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Employee Ownership, Motivation and Productivity

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Employee ownership, motivation and productivity A research report for Employees Direct from Birkbeck and The Work Foundation By Jonathan Michie, Christine Oughton and Yvonne Bennion November 2002 Page 2 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Contents About the authors/Acknowledgements Foreword, by Will Hutton Executive Summary 1. Introduction 2. Site visits and interviews 3.

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Follow-up surveys 4. Focus groups 5. Discussion and Conclusion References 3 4 5 6 10 18 21 30 33 Layout: Wyvern 21 Printing: JW Arrowsmith The Work Foundation.

Registered as a charity no: 290003 This issue first printed November 2002 ISBN 1-84373-003-0 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the publishers. This publication may not be lent, resold, hired out or otherwise disposed of by way of trade in any form, binding or cover other than that in which is is published, without the prior consent of the publishers.

E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 3 About Employees Direct Employees Direct is a working party established in July 2001, following a report commissioned by Mutuo1 on how the government’s aim of enhancing productivity through the motivational effects of employee shareholding might best be realised. 2 Employees Direct brings together academics, practitioners and opinion formers.

Its intention is to report on the potential for employee shareholding to: first, play an active role in improving the corporate governance and accountability of firms second, to enhance employee motivation and productivity. This report has been commissioned to help inform this process. The Working Party members include Mutuo, the CBI, Job Ownership Ltd, the TUC, Unity Corporate Advisers, Cobbetts Solicitors, the Cooperative Bank, the UKCC, Balpa, Prospect, Birkbeck and The Work Foundation (formerly The Industrial Society). For more information see www. employees-direct. rg The research for this report has been undertaken for Employees Direct by staff from Birkbeck and The Work Foundation. The three authors are all members of the Employees Direct working party. Acknowledgements We are grateful to the companies and employees who arranged and participated in the site visits and interviews, and with the follow-up surveys and focus groups. We agreed not to name individuals or companies, so the thanks have to be anonymous. However, four of the companies – Coolkeeragh, Stagecoach, St Luke’s Communications and Tullis Russell – agreed to be named.

We are therefore very pleased to be able to thank from Stagecoach Derek Scott, the Company Secretary, and two bus drivers, Steve Linger and David Wheatcroft; from Tullis Russell the Chief Executive Fred Bowden, plus Gail Ellis, Pam Landells and Erik Priessman; and from Coolkeeragh Power Limited Micky Creswell, for arranging the site visit and interviews, and the subsequent focus group. ICOM, the federation of worker co-operatives, kindly provided contact details for their member companies, and several ICOM members allowed us to conduct follow-up surveys among their employees.

We are grateful, for variously providing material, discussions and advice, to Robin Blagburn of Unity Corporate Advisers; Professor Richard Freeman from Harvard University; Peter Hunt, Chief Executive of Mutuo; and John McGurk of Balpa. Yvonne Bennion would like to thank her colleagues Graham Houston, John Arbuckle, Stephanie Draper and Brooke Guenot for helping to set up and conduct the focus group meetings. Jonathan Michie and Christine Oughton would like to hank their colleagues at Birkbeck who assisted with this research, Michael Lee, Omiros Sarikas, Lee Shailer and Katie Wright. About the authors Jonathan Michie is the Sainsbury Professor of Management at Birkbeck, University of London. He has just completed a three-year research project on ‘workplace reorganisation, HRM and corporate performance’, led jointly with Professor David Guest, within the ESRC’s Future of Work programme. He is a Board member of Mutuo. Dr Christine Oughton is Reader in Management and Head of the Department of Management at Birkbeck, University of London.

She has recently completed a two-year research project on the impact of globalisation and technological innovation on growth and employment, funded by the European Commission, and also coordinates a regional innovation network funded by the DTI and The Work Foundation. Yvonne Bennion is a Policy Specialist at The Work Foundation (formerly The Industrial Society). She has been a board member of Job Ownership Research and is a member of the DTI Partnership Fund Assessment Panel. 1. Mutuo is a new publishing title belonging to Communicate Mutuality.

It is a partnership between organisations that wish to show the value and potential of the mutual sector to a modern society. You can find out more about Mutuo by visiting www. mutuo. co. uk 2. See Michie and Oughton (2001). Page 4 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Foreword Employee-owned companies exist for a variety of reasons, from the personal vision of an owner to management and employee buy-outs, a way out of family succession problems or employees responding to closure threats.

