employee share ownership, commitment and turnover: … · has its main impact upon performance via...

Employee Share Ownership and Performance: Golden Path or Golden

Handcuffs?

Sukanya SenGupta (University of Warwick), Keith Whitfield and Robert

McNabb (Cardiff University)

Paper presented to the Annual Meeting of the Labor and Employment Relations Association, Boston,

January 2006

Abstract Using matched employer-employee data collected as part of the 1998 British Workplace Employee Relations Survey, the paper suggests that the presence of employee share-ownership at a workplace is not significantly associated with employee commitment to the values of the organisation. However, there is evidence of a significant negative relationship between share-ownership and workplace turnover which seems to explain part of the positive share-ownership/performance relationship. This calls into question the postulate that share-ownership has its main impact upon performance via the closer alignment of employees’ and employers’ values and interests – the golden path. It also raises doubts about the degree to which share-ownership can be seen as a component of the practices underpinning the high commitment workplace. However, there is evidence that share-ownership has an impact upon performance via the lowering of employee turnover – the golden handcuffs.

Introduction

Recent years have seen the advent of a wide range of holistic approaches by firms in

search of improved competitive performance in their product markets (Appelbaum

and Batt, 1994; Osterman, 1994; Paauwe, 2004; Whitfield and Poole, 1997).

Employee share-ownership has been accorded a pivotal role in this process. It is seen

by many of its advocates as encouraging employees to identify more closely with

their employing organisation, taking on board its values more fully, and thereby

making a stronger contribution to its continued development. (Rosen 1990; Blasi et al.

2003; Conte and Svejnar 1988; Klein 1983)

There is substantial, though not universal, evidence that firms with employee share

ownership schemes have better performance than those that do not (Bradley et al.

1990; Long 1978; Pendleton 1997). Research on the underlying rationale for this

positive relationship is, however, not only much less abundant, but is also less clear in

its conclusions. While some have suggested that higher levels of employee

commitment are pivotal in this respect (Long 1978a; Pierce et al. 1991; Rosen 1990),

others have suggested alternative causal routes, such as low labour turnover

(Richardson and Nejad 1986; Wilson et al. 1990).

The main aim of this paper is to investigate whether there is any evidence that share-

ownership has an impact upon performance via commitment and/or turnover. It uses

matched employee-employer data from the 1998 British Workplace Employee

Relations Survey (WERS98), a nationally-representative survey of workplaces with

10 or more employees. First, multivariate analyses are undertaken of the associations

between employee share-ownership and both employee commitment and workplace

labour turnover, to see whether these intermediate outcomes are higher in the

presence of share-ownership. Second, fitted values from workplace-level analyses of

turnover are entered into equations examining the correlates of performance, with the

aim of seeing if this affects the relationship between share-ownership and

performance such as to suggest a possible moderating influence.

2

Theoretical Considerations

Theoretical work on the relationship between share-ownership and performance has

been extremely limited (Guest 1997). Most work on this subject has been highly

empirical with little, if any, theoretical content (e.g. Addison and Belfield 2000 and

2001; French 1987; Goldstein 1976). Consequently, the view that ESO schemes have

their main impact upon performance through enhanced commitment levels was a view

propagated by advocates for share-ownership, rather something that originated from a

strong theoretical understanding. Only a few studies explicitly have built a theoretical

model that attempts to operationalise the links between share-ownership, performance

and underlying intermediate variables (e.g. Blasi et al. 1994; Long 1978a; Richardson

and Nejad 1986). Most of these studies focus on the links between share-ownership,

performance and commitment (for example, Klein 1987), and ignore the links

between ESO schemes, employee turnover and organisational performance. At best,

employee turnover is viewed as one of the many behavioural outcomes associated

with the higher commitment fostered by share-ownership (Addison and Belfield

2001).

Those studies that do have an explicit underlying theoretical underpinning use a

variety of approaches. Some use a variant of principal/agent theory (e.g. Blasi et al.

1996), others use socio-psychological rationales (e.g. Long 1978a), and still others

use self-selection models (e.g. Blair and Kruse 1999; Richardson and Nejad 1986).

These are not mutually exclusive, and many models are an amalgam of elements from

each.

The starting point of most models is the perception of a conflict between the interests

of the owners of the firm (the principals) and the workers (the agents) (e.g. Blasi et al.

1996; Conte and Svejnar 1988). These can potentially be reconciled in a variety of

ways, one of which is to increase the degree to which key agents within the firm view

themselves as having the same interests as agents. This can potentially be achieved

by encouraging them to become owners of the firm’s capital via an employee share

ownership scheme. In principle, the greater the agent’s share-holding, the greater the

degree to which his/her increase in wealth results from the success of the company as

3

a whole, and therefore the more that his/her interests are aligned with those of the firm

(Klein 1987; Florkowski 1987; Gamble et al. 2002). This alignment of employee

interests with those of their organisation is seen to encourage profit-maximising

behaviour such as greater employee effort, workplace innovation and the reduction of

wastage. Furthermore, Alchian and Demsetz´s (1972) incentive contract theory

suggests that alignment of interests will also result in self- and peer–monitoring,

leading to reduced monitoring costs. The increased effort combined with reduced

monitoring costs will, in turn, contribute to higher financial performance and labour

productivity.

How precisely this alignment of interests happens in practice, however, is a subject of

much debate. For most workers, the amount of capital that they own is far less than is

necessary to result in a greater return from their assets in the firm rather than their role

as workers. There is also the free rider problem, which states that an agent owning

capital can do little to influence the returns on that capital, and is therefore unlikely to

make a greater commitment to the firm on the basis of holding capital in it.

One explanation of the potential role of share ownership in promoting firm

performance is that workers owning capital in their firms become more committed to

its goals and values. Long (1978a), for example, postulates that share ownership

increases organisational identification, which in turn has a positive impact upon firm

performance. Organisational identification is seen to be composed of integration,

involvement and commitment. Involvement and integration are said to promote

organisational commitment and, in turn, lower turnover, less absenteeism, and an

increased willingness to innovate and support change.

