Marija Ugarković Profit Sharing and Company Performance

Transcription

1 Marija Ugarković Profit Sharing and Company Performance

2 GABLER EDITION WISSENSCHAFT

3 Marija Ugarković Profit Sharing and Company Performance Deutscher Universitäts-Verlag

4 Bibliographic information published by Die Deutsche Nationalbibliothek Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at < Dissertation Universität Dortmund, st Edition November 2007 All rights reserved Deutscher Universitäts-Verlag GWV Fachverlage GmbH, Wiesbaden 2007 Readers: Frauke Schindler / Anita Wilke Deutscher Universitäts-Verlag is a company of Springer Science+Business Media. No part of this publication may be reproduced, stored in a retrieval system or transmitted, mechanical, photocopying or otherwise without prior permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Printed on acid-free paper Printed in Germany ISBN

5 Preface The present dissertation is a synopsis of most of the research that I undertook during my time as a teaching and research assistant at the Chairs of Economic Policy of the Universities of Duisburg-Essen and Dortmund. Writing this thesis on the impact of profit sharing as a wage incentive taught me a lot about individual and group incentives, about intrinsic and extrinsic motivation not only on a theoretical level but also in the hands-on experience of completing this thesis. But above all it taught me about the importance of cooperation: I am indebted to numerous people and institutions that have contributed to the completion of my dissertation project in many ways. I would like to thank, first and foremost, my academic teacher Prof. Dr. Kornelius Kraft for many inspiring discussions and his continuous encouragement and help through all stages of my work. I also thank my second referee, PD Dr. Uwe Jirjahn, for many helpful comments and suggestions in particular during the final stages of this work, and Prof. Dr. Wolfgang Leininger for his readiness to participate in my PhD committee. My research could not have been realized in its present form without the existence of such an extensive and longitudinal data set as the IAB Establishment Panel. I therefore thank the German Federal Employment Service (BA) and the Institute for Employment Research (IAB) for providing the data and for their hospitality during my visits in Nuremberg. Among the employees of the IAB, I would like to express my special thanks to Dana Mueller for her virtually endless patience in running my statistical programs over and over again.

6 VI Preface My work has further profited from several discussions at conferences, within workshops of the Priority Programme Flexibility in Heterogeneous Labour Markets of the German Research Foundation (DFG) whose financial support is gratefully acknowledged, and from discussions with my former and current colleagues in Essen and Dortmund. I would like to express my gratitude to them not only for always being ready to discuss parts of my research or answering a quick question but also for their teamwork, company, and the many good laughs we had. I would like to dedicate the final section of this preface to the most important persons in my life: None of this could have been possible without my parents. Thank you for your love, for teaching me values, for always providing a safe haven, and for letting me have it my way. Thank you also to the best sister in the world (although she knows she is the only one), Vesna, for your unconditional love and support, your honesty and optimism, and all the fun we had throughout our lives. You really are a gift to all of us! There is, finally, one person left that went through all stages of this dissertation project with me and probably deserves my apologies more than my thanks for sometimes giving him a hard time testing his comedian skills on me and becoming an involuntary expert on wage incentives through several rounds of proofreading and discussing my research. Your love, friendship, encouragement, intellectual curiosity, and humour are an inspiration, Dubi. Every single day. Marija Ugarkovi

7 Contents 1 Introduction 1 2 Definition, Incidence and Determinants of Profit Sharing Definition Incidence Determinants 11 3 The Economic Impact of Profit Sharing Theoretical Considerations Profit Sharing and Productivity Profit Sharing and Employment Prior Empirical Studies on the Impact of Profit Sharing Productivity Profitability Wages Employment Levels Employment Stability Summary 37 4 Data Set and Econometric Methods Data Set and First Descriptive Results Microeconometric Evaluation Methods Experimental Evaluation Methods Non-Experimental Evaluation Methods The Instrumental Variables (IV) Estimator The Heckman Selection Estimator Before-After Estimator Difference-in-Differences Matching 51

8 VIII Contents Conditional Difference-in-Differences Which Estimator? 54 5 The Output, Employment and Productivity Effects of Profit Sharing Theoretical Considerations Econometric Model Empirical Study Summary 70 6 Profit Sharing: Supplement or Substitute? Theoretical Considerations Empirical Study Summary 77 7 Profit Sharing and the Financial Performance of Firms Theoretical Considerations Empirical Study Summary 82 8 Profit Sharing and Works Councils: Substitutes or Complements? Theoretical Considerations and Empirical Evidence Empirical Study Summary 98 Conclusions and Outlook 101 Appendix 107 Bibliography 119

9 List of Figures Figure 1- Labour Demand in Equilibrium 25 Figure 2- Labour Demand under Negative Demand Shock 26 Figure 3- Frequency Distributions of the Propensity Scores 66 Figure 4 Frequency Distributions of the Propensity Scores, Firms with Works Councils 92 Figure 5 Frequency Distributions of the Propensity Scores, Firms without Works Councils 93

10 List of Tables Table 1 Incidence of Profit Sharing in Selected Countries 8 Table 2 - Mean Comparison of Firms with and without Profit Sharing, Table 3 - Mean Values of Variables for Firms (not) introducing Profit Sharing, Table 4 - Results of the Probit Estimation 65 Table 5 - Results from Conditional Difference-in-Differences Estimation, Introduction of Profit Sharing 68 Table 6 Results from Conditional Difference-in-Differences Estimation, Introduction of Profit Sharing, Capital Stock included 70 Table 7 - Mean Values of Variables for Firms (not) introducing Profit Sharing, Table 8 Results from Conditional Difference-in-Differences Estimation 77 Table 9 - Mean Values of Variables for Firms (not) introducing Profit Sharing, Table 10 Results from Conditional Difference-in-Differences Estimation 82 Table 11 Results of the Probit estimation 91 Table 12 Conditional Difference-in-Differences estimation, Firms with(out) Works Council 94 Table 13 Mean Values of Variables for Firms (not) introducing Profit Sharing after Matching 95

