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Motivating Employee-Owners in ESOP Firms
Human Resource Policies and Company Performance

Douglas Kruse (Rutgers University and NBER)
Richard Freeman (Harvard University, LSE, and NBER)
Joseph Blasi (Rutgers University)
Robert Buchele (Smith College)
Adria Scharf (University of Washington)
Loren Rodgers (Ownership Associates)
Chris Mackin (Ownership Associates)
The full text is available in PDF format and as a multipart webpage.

Presented at panel on "Econometric Case Studies of Human Resources and Firm Performance," Industrial Relations Research Association, January 2003, Washington, D.C. This paper is part of the National Bureau of Economic Research's Shared Capitalism Research Project, funded by the Russell Sage and Rockefeller Foundations. Address comments and questions to: Douglas Kruse, School of Management and Labor Relations, Rutgers University, 94 Rockafeller Road, Piscataway, NJ, 08854, 732-445-5991, dkruse@rci.rutgers.edu


Contents of this section:

Within-company Comparisons on Worker Effort and Peer Pressure

Conclusion

References

Within-company Comparisons on Worker Effort and Peer Pressure

In 2002 the NBER Shared Capitalism research project undertook a set of surveys of firms with particular employee ownership structures. At this point we have data available from two ESOP firms in the 250-500 employee category, with an average response rate from workers of 54%. One firm is 100% employee owned, and the other is one-third owned by employees. We concentrate on how employee participation on EI committees and involvement in group decision-making affects responses to free riding behavior. The key question on our survey relating to employee response to free-riding behavior is:

If you were to see a fellow employee not working as hard or well as he or she should, how likely would you be to:
  • Talk directly to the employee
  • Speak to your supervisor or management
  • Do Nothing


The responses were given on a four point scale, running from (1) not at all likely, to (2) not very likely, to (3) somewhat likely, to (4) very likely. We break down these answers by whether employees participate in employee involvement (EI) committees (done by 58% in company A and 29% in company B), and whether they have received formal training from their employer in the past year (received by 60% in company A and 17% in company B).

The evidence in Table 2 shows that workers on EI committees are far more likely to talk directly to the employee and much less likely to do nothing than workers who are not on such committees. For example, the mean score for the response of "talk directly" for workers is 0.72 higher among EI participants compared to non-participants in company A, and 0.50 higher in company B. The results are consistent with the notion that the participation of workers on EI committees leads them to intervene more than other workers when they see someone not doing their job and, most important, to intervene directly to a greater extent than going to a supervisor. The EI participants 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."

To what extent can we interpret these differences as being causally related to workers' participation in EI as opposed to some unobserved individual characteristic? One way in which we probe for causality is through a difference-in-differences approach, by comparing the differences based on EI to those based on another aspect of the individual's work life, namely the receipt of training. As shown at the bottom of Table 2, the differences in responses to the question about how workers would react to someone not doing their job by whether or not the worker received training are smaller and statistically weaker than those for EI, supporting the idea that EI is playing an important role. In addition, comparisons based on other survey measures also show smaller differences than those for EI.

Conclusion

Economic theory suggests that by itself ownership is unlikely to greatly affect worker effort and performance. Ownership must be combined with employee involvement and other policies that give workers the power to act on ownership incentives and the disposition to resist the tendency to free ride. Our analysis of worker-reported effort across eleven ESOP firms and of workers within two ESOP firms supports these arguments. We find significant differences in worker assessment of work effort across ESOP firms, indicating that even in firms with substantial employee ownership, other factors influence outcomes. Relating worker-reported outcomes to their sense of ownership and an index of HR policies shows that ownership and HR policies are both positively linked to employee reports of workplace performance, which is itself related to company performance.

Our analysis of employee response to co-workers who perform poorly shows that workers on employee involvement committees or who otherwise report being involved in setting goals for their work group are more likely to talk directly with non-performing workers and are less likely to do nothing. Conceptually, an understanding of how employee ownership works requires a three-pronged analysis of: (1) the incentives that ownership gives; (2) the participative mechanisms available to workers to act on those incentives; and (3) incentives/corporate culture that counteracts tendencies to free ride. All firms, whether employee-owned or not, have to combine these three elements to motivate workers to perform as best they can. Employee ownership provides a distinct solution to the incentive problem, but must still deal with the participation and free-riding problems.

References

Appelbaum, Eileen, Thomas Bailey, Peter Berg, and Arne Kalleberg. 2000. Manufacturing Advantage: Why High-Performance Work Systems Pay Off. Ithaca, NY: Cornell University Press.

Becker, Brian, Mark Huselid, and Dave Ulrich. 2001. The HR Scorecard. Boston: Harvard University Press.

Blasi, Joseph, Douglas Kruse, and Aaron Bernstein. 2003. In the Company of Owners. New York: Perseus Books.

Freeman, Richard, and Arin Dube. 2000. "Shared Compensation Systems and Decision Making in the U.S. Job Market," Draft, Harvard University Department of Economics.

Freeman, Richard, and Joel Rogers. 1999. What Workers Want. New York: Russell Sage and Cornell University Press.

Ichniowski, Casey, Thomas Kochan, David Levine, Craig Olson, and George Strauss. 1996. "What Works at Work: Overview and Assessment," Industrial Relations, 35(3).

Kruse, Douglas. 2002. "Research Evidence on the Prevalence and Effects of Employee Ownership," Journal of Employee Ownership Law and Finance 14(4), Fall, pp. 65-90.

-----, and Joseph Blasi. 1997. "Employee Ownership, Employee Attitudes, and Firm Performance: A Review of the Evidence," in David Lewin, Daniel Mitchell, and Mahmood Zaidi, eds., The Human Resources Management Handbook. Greenwich, CT.: JAI Press.

Mackin, Christopher. 2002. "United It Was Not," unpublished manuscript. Cambridge, MA www.ownershipassociates.com.

Weitzman, Martin, and Douglas Kruse. 1990. "Profit Sharing and Productivity," in Alan Blinder, ed., Paying for Productivity. Washington, D.C.: Brookings Institution.

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