Similarly, Pierce et al. (1991) suggest that, under certain moderating conditions, share

ownership leads to ‘psychological ownership’ and a number of positive socio-

psychological outcomes. A distinction is made between formal ownership and

psychological ownership, thereby highlighting the importance of perception in

influencing the share-ownership/performance relationship. Klein (1987) suggests that

the formal ownership rights conferred upon employee share-owners, the financial

rewards yielded by owning shares and influence in the decision-making process

4

through participatory rights all contribute towards satisfaction with the schemes,

thereby fostering commitment amongst employee-owners.

Klein’s satisfaction models have been widely used as a theoretical basis for explaining

the relationship between share-ownership and commitment (Ben-Ner and Jones 1992;

Buchko 1992; Gamble et al. 2002; Keef 1998; Long 1978a; Pierce et al. 1991),

particularly the ‘extrinsic satisfaction’ model which focuses on the relevance of

financial rewards in determining the commitment levels of employee-owners (Buchko

1992; French 1987; Klein 1987; Klein and Hall 1988; Pendleton 2001).

In such a situation, one would expect workers in firms operating share-ownership

schemes to exhibit a greater commitment to the firm and its values. This could, in

turn, be expected to yield a higher level of work effort and a greater willingness to

undertake activities that are in the firm’s interests, while not necessarily being in the

worker’s own immediate self-interest. This yields hypothesis one, which states that

employees in firms operating employee share-ownership schemes will exhibit

higher levels of commitment to the values of their organisation, other things equal.

The enhanced commitment or “golden path” approach to the share-

ownership/performance relationship has strong links to the wider literature on high

commitment work organisations (Beer et al. 1985). Within this literature the (often

implicit) assumption is that the moderating variable in linking HRM initiatives to

enhanced performance is employee commitment. This is generally associated with

the so-called “soft” approach to HRM (Redman and Wilkinson, 2001).

An alternative view of the share-ownership/performance relationship is, however,

sceptical of such a golden path involving enhanced commitment. This approach

suggests that share ownership schemes are primarily an effective worker retention

tool and reduce labour turnover by making it financially expensive for workers to

leave the firm’s employment – the “golden handcuffs hypothesis”. In the presence of

specific human capital, this can yield a turnover rate that is closer to the firm’s

optimum, thereby economising on a mix of hiring and firing and training costs (Blair

and Kruse 1999; Richardson and Nejad 1986). This yields the second hypothesis that

share ownership firms will have lower turnover rates, other things equal.

5

The difference between the golden path and golden handcuffs hypotheses can be most

clearly articulated using Meyer and Allen’s distinction between affective and

continuance commitment. The first relates to an employee’s emotional attachment to,

identification with and involvement in the organisation. It is the form of commitment

that is typically seen to be the key intermediary variable in the share-

ownership/performance relationship. Continuance commitment involves simply

remaining with the organisation. It might result from affective commitment, but it

might be independent of it. Indeed, to the extent that continuance commitment results

from some form of compulsion, it might even have a negative impact on affective

commitment.

The golden handcuff hypothesis, however, is not without its critics. For example,

Culpepper et al. (2004) state that the high financial rewards associated with share-

ownership schemes would make employees feel freer to leave the firm. In this view,

it is likely that share-ownership firms can be expected to have higher rather than

lower turnover rates, other things equal. However, this scenario is likely to be most

effective if the schemes are stand-alone initiatives and employee-owners make large

windfall gains. Under these conditions, there is little financial incentive for remaining

with the firm. In reality, this is rarely likely to be the case. Moreover, firms can

influence this situation by manipulating the vesting schedule to encourage continued

employment. For example, some opt for the staggered vesting schedule whereby the

proportion of shares allocated to employees is directly proportional to the number of

years in employment. Others opt for the cliff vesting schedule whereby employees are

allocated shares when they have been with the firm for a certain period of time.

There is also considerable debate as to whether the lower employee turnover induced

by financial rewards can raise performance, given that it is possible that the less

productive workers will be more likely to remain with the firm (Luchak, 2003;

Glebeek and Bax, 2004). An argument working in the opposite direction is that a

performance-linked compensation scheme is likely to attract more high-performing

workers to the firm (Conte and Svejnar, 1990; Richardson and Nejad, 1986).

6

The golden handcuff hypothesis is closely linked to the so-called “hard” models of the

HRM/performance debate (Redman and Wilkinson, 2001). It suggests that firms gain

competitive advantage by minimising the costs associated with employing labour.

Share ownership is seen as a vital component in economising on the substantial costs

associated with the turnover of key workers. It is widely argued that lower levels of

employee turnover often encourage greater firm-specific capital investment which

contributes towards greater labour productivity and subsequently higher financial

performance (Lincoln and Kalleberg 2003; Richardson and Nejad 1986; Staw 1980).

To the extent that it is effective, one would anticipate that the positive relationship

between share-ownership and performance would be lower in statistical equations

where the impact of turnover had been allowed for, reflecting the moderating

influence of the latter. This yields the third hypothesis that part of any positive

association between share-ownership and performance can be attributed to a

negative impact of share-ownership on labour turnover.

Previous Empirical Work

Share Ownership and Commitment. Evidence on the relationship between share-

ownership and commitment is mixed. A majority of studies report higher

commitment levels in share-ownership firms (Long, 1978; Pendleton, 2001;

Pendleton et al., 1998; Jochim, 1979; Bell and Hanson, 1984; Oliver, 1984; Bell and

Hanson, 1989; Marsh and McAllister, 1981; Russell et al., 1979; Rhodes and Steers,

1981; Long, 1980; Buchko, 1992; Goldstein, 1978; Tucker et al., 1989). However,

some studies suggest that share-ownership schemes do not seem to have a significant

impact on commitment (Dunn et al., 1991; French and Rosenstein, 1984; Hyman et

al., 1989; Marchington et al., 1994; Wilkinson et al., 1994; Poole and Jenkins, 1990),

and others indicate that they are associated with reduced levels of commitment (Keef,

1998; Long, 1982; Kruse, 1984).

