlier entrants in the stock market were less likely to lose from 2008 market crash.

18 The Problem Earlier entrants in the stock market were less likely to lose from 2008 market crash. Why It Matters Democratization of stock ownership until But this evolution was only temporary: Later entrants were the first investors to exit the market after the downturn. Significant differences in investor stock portfolio returns are observable by age, income, race. These differences are entirely attributable to timing of entry in the market: Younger, less well-off and African-American investors earned lower returns because they entered the market last during the bubble. Understanding the diffusion process is critical.

19 What About Employee Equity Ownership? Overall stability of direct employee stock ownership rates during the bubble-and-bust cycle contrasts with the more ample changes in stock ownership rates. Comparing the Diffusion of Employee and Non- Employee Stock Ownership Two critical factors affecting the decision of individual households to enter the stock market during a bubble: Cultural changes (attitudes towards financial risk; perception of the stock-market) Diffusion of financial information and advice through social networks

20 Comparing the Diffusion of Employee and Non- Employee Stock Ownership Two critical factors affecting the decision of individual households to enter the stock market during a bubble: Cultural changes (attitudes towards financial risk; perception of the stock-market) Diffusion of financial information and advice through social networks Comparing the Diffusion of Employee and Non- Employee Stock Ownership Two critical factors affecting the decision of individual households to enter the stock market during a bubble: Cultural changes (attitudes towards financial risk; perception of the stock-market) Diffusion of financial information and advice through social networks

21 Comparing the Diffusion of Employee and Non- Employee Stock Ownership Two critical factors affecting the decision of individual households to enter the stock market during a bubble: Cultural changes (attitudes towards financial risk; perception of the stock-market) Diffusion of financial information and advice through social networks What Happened to Employee Stock Ownership During the Bubble? Small increase in direct employee ownership observable during this period, but the channel of diffusion was different adding stability in a period of bubble: Informational/cultural diffusion (rapid changes in individual attitudes and behaviors) vs. organizational diffusion (slow changes in organizational practices). Employee stock ownership was already more equally distributed than non-employee stock ownership.

22 Outline Employee equity prevalence and demographics Employee equity and organizational performance Bubble and bust Conclusion Conclusions I Almost half of US workers have access to shared capitalism in some combination. Your corporations that have these practices and your corporations that help companies manage them are leading a shift in capitalism itself. This shift is made up of three giant trends: Inflation adjusted wage is flat but capital income = new wealth. The most innovative work places require new work systems. Citizens want economies that are more inclusive.

23 Conclusions II Difficult economic conditions: equity compensation may not appear as attractive to employees in the current market as in a period of irrational exuberance. But: keep in mind that employee equity was a factor of stability in this boom-and-bust cycle. What Should You Do? Now you know the moving parts to getting it right. Companies and your clients spend billions on sharing rewards but nothing on evaluating if you are doing it correctly. Time to change employee surveys or do special surveys and bring this to strategic discussions. Structuring share participation so it does not substitute for fixed pay, so it is get + buy, and does not create excessive risk is critical. Companies and clients spend billions on sharing rewards but nothing on supporting research of young scholars. Time to encourage foundations and managers to engage scholars.