In our paper, Employee Stock Ownership Plans: Employee Compensation and Firm Value, which was recently made publicly available on SSRN, we investigate whether adopting a broad-based employee stock ownership plan enhances productivity by improving team incentives and co-monitoring. That is, does employee capitalism work? If so, how are gains divided between shareholders and employees?
We find that small ESOPs increase productivity. Unlike Jones and Kato (1995) on Japanese ESOPs, our evidence of productivity gains is based on the effects on two main beneficiaries of such gains: employees and shareholders. Because our evidence indicates both stakeholders gain from adopting small ESOPs, we infer employee share ownership increases the size of the economic pie by improving worker productivity.
This causal interpretation is substantiated by our evidence on how the division of productivity gains is related to employee mobility within an establishment’s industry and location of work place. We find that when labor mobility increases, increasing workers’ bargaining power vis-à-vis shareholders’, employees’ share of gains increases and stockholders’ share decreases.
Large ESOPs, defined as those controlling more than 5% of shares outstanding, have a more or less neutral effect on both cash wages and shareholder value, suggesting that the average gains are limited to the value of ESOP shares granted to employees. The lower average gains are due to heterogeneity in motives for establishing large ESOPs. We identify two subgroups of large ESOPs with motives unrelated to improving group incentives and co-monitoring: cash conservation and entrenchment against threats from the market for corporate control.
Large ESOPs motivated to conserve cash are followed by wage cuts. By contrast, those motivated to thwart hostile takeover bids provide substantial wage gains, a previously undocumented cost of managerial entrenchment to shareholders. With these exceptions notwithstanding, the overall implication we draw from this study is that employee capitalism works through group incentives and co-monitoring when ESOPs are designed for that purpose.
The full paper is available for download here.