A number of reasons could be suggested for these differences in results. One of these

relates to the methodology adopted. Studies that investigate the responses of share-

owners before and after the setting-up of the scheme generally report increases in the

level of organisational commitment (for example, Pendleton, 2001; Jochim, 1979).

Those comparing share-owners and non-owners within the same firm are much more

7

mixed (for example, Russell et al., 1979; Long, 1980; Poole and Jenkins, 1988; Keef,

1998; Hyman et al., 1989).

Another factor would seem to be the amount of time that has elapsed between setting-

up the scheme and the measurement of commitment. Some studies that trace changes

in commitment levels in share-ownership firms over time generally find that there is

an improvement in commitment soon after the scheme is set up, but that the positive

effect seems to disappear over time (Keef, 1998; Kruse, 1984; Dunn et al., 1991).

However, other studies find no effect subsequent to the introduction of the scheme

(Hammer and Stern, 1980; Long, 1982), and one found a substantial positive impact

after six years.

Studies based on case study methods show a range of relationships between share-

ownership and commitment, but those using survey methods are more likely to show

a positive relationship. A further issue concerns the proxy measure/measures used for

commitment. In general, those using the Mowday et al. (1979) framework tend to

show more positive results. This involves the undertaking of a questionnaire that has

15 items relating to organisational commitment. Those using the Cook/Wall

framework, which looks at identification, involvement and loyalty, are more mixed.

A key contextual factor underlying the share-ownership/commitment relationship is

the amount of organisational re-structuring that accompanies the introduction of the

scheme. For example, Keef (1998) found that layoffs due to organisational

restructuring contributed to reduced employee morale and hence reduced levels of

commitment. Similar results were obtained by Long (1982) and Marchington et al.,

(1994).

The introduction of share-ownership schemes is often accompanied by enhanced

participation in decision-making. The evidence suggests that participation has a

stronger positive impact on commitment (Long 1978, 1980, 1981; Goldstein, 1978;

Dachler and Wilpert; 1978; Katz et al., 1983; Sockell, 1985). Moreover, there is

evidence that the failure to introduce participation alongside share-ownership results

in either no change or even decreased levels of commitment (Kruse, 1984; Wilkinson

et al., 1994; Sockell; 1985). This seemingly reflected a feeling among the employee

8

share-owners of unmet expectations with regard to greater information disclosure and

a greater say in decision-making.

Share-ownership and turnover. A small number of studies have investigated the

relationship between share-ownership and turnover, but none have looked directly at

the question of share-ownership, turnover and performance. Most studies report a

strong and negative relationship between share-ownership and turnover (Buchko,

1992; Long, 1980; Rhodes and Steers, 1981; Wilson et al., 1990), though some

suggest that only certain types of scheme reduce turnover (Fernie and Metcalf, 1995;

Addison and Belfield, 2001).

In general, case studies (for example, Buchko 1992) are more likely to find a strong,

negative relationship than survey analyses (Addison and Belfield 2001; Fernie and

Metcalf 1995). Those studies comparing turnover before and after share-ownership

introduction (Buchko 1992) tend to show a stronger negative relationship than those

comparing share-ownership and non-share-ownership firms or share-owners and non-

owners within the same firm (Addison and Belfield 2001; Fernie and Metcalf 1995).

There is also evidence that the greater the coverage of the share-ownership scheme,

the more likely that either turnover intention or actual turnover were reduced.

Methodology

Data. The analysis uses the 1998 Workplace Employee Relations Survey (WERS98).

It differs from its predecessors in collecting matched employer-employee information.

It has comprehensive information on a nationally-representative sample of 2,191

establishments employing 10 or more employees and on 28,323 employees who work

in these establishments. (Cully et al., 1998). Data on the establishments include

information on their structural characteristics, management employment practices,

product markets, labour force composition and the nature of their collective

employment relations. The data on employees include weekly pay, occupational

group, qualifications, marital status, age, gender, union membership, hours worked

and tenure.

9

Financial Performance and Labour Productivity Variables. In WERS98, the

measures of performance are qualitative, and are derived from manager assessments

of what is happening in their own establishment relative to what they believe is

happening in other establishments in the same industry. For measuring financial

performance, the particular question asked is:

How would you assess the financial performance of this establishment compared with

the establishments and firms in the same industry?

(i) a lot better than average (ii) better than average (iii) about average for

industry (iv) below average (v) a lot below average.

A similar question was asked for measuring labour productivity i.e.:

How would you assess the labour productivity of this establishment compared with

the establishments and firms in the same industry?

(i) a lot better than average (ii) better than average (iii) about average for

industry (iv) below average (v) a lot below average

The variables used in the performance analyses are binary, taking the value “1” if the

workplace has above average performance and “0” otherwise. This is because some

of the cells in the five-part variable are too small for meaningful maximum likelihood

analysis.

There is some scepticism regarding the reliability of the performance measures which

are based upon subjective evaluations of organisational performance by managers.

However, Machin and Stewart (1996) validated the performance measures by

tabulating plant closure in 1984-1990 against the reported financial performance in

1984 (using the Workplace Industrial Relations Survey panel data for 1984 and 1990).

They found that those establishments reporting below average financial performance

vis à vis their competitors in 1984 were significantly more likely to have closed down

between 1984 and 1990. This significant correlation clearly adds more weight to the

validity of the performance measure (ibid: 220). Besides, the subjective measures are

articulated as a useful alternative to objective performance measures which have

limitations of their own (Machin and Stewart 1996).

10

Commitment Variable. The commitment variable is based on a question asked in the

employee questionnaire which seeks to determine the extent to which the respondent

agrees or disagrees with the statement, “I have a sense of loyalty towards the

establishment,” on a 5-part scale from “strongly disagree” to “strongly agree”, with

“neither agree nor disagree” as the middle category.