11 XII List of Tables Table 14 Conditional Difference-in-Differences Estimation, Firms with(out) Works Councils, employees 96 Table 15 Conditional Difference-in-Differences Estimation, Firms with Works Councils, employees 97

12 Introduction There is a long tradition of academic research into the nature, causes and consequences of financial participation of employees in their enterprises which can be traced back into the nineteenth century. In the past two decades, financial participation has attracted renewed interest among academics and policy makers alike. In several European countries, legislation that is supportive of financial participation has been introduced, while in others debates have been initiated between the social partners. In Germany, several changes have been made to the Capital Formation Law (Vermögensbildungsgesetz) during the 1990s. Financial participation was also propagated by former Chancellor Gerhard Schröder as one of the pillars of the Social Market Economy (Schröder, 2000), and only recently the German President Horst Köhler appealed to the social partners that the time has come to bring up the issue of a financial participation of employees again (Köhler, 2006). This upswing in the interest in financial participation is closely related to the fact that during the last decade, financial participation has grown in importance as a policy issue for the European Union. The driving force behind the promotion of this matter was the European Commission. An important landmark was the Commission s Recommendation Concerning the Promotion of Employee Participation in Profits and Enterprise Results of July 1992 which has also become known as the PEPPER Recommendation. The PEPPER Recommendation which was passed in 1992 by the Council of Ministers of the European Union, urged member states to ensure that national legal structures did not inhibit the use of financial participation, to consider the introduction of fiscal incentives and to encourage the use of such schemes by facilitating the supply of adequate information to all relevant parties (Council of the European Communities, 1992). In the Commission s Social Policy Agenda , the importance of financial participation was reaffirmed and a proposal was made to launch a communication and action plan on the financial participation of workers (Commission of the European Communities, 2000). The motives of the European Commission for a promotion of the so-called PEPPER schemes which

13 2 Introduction encompass profit sharing and employee share ownership cover a wide variety of issues as the following quotation expresses : The different benefits of employee financial participation make it an integral element of achieving the Lisbon objectives. Financial participation is an excellent example of a policy which can simultaneously address economic, employment and social objectives in a mutually reinforcing way. When introduced in the right way, financial participation can render enterprises more profitable and competitive, improve the motivation, commitment and job satisfaction of workers, enhance the quality of work and last but not least contribute to a more equitable distribution of income and wealth. (Commission of the European Communities, 2002) Several facets of employee financial participation are thus stressed. On the company level, financial participation has traditionally been introduced to commit employees to the firm which should lead to higher motivation and productivity, higher investment into firm-specific human capital and lower turnover. It has also been used as a means to enhance the flexibility of remuneration, to attract performance-oriented workers and to improve the company s equity situation. Overall, financial participation should thus lead to an increase of the firms competitiveness. From the employees perspective, financial participation encourages greater involvement of employees in the progress of their companies which should not be without consequences on workers motivation, job satisfaction and work quality. Finally, on an aggregate level, the assumed company-level effects of financial participation can contribute to an overall increase in productivity which might spur economic growth and increase the economies prosperity. Martin Weitzman (1984) in his theory of a share economy further propagates financial participation as a means to increase employment levels and employment stability by substituting part of fixed wages with a variable profitrelated part. From a socio-political perspective, financial participation is, finally, expected to raise social integration and to achieve a wider distribution of the wealth generated by the enterprises which workers have helped to produce (for a comprehensive discussion see e.g. Priewe and Havighorst, 1999).

14 Introduction 3 A recurrent theme in recent discussions of financial participation among policymakers and the social partners is the need for more research into the outcomes of financial participation schemes. The aim of this thesis is to contribute to this lack of empirical research. In general, financial participation schemes can be classified into profit sharing and employee share ownership schemes. We restrict our analysis to the investigation of profit sharing as a method of payment on various firm-level outcomes. 1 Quite a number of studies have investigated the effects of profit sharing. The primary focus of the majority of studies is the impact of profit sharing on productivity. Surprisingly, the consistency of findings is remarkable: Profit sharing is associated with higher productivity levels in every case, regardless of methods, model specification and data used. By contrast, only a limited number of studies analyse how profit sharing affects other outcomes such as employment, wages or profitability, and, moreover, do not find conclusive evidence. One contribution of this study is the rare provision of a comprehensive picture of profit sharing that takes into consideration the effects of profit sharing on output, employment, productivity, wages and profitability. We also investigate the question how works councils as a form of representative participation affect the success of profit sharing as a mode of financial participation, a question that has found very little attention so far. Another contribution of this study is of methodological nature. In light of the remarkably clear result that profit sharing is associated with higher productivity, it seems rather surprising that across the industrialized world only a minority of firms considers introducing such a scheme. Since it appears unreasonable to assume that the majority of capital owners are persistently unaware of the possible productivity effects of profit sharing, there must be other reasons for their reluctance to introduce such an apparently useful remuneration model. One explanation might be that firms have specific advantages or disadvantages with respect to the introduction of alternative incentive systems. Depending on different circumstances such as work organization, work content, verification possibilities of individual performance or industrial 1 The restriction of our analysis to profit sharing schemes only is due to the fact that employee stock ownership is still rather uncommon in Germany. According to the Institute for Employment Research (IAB), only about 2 percent of German establishments had implemented an employee share ownership scheme in 2001 (IAB, 2002).