The evidence is that companies with high levels of employee ownership outperform others, and the government has demonstrated through the introduction of the Share Incentive Plan that it sees employee share ownership playing a significant part in its policy to increase the UK’s productivity. This interim report addresses the question of whether the government’s approach will bear fruit. The majority of companies may admire the track record of the best-known employee-owned businesses, but have never regarded employee ownership as more than marginal to their own practices.

Yet there is a fascination to know whether employee-owned businesses have the essence of a commitment and enhanced performance that is not otherwise accessible.

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These are risky times for shareholders, but there is no better time to put the spotlight on employee ownership. People are at the heart of the productivity challenge. The skills, flexibility and ability to adapt of workers are key components of broader economic performance. Creative, knowledge-rich, innovative, highly productive work requires a high trust, people-driven organisation.

The UK’s productivity balance sheet suggests that our businesses are failing to create such Will Hutton environments and to get the best out of the UK workforce. Employee ownership by definition challenges traditional management attitudes towards employees. At the very least it creates an expectation of achieving a genuine balance in the interests of the company and employees. This research shows that the interrelationship of sound employee involvement practices with employee ownership has a positive effect on motivation and performance.

It does not ignore the hard work necessary over time to achieve this, nor the disenchantment of employees when they cannot see employee ownership changing the company’s style or benefiting them directly. Employee ownership may imply collective practices but this does not always happen. The government’s new scheme, being based on tax incentives, is individualised. The report, however, makes a case for the collective voice of employee owners and shareholders being integral to realising the full potential of employee ownership and its potential contribution to productivity.

I appeal to the government to give urgent consideration to these interim findings. E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 5 Executive summary Raising productivity is a key government objective. Skills, motivation and commitment are vital to how productive people are at work. This is the context in which tax incentives were introduced for employee shareholding. Will it work? That is the question the report addresses. Chapter 1 discusses current research on the causal links, grouped within three categories.

First, the Chancellor assumes share ownership will be seen by employees as a financial incentive, leading them to be more committed and motivated. Research supports this, with a caveat that employees are aware that an increase in their individual effort at work will not have a significant enough impact. Any such effect would require increased effort from the workforce collectively. Second, the Chancellor assumes that increased commitment and motivation will lead to increased productivity and profitability.

There is a large body of literature supporting this. Third are additional effects to those assumed by the Chancellor, namely that share ownership may lead to employees having a collective voice, with a positive effect on commitment and motivation. In Chapter 2 the ‘qualitative’ links between these various factors – of share ownership, consultation and participation, motivation and commitment, and performance outcomes – are explored by interviewing management and employees from ten selected companies.

The businesses were as follows: the generation and supply of electricity (Coolkeeragh) a leading UK airline a leading business consultancy, IT and outsourcing company an independent Scottish papermaker (Tullis Russell) a partnership of fuel efficiency experts a national bus and rail company (Stagecoach – bus interests only) an advertising agency (St Luke’s Communications) a family-owned department store a telecommunications company a computing consultancy firm. Next, we wanted to explore further the motivational effects of employee share ownership by surveying companies where such policies had been pursued for some time.

Chapter 3 reports on a survey of ICOM member companies, the federation of worker cooperatives, followed up with a questionnaire to employees. We also followed up our interviews with the airline employees, receiving further responses from flight crew members. The ICOM survey and the airline employee responses provide Institutional reform There is much to be gained by companies pursuing policies for employee involvement, and in this context employee share ownership can play a significant role.

However, for this potential to be fully tapped, the government’s current policy initiative needs to be further developed to include the collective voice aspect as a key component. How government policy can best be developed in this area will be addressed by the Employees Direct working party in their Final Report, in January 2003. Feedback on this report is therefore welcome, to: Professor Jonathan Michie School of Management & Organisational Psychology Birkbeck, University of London Malet Street, London WC1E 7HX Email: j. [email protected] ac. k Telephone: 020 7631 6761 Fax: 020 7631 6769 support from both the employer and employee returns for a number of the links. To explore these qualitative relations in greater depth, we revisited seven of our ten companies to conduct focus group discussions with a wider range of employees, reported in Chapter 4. The government recognises that productivity gains are more likely when share schemes ‘are combined with modern management practices which promote active employee participation’. Our own interviews, surveys and focus group discussions reported in Chapters 2, 3 and 4 respectively support this view.