Turnover Variable. The turnover variable is based on a question asked of the

manager most responsible for personnel about the number of permanent employees

who stopped working at the workplace in the last five years because they resigned

voluntarily, expressed in logarithmic form.

Defining Employee Share Ownership. The base definition of employee share

ownership used in the analysis is derived from a question asked of the manager most

responsible for personnel matters as to whether any employees receive payments from

employee share ownership schemes (ESO presence). There was also a variable for

whether sixty or more per cent of non-managerial workers participate in an employee

share ownership scheme (ESO participation).

Estimation. The paper estimates three sets of equation. The first is a series of ordered

probit equations with organisational commitment as the dependent variable. Data are

derived from both the establishment and employee questionnaires. The equations take

the form:

COMMij = α + β1ESj + β2Zj + β3Xij + eij,

where COMMij is a measure of employee commitment (as defined above), ESj is a

measure of share-ownership at the establishment, Xij is a vector of employee

characteristics, and Zji is a vector of establishment characteristics. The vector of

employee characteristics include controls for gender, ethnic background, age, marital

status, tenure, qualification, occupational status, job characteristics and pay levels.

The establishment vector is classified into organisation size, market characteristics,

ownership status (public, foreign, independent), time of operation and union

representation.

11

Because the data used in the analysis are multi-level the error term can be written as,

jijij θϕε +=

where ijϕ represents that part of the error term that varies independently across

individuals both within and between establishments and jθ measures that part that

varies across establishments but which is constant for workers within establishments.

This error structure describes a random effects model and the efficient estimator is

feasible generalised least squares.

The second set of equations is a series of least squares regressions with establishment

turnover as the dependent variable. They use data derived from the establishment

questionnaire. The equations take the form:

T/Oj = α + β1ESj + β2Zj + β3Yij + ej,

where T/Oj measures the level of turnover at the establishment (as defined above), ESj

is a measure of share-ownership at the establishment, and Zj is a vector of

establishment characteristics and Yij is a vector for employee characteristics as well

as workforce composition. The Yij vector includes controls for age of workforce,

gender, ethnic background, skill level, occupational distribution, employment status

and levels of pay are identified as important characteristics that influence employee

turnover (Addison and Belfield 2001; Fernie and Metcalf 1995). Except for the

workforce characteristics related to age and pay, the other workforce characteristics

are based upon Fernie and Metcalf’s (1995) model.

The third set of equations are based on the two proxies for performance used in this

study, labour productivity and financial performance. They use data derived from the

establishment questionnaires. The equations take the form:

12

PERFij = α + β1ESj + β2Zj + ej,

, technology, establishment age, industry, size and market

acteristics.

nitions of the variables used in the analysis are shown in the Appendices 1, 2 and

.

where PERF measures whether the establishment has above average performance or

not, ESj measures whether share-ownership exists at the establishment, and Zj is a

vector of establishment characteristics. The control variables include proxies for

union presence

char

Defi

3

13

Results

Share-Ownership and Commitment. The ordered probit analysis of employee

commitment is summarised in Table One. Contrary to hypothesis one, the analysis

suggests that workplaces with share-ownership schemes in place do not have higher

level of commitment, other things equal. Indeed, the evidence suggests that they may

have lower levels. The coefficient estimates for the variables based on whether the

employee’s workplace has a share ownership scheme in place both have a negative

sign, neither of which are not significant at the ten per cent level. This applies for

both definitions of share-ownership used – presence and participation.

A plausible interpretation of this result is that the presence of share-ownership causes

reduced levels of affective commitment. This interpretation is favoured particularly

since there is a strong theoretical rationale as well as some empirical evidence to

suggest that share-ownership schemes influence affective commitment rather than the

other way round (Dunn et al. 1988).

Such a result calls into question the widely-held view that share-ownership has its

main impact on performance via enhanced employee commitment, and the related

belief that share-ownership is a key component in the generation of a high

commitment workplace (Conte 1982; Florkowski 1987; Long 1978a; Pierce et al.

1991; Rhodes and Steers 1981; NCEO 2002, 2004). One possible explanation for this

result builds on the theory of unmet expectations. Kruse (1984) suggests that the

existence of share-ownership schemes raises expectations with respect to greater

participatory rights amongst the employees in these workplaces. Inability of the share-

ownership schemes to fulfil these expectations may result in disillusionment and

hence a decline in the levels of commitment amongst employees in some share-

ownership establishments.

Share-Ownership and Turnover. The analysis of establishment labour turnover is

summarised in Table Two. In support of hypothesis two, it suggests that there is a

strong negative relationship between share-ownership and turnover, other things

equal. This result applies to both proxies for employee share-ownership, the

coefficient estimate being slightly higher for the participation than for the presence

14

variable. However, the differences are minimal. These coefficients are both

significant at the one per cent level.

The possibility that the lower levels of employee turnover in share-ownership

establishments are attributable to the high wages paid in these establishments (Renaud

et al. 2004; Blair and Kruse 1999) is tested by controlling for the level of yearly

earnings for full-time employees.

The suggestion therefore is that the often found positive relationship between share-

ownership and performance could result from its influence on the quit-rate, by helping

the firm to economise on hiring/firing costs and protect valuable investments in

specific human capital. This would suggest a hard HRM, “golden handcuffs”

explanation of the positive share-ownership/performance relationship.

Share-Ownership, Financial Performance and Labour productivity. The probit

analysis relating share-ownership and relative financial performance is shown in

Table Three. It indicates that employee share-ownership is positively associated with

financial performance and the relationship is significant at the one per cent level for

the presence measure of share-ownership.

Adding the fitted values for turnover derived from the analyses summarised in Table

Two reduces the coefficient on the share-ownership variable by 14 per cent for the

presence variable and 16 per cent for the participation variable. In both cases, the

fitted value variable is negative, but not significant at the ten per cent level. This

suggests that a part of the positive relationship between share-ownership and financial

performance is due to the impact of share-ownership on labour turnover, thereby

offering support for hypothesis three.

