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Human Resources and Company Performance

Published by The ESOP Association
The ESOP Report, April, 2003, p. 3
by Noémi Giszpenc
Ownership Associates, Inc., Cambridge, MA


Anyone who has been to an ESOP Association event has heard the success stories: companies where employees have a nearly missionary zeal to make their companies succeed. It's easy to see the fire in people's eyes and to listen to the stories about how these companies got to that point. But what happens when you try to study the roots of the ownership advantage?

After looking at over 30 studies, Dr. Douglas Kruse, one of the country's experts on ESOPs, concludes that ESOP companies beat similar non-ESOP companies by 4 to 5% on productivity measures-but that's on average. Some companies do much better, others see virtually no change, and a few experience declines.

Some of those studies shed no light on why some companies do well and some don't. Some suggest that participative management and ownership culture make the difference. These studies are all limited because some of them include economic performance data, and others look at detailed measures of ownership culture. Until recently, no study had ever included both in a rigorous way.

A new report by a team of researchers looks at new data to compare differences among ESOP firms as well as differences among employees within a particular ESOP firm. They look at differences in employee attitudes toward work and the different policies and practices of firms to see how firms may be able affect employee performance.

The Role of HR Practices

The first part of the study, on between-firm comparisons, looked at 11 ESOP firms. It used data from the Ownership Culture Survey™ (OCS) and from the Employee Ownership and Financial Trends (EOFT) survey. The OCS is an employee-attitude survey for employee-ownership companies developed by Ownership Associates. The EOFT was developed by Amy Smith-Boden as part of a research project for the NIMBAS Graduate School of Management in Utrecht, the Netherlands.

The EOFT data allowed researchers to put together a human resource index that combines a number of practices: firms' level of employee involvement and information sharing, the percent of pay contributed to the ESOP, and whether the firms had a pension plan apart from the ESOP, a grievance procedure in place, labor-management training, and employee surveys. The researchers found that this index of practices was related to employee performance measures.

Specifically, in those firms with a higher score on the HR index, employees were more likely to report that their fellow employees worked hard, met customers' needs, made sacrifices to help co-workers, and were committed to the company and its future. (The data on these measures come from the OCS.) The HR practices were also related to employees reporting that their co-workers cared about company performance and worked just as hard when supervisors were not watching.

Not only do higher measures on the HR index relate to improved employee performance, they also are linked to greater perceptions of fairness, better co-worker relations, better supervision and increased worker input and influence.

A Sense of Ownership

Another measure that the researchers linked to improved performance was the workers' sense of ownership. Employees' feelings of ownership tend to be linked with the percentage of company shares owned by the ESOP and the ESOP value per employee.

Reacting to Under-Performance

Data ChartThe study researchers looked at information from two case studies of ESOP firms done as part of the National Bureau of Economic Research's Shared Capitalism Research Project. Within these two firms, some employees were on Employee Involvement committees or were otherwise involved in group decision making, for example in setting goals for their work group, and others were not. The researchers looked at the differences between the attitudes of employees who participated and those who did not toward their co-workers' under-performance.

The researchers found that involved employees are significantly more likely to speak directly to an under-performing co-worker, and are significantly less likely to do nothing. (See chart.) Those employees are also more likely to say they are "willing to work harder than I have to in order to help the company I work for succeed."

Ownership Is Not Enough

The conclusion that the researchers draw from this study is that ownership is not enough, on its own, to motivate employees to improve their performance. Firms need to provide at least two more elements:

  • Firms should give employees the means to understand how their actions contribute to company performance and the opportunity to participate and take those actions.
  • Firms should create a company culture that increases employees' motivation to make their own best efforts and call on their co-workers to do the same.

With this increased motivation and the means and opportunity to follow through with improved performance, employees are more likely to help their companies achieve and maintain significant productivity increases. As researcher Amy Smith-Boden comments, "ESOP proponents should be encouraged by the fact that what they inherently believed to be true is supported by objective data: that is, where ownership and participative HR practices combine in employee owned companies, the result is likely to be success."

Looking to the Future

The study researchers devised questions similar to those in the current study for use by the National Opinion Research Center (NORC) in a recently completed national survey. This new survey has both a representative sample of workers and data that match workers with firms. Thus, in the near future there will be new and nationally representative information on the topic of firm practices and improved employee performance.


ENDNOTES

Kruse, Douglas, Richard Freeman, Joseph Blasi, Robert Buchele, Adria Scharf, Loren Rodgers, and Chris Mackin. 2003. "Motivating Employee-Owners in ESOP Firms: Human Resource Policies and Company Performance." Presented at panel on "Econometric Case Studies of Human Resources and Firm Performance," Industrial Relations Research Association, January, Washington, D.C. The research was partially supported by the Employee Ownership Foundation.

A more in-depth report on this data is available here.

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