Within this framework of enhanced employee commitment and motivation, employee share ownership appears capable of playing an important role: employee share ownership may make it more likely that companies will introduce policies of participation and involvement such policies may be pursued more seriously by management against a backdrop of employee share ownership employees may take such policies more seriously within a context of employee share ownership if the employee shareholdings are pooled to create a collective voice, this will reinforce the above three processes such a collective voice may itself boost commitment/motivation the financial incentive requires the whole workforce to act, since one employee along cannot affect profits. This can work in the right culture. Page 6 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 1. Introduction Raising productivity in UK firms to match levels in other European countries and the US is a key objective of this government’s economic policy agenda. This is, of course, a major and long-standing issue.

There is a range of factors involved, each of which require action on a number of fronts. There are no simple solutions. Closing the productivity gap will require increased investment in research and development, capital and people, improved education and training, and a modernised, productive infrastructure including transport. The problem of short-termism in British industry needs to be resolved; and within companies continuous improvements are needed in management practice, corporate governance and organisational design. But as productivity is fundamentally about how productive people are at work, their skills, motivation and commitment are key. 1 training for their workforce.

Less commented on – in either academic literature or public policy discussions – is the fact that the payback from investment in product and process innovation depends crucially on the tacit knowledge accumulated by the workforce, so reduced labour turnover can increase the long-term payback from such investments. This effect may not only increase productivity and profitability, it may make the difference between the firm deciding whether or not to proceed with the proposed investment. There is a large amount of literature on both the theory and practice of these processes which will be touched on only briefly in this report,2 but what we need to try to test can be illustrated in simple terms along the lines depicted in Figure 1. Figure 1: Linkages from share ownership to organisational effects, impact on employees, and organisational outcomes

This is the context in which the government has introduced a number of new arrangements, including tax incentives in the 2000 and 2001 budgets, to encourage employee commitment through employee shareholding, with the aim of improving Britain’s productivity: ‘Share ownership offers employees a real stake in their company… I want, through targeted reform, to reward long-term commitment by employees. I want to encourage the new enterprise culture of teamwork in which everyone contributes and everyone benefits from success. ’ Gordon Brown, Chancellor of the Exchequer, 1999 budget speech Will this work? What is the theory behind it, and is there any evidence in support? These are the questions that the current report seeks to address.

The results suggest that in economic terms there is certainly a rich seam to be tapped here, and indeed that by further developing government policy in this area, still more could be achieved. We need to ascertain whether any of these causal arrows actually exist in the real world and if so, how significant they are. Reduced labour turnover 1. Share Ownership 2. Effects 3. Impact 4. Outcomes Increased productivity and profitability Employee Share ownership Financial incentives Motivation and commitment The evidence The theory The theory is that owning shares will provide employees with financial incentives that will make them more committed to the organisation and more motivated at work.

If the company is more profitable, employees will gain financially through dividend payments and an increased share price. Greater motivation will have a direct effect in improving productivity through greater effort and possibly innovation. There may be a further benefit, alluded to in the Chancellor’s comments, if greater commitment to the firm results in reduced labour turnover. This will make it more worthwhile for firms to invest in Capital Strategies produces an Employee Ownership Index (EOI) of the share prices of firms that have a ‘significant degree’ of employee share ownership. Over the period 1992–2000 this index outperformed the FTSE All-Share Index by 173%. What, though, are the causal mechanisms at work?

McNabb and Whitfield (1998), using the 1990 Workplace Industrial Relations Survey (WIRS) data, found financial participation positively related to financial performance. But they also show that strong interaction effects mean that the influence of financial participation schemes cannot be analysed independently of other types of 1. ‘On the most recent comparative measure of output per person employed, UK productivity was found to be around 39% below that of the USA, 15% below France and 7% below Germany. There is a whole host of reasons for the productivity gap, but with specific regard to the workplace the problem seems to be one of uneven application of effective manage- ment techniques and training and development opportunities. Philpott (2002, p 15). 2. Some of this literature was reported and discussed in Michie and Oughton (2001). See also Michie (2001). E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 7 employee participation schemes, and that the effects of problem-solving schemes, for example, are dependent on the linkage with a financial participation scheme, while downward communication tends to have a positive effect regardless. However, using the 1998 Workplace Employee Relations Survey (WERS) data, Addison and Belfield (2000) find different results, for example discerning no significant association between downward communication and firm performance.

McNabb and Whitfield (2000) confirm that the two datasets generate different results, concluding that while there are enduring links between employee participation and financial performance, the precise nature of these requires more careful investigation than has thus far been possible. Also using the 1998 WERS data, Conyon and Freeman (2001) found that firms and establishments with shared compensation arrangements perform better than other firms in productivity and financial performance. The stock price of firms with shared compensation practices also outperformed those of other firms. Conyon and Freeman (2001) then surveyed 1,518 UK listed companies and found that, of their 299 returns, those with approved profit sharing or all-employee share schemes outperformed the FTSE All Share index by 40%.