Further support for hypothesis three exists when performance is measured in terms of

labour productivity. Table Four shows the results of the probit analysis relating to

share-ownership and labour productivity. The result indicates that employee share-

ownership is positively associated with labour productivity and the relationship is

significant at the one per cent level for the presence measure of share-ownership.

15

Upon the inclusion of the fitted value for employee turnover (columns 2 and 4 of

Table Four) the coefficient on the share-ownership variable reduces by 60% per cent

for the presence variable and 100% per cent for the participation variable. In both

cases, the fitted value variable is negative and significant at the one per cent level.

This suggests that a significant part of the positive relationship between share-

ownership and labour productivity is due to the impact of share-ownership on labour

turnover, thereby offering strong support for hypothesis three. Thus, the higher levels

of labour productivity observed in share-ownership workplaces are substantially

attributable to lower levels of employee turnover, thereby providing strong support for

hypothesis three.

Discussions, Conclusions and Implications

The analysis suggests that previous work investigating the relationship between share-

ownership and organisational performance neither provides a sufficiently clear picture

of the factors mediating the strength of this relationship, nor fully explores the routes

through which share-ownership schemes enhance performance. The findings suggest

that the “golden path” hypothesis that employee share ownership has its main impact

on organisational performance via enhanced commitment is open to question. The

evidence is that the level of employee commitment is actually lower in share-

ownership workplaces.

The analysis does, however, offer some support for the hypothesis that a substantial

part of the explanation of this positive association with labour productivity and

financial performance is due to the promotion of lower labour turnover in share-

ownership workplaces. Not only is turnover significantly lower in share-ownership

workplaces, but the positive association between share-ownership and labour

productivity is substantially lower when fitted values for turnover are included in the

labour productivity statistical equations.

While ESO schemes are associated with lower levels of employee turnover, these

schemes do not foster higher affective commitment. This challenges the dominant

view that ESO schemes influence employee turnover by fostering feelings of affective

16

commitment (Pierce et al. 1991). Instead, the findings direct attention to the ‘golden

handcuff’ theory which suggests that ESO schemes raise perceived costs of leaving

the firm because the ongoing income associated with employee-ownership can be

sustained only if organisational membership persists (Culpepper et al. 2004;

Richardson and Nejad 1986).

By advocating the ‘golden handcuff’ theory, this paper emphasises the critical role

played by financial considerations and therefore continuance rather than affective

commitment in explaining the higher productivity in share-ownership firms. These

findings endorse Culpepper et al.’s (2004) view that future research on ESO schemes

and behavioural outcomes should extend beyond affective commitment by including

other components of commitment as identified by Meyer and Allen (1997). Therefore,

this paper makes a case for distinguishing between different components of

commitment when attempting to explain the ESO/performance relationship.

Fundamentally, this paper challenges the generalisability of Culpepper et al.’s (2004)

argument that the financial rewards associated with stock ownership are more likely

to encourage employees to leave rather than increasing the perceived costs of leaving

the firm.

The higher labour productivity observed in the share-ownership firms can, to a large

extent, be attributed to lower employee turnover. Higher labour productivity can

therefore be achieved even if the employee decision to remain is primarily due to

financial considerations. This challenges Luchak’s (2003) argument that lower

employee turnover induced by financial rewards results in the retention of

unproductive employees, thus lowering labour productivity. Instead, this paper

advocates the firm-specific capital investment argument which suggests that reduced

employee turnover enhances labour productivity by maximising returns from existing

investments in human capital and encouraging greater investment in firm-specific

capital (Blair and Kruse 1999; Richardson and Nejad 1986; Wilson et al. 1990).

The conclusions that ESO schemes improve organisational performance and that they

operate through reduced employee turnover rather than enhanced affective

commitment is likely to have implications outside the academic sphere.

17

First, the findings have implications for managerial practitioners and companies

considering the implementation of a share scheme. The results would enable them to

have a more realistic view of the expected benefits and the costs associated with the

adoption of a share scheme, thereby influencing their decision whether to invest in a

share scheme. Furthermore, they will have realistic expectations regarding the

benefits associated with the ESO scheme. It is unlikely that they will perceive it as a

magical cure for poor performance. Instead, and more appropriately, they may view it

as a useful retention and recruitment device.

Second, the findings have implications for policy-makers who determine the

incentives that should be given to encourage companies to adopt share-ownership

schemes. When the mere existence of share schemes is no guarantee for boosting

organisational performance, reducing agency costs, empowering employees and

bringing about a more equitable distribution of wealth, policy-makers may wish to

reconsider whether or not to encourage their adoption or to advocate tax breaks.

Some caution must, however, be applied to the conclusions reached in this study,

however. While WERS98 has many of the key qualities that are desirable for such an

analysis, there are attributes that are less desirable. This particularly applies to the

cross–sectional nature of the data-set and the broad definitions of share-ownership

used in the survey questionnaire. Thus the results should be seen as indicative of the

need for further, more focused research, rather than definitive in their own right. The

problem of causality can be addressed by using panel data, or by designing

longitudinal studies with different samples. Qualitative data could add value by

providing insights into the causal processes. A case is thereby made for encouraging a

tradition of collaborative research employing both quantitative and qualitative

analysis techniques. Furthermore, this paper paves the way for exploring non-

attitudinal routes through which ESO schemes possibly impact upon performance.

Finally, the existing focus on the impact of ESO schemes on performance has

neglected other important uses of share schemes, i.e. as an anti-takeover device, in

facilitating employee buy-outs, as an HR tool for attracting and retaining critical

talent, and finally as an alternative to the pension plans. This gap presents yet another

18

opportunity for future research which would be of relevance to academics and

practitioners.

19

Table One: Random Effects Analysis of Employee Commitment Independent and Control Variables Presence Participation Constant 2.168*** 2.212*** Presence of share-ownership -0.098 - 60-100% of non-managerial employees actually participate in the share-ownership - - 60-100% of non-managerial employees eligible for share-ownership - -0.048 % of female employees -0.030 -0.040 Ethnicity: % of Black employees -0.207 -0.228 % of Asian employees 0.069 0.044 % of Chinese employees 6.680 6.428 Age group: Aged 20-24 years -0.008 -0.073 Aged 25-29 years -0.161 -0.213 Aged 30-39 years -0.198 -0.252* Aged 40-49 years -0.043 -0.124 Aged 50-59 years 0.085 0.007 Aged 60 years plus 0.220 0.139 Marital status: Married 0.177*** 0.171*** Current job tenure: 1- 2 years -0.127 -0.128 2- 5 years -0.153* -0.162* 5- 10 years -0.142* -0.135 Plus 10 years -0.158* -0.131 Education: A-level or equivalent 0.055 0.060 O-level or equivalent 0.053 0.030 Cse or equivalent 0.033 0.008 Nvq or equivalent -0.077 -0.072 Occupational distribution: % Managerial and Professional -0.064 -0.053 % Technical, scientific 0.084 0.076 % Craft -0.005 -0.005 % Clerical -0.108 -0.090 % Sales 0.098 0.153 % Operatives/unskilled -0.217* -0.202* Establishment variables: Trade union membership -0.289*** -0.288*** Temporary job -0.108 -0.117 Fixed job -0.178 -0.198 Female job 0.155* 0.164* Male job -0.207*** -0.191** High pay 0.256*** 0.294*** Low pay 0.014 0.021 Big organisation -0.104 -0.098 Small organisation -0.144* -0.131 Sectors: Manufacturing -0.148 -0.162 Electricity, gas and water 0.113 0.043

20

Construction -0.072 -0.079 Wholesale and retail -0.008 -0.040 Hotels and restaurants 0.038 0.024 Transport and communications -0.103 -0.096 Financial services -0.048 -0.055 Other business services -0.099 -0.124 Public Administration 0.095 0.089 Education 0.111 0.111 Health 0.018 0.026 Market characteristics: Product market competition (high competition for main product or services) 0.093 0.079 International market 0.030 0.026 Market growth 0.011 0.017 Market share 0.011 0.029 Establishment characteristics: Presence of a consultation committee -0.098* -0.109* Presence of a briefing committee 0.028 0.014 Presence of a performance/quality committee 0.037 0.034 Public sector 0.019 0.023 Foreign owned -0.047 -0.042 Establishment status: Independent establishment 0.105 0.125 Establishment age 0.000 9.38E-05 Recognised union at establishment 0.131* 0.136* Number of observations 14960 14420

* Significant at 10% level, ** Significant at 5% level, *** Significant at 1% level

21

Table Two: Least Squares Analysis of WorkplaceTurnover Independent and Control Variables Presence Participation Constant -1.858*** -1.787*** Presence of share-ownership -0.337** - 60-100% of non-managerial employees actually participate in the share-ownership - - 60-100% of non-managerial employees eligible for share-ownership - -0.376*** Sectors: Manufacturing -0.072 -0.043 Public Administration -0.134 -0.131 Education 0.012 0.015 Health and Social Work 0.247 0.255 Electricity, gas and water -0.367 -0.385 Construction -0.084 -0.070 Wholesale and retail -0.053 -0.031 Hotels and restaurants 0.502 0.480 Transport and communications -0.112 -0.168 Financial services -0.073 -0.145 Other business services 0.100 0.132 Number of employees (multiplied by 1000) -0.000*** -0.000*** Establishment status: Independent establishment -0.190 -0.154 Private sector 0.399** 0.350 Recognised union at establishment -0.301** -0.271 Procedures dealing with collective disputes -0.039 -0.085 Proportion of part-time workers 0.246 0.306 Proportion of female workers -0.353 -0.488 Proportion of ethnic workers -0.080 0.031 Proportion of workers aged under 21 1.158*** 1.125** Proportion of unskilled workers -0.461 -0.449*** Proportion of workers in sales -0.051 -0.222 Proportion of technical and scientific workers -0.647* -0.696** Proportion of clerical workers -0.224 -0.199 Proportion of craft workers -0.578 -0.650** Proportion of operative workers -0.617** -0.733*** Proportion of professional and managerial workers -0.321 -0.269 % full-time employees earning <£9000 p.a 0.188 0.259 % full-time employees earning <£22000 p.a -0.016 -0.034 Number of observations 1351 1308 R-squared 0.3168 0.3125


22

Table Three: Probit Analysis of Financial Performance, Turnover and Share-ownership

Presence of share-

ownership Participation in share-

ownership

Independent and Control Variables No Fitted Values

Fitted Values for Turnover

No Fitted Values


Constant -0.173 -0.883*** -0.107 -0.955** Presence of share-ownership 0.593*** 0.510*** - - 60-100% of non-managerial employees actually participate in share-ownership - - 0.481*** 0.402* Recognised union at establishment -0.155* -0.285*** -0.201 -0.370** Level of technology: % of unskilled workers 0.081 -0.126 0.018 -0.180 Establishment age: >20 years -0.007 -0.033 0.013 -0.009 Sectors: Manufacturing 0.193 0.286 0.234 0.308 Public Administration 0.875*** 0.715* 0.844 0.665 Education 0.415** 0.349 0.397 0.324 Health 0.005 0.264 0.003 0.300 Electricity, gas and water 0.159 0.006 0.371 0.244 Construction -0.103 0.342 -0.078 0.372 Wholesale and retail -0.056 0.041 -0.015 0.093 Hotels and restaurants 0.007 0.428* 0.091 0.568 Transport and communications -0.022 -0.149 0.106 -0.030 Financial services 0.182 0.091 0.158 0.024 Other business services -0.216 -0.254 -0.220 -0.235 Number of employees (multiplied by 1000) 0.000 0.000 0.000 0.000 Market characteristics: Market growth 0.455*** 0.505*** 0.445*** 0.482*** International market -0.022 -0.104 -0.042 -0.130 Product market competition (high competition for main product or services) -0.013 0.021 -0.019 0.015 Establishment status: Independent establishment 0.183** 0.019 0.110 -0.060 Fitted value of employee turnover - -0.391*** - -0.464** Number of observations 1329 1145 1284 1143 Chi Squared 82.672 97.569 56.187 87.798


23

Table Four: Probit Analysis of Labour productivity, Turnover and Share-Ownership

Presence of share-

ownership Participation in share-

ownership

Independent and Control Variables No Fitted Values


No Fitted Values


Constant 0.076 -1.236*** 0.122 -0.998** Presence of share-ownership 0.331*** 0.133 - - 60-100% of non-managerial employees actually participate in share-ownership - - 0.298* -0.026 Recognised union at establishment 0.008 -0.277** 0.013 -0.214 Level of technology: % of skilled workers 0.094 -0.055 0.028 -0.053 Establishment age: >20 years -0.177** -0.158* -0.201 -0.172 Sectors: Manufacturing -0.307 -0.368* -0.294 -0.320 Public Administration 0.393 0.021 0.361 0.069 Education 0.352 0.090 0.333 0.123 Health 0.424** 0.577*** 0.407 0.546 Electricity, gas and water -0.111 -0.553 0.083 -0.315 Construction -0.441* -1.071*** -0.439 -1.015* Wholesale and retail -0.287 -0.126 -0.200 -0.048 Hotels and restaurants -0.284 0.455 -0.239 0.389 Transport and communications -0.169 -0.505 -0.103 -0.408 Financial services -0.432* -0.581** -0.379 -0.500 Other business services -0.421** -0.313 -0.424 -0.282 Number of employees (multiplied by 1000) 0.000 0.000 0.000 0.000 Market characteristics: Market growth 0.205 0.217*** 0.184 0.186 International market 0.168 0.006 0.127 -0.022 Product market competition (high competition for main product or services) -0.020 -0.051 0.005 -0.047 Establishment status: Independent establishment 0.009 -0.084 -0.044 -0.098 Turnover - -0.764*** - -0.640*** Number of observations 1273 1101 1232 1069 Chi Squared 77.325 93.275 68.977 76.612


24

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29

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30

Appendix 1: Definition of Variables for Share-Ownership Schemes and Affective Commitment

Variable Appendix 1: Definition

Independent and Dependent Variables

Presence of share-ownership (Empshare) Do any employees at this workplace receive payments or dividends from any of the following payment schemes? (1= employee

share-ownership scheme; 0 = profit related payments or bonuses, deferred profit sharing schemes, individual or group

performance related pay schemes, other cash bonuses)

60-100% non-managerial employees actually

participate in share-ownership

Do the majority of eligible non-managerial employees (60% or more) at this workplace participate in the employee share-

ownership schemes? (1/0, Yes/No).

Affective commitment I have a sense of loyalty to the establishment

(0 = Strongly Disagree , 1 = Disagree, 2 = Neither Agree nor Disagree , 3 = Agree or 4 = Strongly Agree)

Contextual Variables

Individual Controls

Sex of employee Are you male or female?

Male (1 = male, 0 = otherwise)

Ethnic group To which of the groups do you consider you belong?

Black 1 = Black, 0 = otherwise.

Asian 1 = Asian , 0 = otherwise.

Chinese 1 = Chinese , 0 = otherwise.

Age of employee How old are you?

20-24 yrs 1= 20-24 yrs, 0 = otherwise.

25-29 yrs 1 = 25-29 yrs, 0 = otherwise.


30-39 yrs 1 = 30-39 yrs, 0 = otherwise.

40-49yrs 1 = 40-49yrs, 0 = otherwise.

50-59yrs 1 = 50-59yrs, 0 = otherwise.

60 yrs or more 1 = 60 yrs or more, 0 = otherwise.

Marital status Which of the following describes your current status?

Married 1 = Living with spouse or partner , 0 = otherwise.

Job Tenure How many years in total have you been working at this workplace?

1 to less than 2yrs 1 = 1 to less than 2yrs, 0 = otherwise.

2 to less than 5 yrs 1 = 2 to less than 5 yrs, 0 = otherwise.

5 to less than 10 yrs 1 = 5 to less than 10 yrs, 0 = otherwise.

More than 10 yrs 1 = More than 10 yrs , 0 = otherwise.

Educational qualifications What is the highest educational qualification you hold?

ALEVEL 1 = A level or equivalent , 0 = otherwise.

OLEVEL 1 = O levels or equivalent/ GCSE , 0 = otherwise.

CSE 1 = CSE or equivalent/GCSE , 0 = otherwise.

NVQ (vocational) Do you hold any recognised vocational qualification such as trade apprenticeships, NVQs or a city and guilds certificate? (1/0,

Yes/No).

Occupation Which of the following occupational groups best describes your job at present?

Professional e.g. teachers, lecturer, lawyer, librarian, engineer, architect, doctor, accountant, social worker.

1 = Professionals , otherwise = 0.

Craft and skilled service e.g. tool maker, electrician , fitter, motor mechanic,

1 = Craft & skilled service = 1, 0 = otherwise.

32


Clerical and secretarial

e.g. typist, postal clerk, secretary, civil service

1= Clerical & secretarial , 0 = otherwise.

Sales e.g. till operator, sales assistant, sales representative, petrol pump attendant

1 = Sales = 1, 0 = otherwise.

Line and assembly. e.g. assembly line worker, packer, truck driver

1 = Operative and assembly, 0 = otherwise.

Trade union membership 1= if the employee is currently a member of a trade union or a staff association, 0 = otherwise.

Nature of job Is your job permanent or is it temporary or for a fixed term?

Temporary job 1 = Temporary contract, 0 = otherwise.

Fixed term contract 1 = Fixed term contract, 0 = otherwise.

Female work 1 = The work at this workplace is done mainly by women or only by women , 0 = otherwise.

Male work 1 = The work at this workplace is done mainly by men or only by men , 0 = otherwise.

Gross yearly Wage level How much do you get paid for the job here before a tax and other deductions are made?

Above £18,721 1 = Above £18,721 p.a. before tax , 0 = otherwise.

Between £7,281 - £ 9,360 1 = Between £7,281 - £ 9,360 p.a. before tax , 0 = otherwise.

Industry Controls Which sector does the establishment operate in?

Manufacturing sector (1/0, Yes/No)

Public administration (1/0, Yes/No)

Education (1/0, Yes/No)

Health (1/0, Yes/No)

Electricity, gas and water (1/0, Yes/No)

Construction (1/0, Yes/No)

33


Wholesale and retail (1/0, Yes/No)

Hotels and restaurants (1/0, Yes/No)

Transport and communication (1/0, Yes/No)

Financial services (1/0, Yes/No)

Other business Services (1/0, Yes/No)

Other community services Omitted category

Establishment Controls

Establishment size How many employees are currently employed in an establishment?

10,000 plus 1 = Number of employees in the establishment is >= 10,000. , 0 = otherwise.

Less than 200 1 = Number of employees in the establishment is < 200 , 0 = otherwise.

Market Characteristics

Product market competition

Is there a high competition for main product or service produced by the establishment?

(1/0, Yes/No).

International market Is the market for the main product or service international?

(1/0, Yes/No).

Market growth Is the market in which this establishment operates growing? (1/0, Yes/No).

Above 26% UK market share The establishment’s UK market share for the main product or service is 26-50% or greater than 50% = 1, 0 = otherwise.

Communication systems

Joint consultation Are there any committees of managers and employees at this work place primarily concerned with consultation rather than

negotiation? (1/0, Yes/No)

Team briefing Do you have a system of briefings for any section or sections of the workforce here? (1/0, Yes/No)

34


Quality circles Do you have any groups at this workplace that solve specific problems or discuss aspects of performance or quality? (1/0,

Yes/No)

Ownership status

Private sector How would you describe the formal status of this establishment?’ Is it privately or publicly owned ?

1 = Private sector,

0 = otherwise

Foreign ownership; part/full How would you describe the ownership status of the establishment?

1 = UK and foreign owned or predominantly foreign owned (51% or more) or foreign owned or controlled,

0 = otherwise.

Independent establishment Is the establishment a single independent UK based establishment? (1/0, Yes/No).

Age of establishment For how long has this establishment been operating at this address? (Continuous variable Minimum 0 years-997 years).

Union presence Is there at least one recognised union at the establishment. (1/0, Yes/No)

Note : Most of the questions from the WERS98 data set have been rephrased in the interest defining the variables used in this thesis

35

Appendix 2: Definition of Variables for Share-Ownership Schemes and Employee Turnover Variable Appendix 2: Definition


Presence of Employee Share-Ownership Schemes and Majority

participation in Employee Share-Ownership Schemes

Same as Appendix 1

Employee Turnover (LogQuit) During the last twelve months how many permanent employees stopped working here because they resigned

voluntarily?

Log of total number of part-time and full-time employees that resigned voluntarily.

Better than average financial performance (Betterfp) How is the financial performance of this establishment compared with the establishments and firms in the same

industry? (1= a lot better than average or better than average, 0 = about average for industry, below average or a lot

below average).

Better than average labour productivity (Betterlp) How is the labour productivity of this establishment compared with the establishments and firms in the same

industry? (1= a lot better than average or better than average, 0 = about average for industry, below average or a lot

below average).


Individual Controls

Sectors Same as Appendix 1

Establishment size Same as Appendix 1

Establishment Status

Independent establishment Same as Appendix 1

Private sector How would you describe the formal status of this establishment? Is it privately or publicly owned? (1= Private

sector company or Private sector-other; 0 = Public sector)

36


Union Presence Same as Appendix 1

Grievance handling procedures Are there any formal procedures for dealing with collective disputes raised by any group of non-managerial

employees (1/0, Yes/No).

Pay

% full time employees getting more than £22,000 p.a % full time employees earning more than £22,000 p.a. to total full-time workforce currently in the establishment

Employment contract

% of part time employees % part-time workers to total workers to total workforce currently in the establishment.

Gender

% of female employees % of part-time and full-time female employees to total workforce currently in the establishment.

Ethnicity

% of non white employees % of current workforce from non ethnic background to the total workforce currently in the establishment.

Age

% of employees under 20years % of current workforce aged under 20 years to the total workforce currently in the establishment.

Occupational distribution

% of unskilled workers % of routine unskilled workers to the total workforce currently in the establishment.

% sales % of full-time and part-time sales staff to the total workforce currently in the establishment.

% technical and scientific % of full-time and part-time technical staff to the total workforce currently in the establishment.

% Clerical % of full-time and part-time clerical and secretarial staff to the total workforce currently in the establishment.

% craft and skilled % of full-time and part-time craft and skilled services staff to the total workforce currently in the establishment.

% operative and assembly % of full-time and part-time operative and assembly staff to the total workforce currently in the establishment.

% professional % of full-time and part-time professional services staff to the total workforce currently in the establishment.

Note : Most of the questions from the WERS98 data set have been rephrased in the interest defining the variables used in this thesis.

37

Appendix 3: Definition of Variables Employee Turnover and Organisational Performance



share-ownership schemes and majority participation

in share-ownership schemes and Betterfp

Same as Appendix 1.

Fitted values of employee turnover


Union presence Same as Appendix 1

% of unskilled workers % of routine unskilled workers to the total workforce currently in the establishment.

Establishment Age

> 20 years Has the establishment been in operation at the current address for greater than 20 years? (1/0, Yes/No).

Sectors Same as Appendix 1

Establishment size

10 – 30,000 employees Currently how many employees do you have on the payroll at this establishment? (Continuous

variable; Minimum 10 to Maximum 30,000 employees)

Market Characteristics

Market growth Same as Appendix 1

International market Same as Appendix 1

Product market competition

Same as Appendix 1

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Establishment Status

Independent establishment Same as Appendix 1

Note: Most of the questions from the WERS98 data set have been rephrased in the interest defining the variables used in this thesis.

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employee share ownership, commitment and turnover: … · has its main impact upon performance via...

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