They also found that firms and establishments with some form of shared compensation, particularly those with deferred profit sharing and employee share ownership are more likely to establish formal communication and consultation channels with workers than other establishments. This raises the question of what is actually causing the improved performance; it may be through increased commitment and motivation, but what is causing this? Is it just the financial incentive, or is it the improved communication and consultation which appears to be associated with employee share ownership? Certainly there is a large body of literature suggesting that employee commitment and motivation can be enhanced through a range of progressive human resource management practices, including but not restricted to employee share ownership.

It may be that the key effect of employee share ownership on performance is through making it more likely that firms introduce these other HRM practices – of communication, involvement and participation. In addition, where such practices are pursued, the existence of employee share ownership may underpin and enhance the positive effect that these have on commitment and motivation, by increasing employees’ faith that such involvement and participation is genuine and long term. Surveying employee share ownership across the EU, Pendleton et al (2001) concluded that: ‘There is a relationship between financial participation arrangements and other forms of employee participation (direct and/or representative) – enterprises that have financial participation are more likely to also have other participation and communications arrangements in place.

This supports research findings that financial participation works best when it is integrated with other participative, information and consultation arrangements, for example, in supporting ‘high performance’ work organisations’ (p 5, emphasis in the original). The ‘collective voice’ aspect of participation at work has been found to have a significantly positive effect on motivation and commitment. Where this collective voice takes the form of an employee shareholding trust, this may again make the introduction of progressive HRM policies both more likely and more effective. These considerations introduce a number of additional causal links that need to be explored, as illustrated in Figure 2: Figure 2: Further links from share ownership to organisational outcomes 1. Share Ownership 2. Effects 3. Impact 4. Outcomes 1

Financial incentives 2 Employee share ownership 3 Collective voice 6 Involvement and participation 4 Motivation and commitment 8 11 9 5 Increased productivity and profitability 10 7 Reduced labour turnover The causal links can be grouped within three categories, the first two of which are being assumed by the Chancellor, and upon which his policy depends for its efficacy. The third category are the additional effects just described, which if found to have substance would suggest Page 8 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 that the Chancellor’s policy agenda in this area may have the potential for delivering more than he had hoped.

However, to benefit from these additional effects the policies themselves may need to be further developed. First, the Chancellor is assuming that employee share ownership will be seen by employees as representing a positive financial incentive (Arrow 1), and that this will lead them to be more committed and motivated (Arrow 2). The existing academic literature, as well as our own research, provides supporting evidence for both assumptions, with one caveat – namely, that employees are aware that an increase in their own individual effort at work will not have a significant enough impact on productivity and profitability to alter the dividend they receive on their shares, nor on the share price.

Any such effect requires increased commitment and effort from the workforce collectively – the sort of teamwork that the Chancellor refers to. Second, the Chancellor is assuming that increased commitment and motivation will lead to increased productivity and profitability, both directly through increased ‘effort’ (Arrow 5) and also indirectly through reducing labour turnover (Arrow 9) and hence increasing the payback that firms enjoy from investment, both in training and in new products and processes (Arrow 10), with a concomitant tendency for firms to increase such investments accordingly. 3 These links have been tested for in what might be termed the ‘High Commitment Work Systems’ literature.

As with any such statistical work on large datasets, measuring what are inevitably very different firms in changing circumstances, with managements and workforces that are not homogenous either within or between firms, the results from different studies differ, but most do find such a causal link from motivation to outcomes. That literature also tends to find a positive link from progressive HRM practices that encourage involvement and participation, through to increased motivation and commitment (Arrow 8). Thus there is a large body of literature already providing support for these links in the Figure 2 model. The third group of arrows are additional effects to those assumed by the Chancellor. Employee share ownership may lead to employees feeling that they have a collective voice in the company (Arrow 3). This feeling of having a collective voice may have a direct, positive effect on commitment and motivation (Arrow 4).

That collective voice may encourage the adoption of progressive HRM policies involving involvement and participation (Arrow 6). Employee share ownership itself may also make the adoption of such practices more likely (Arrow 7). Finally, and perhaps most important of all, the positive effect that involvement and participation policies have on motivation and commitment may be enhanced and made more effective and significant if they are underpinned by and combined with employee share ownership (Arrow 11 – ie, enhancing Arrow 8). The interviews, surveys and focus groups reported on seek to shed light on how important managers and employees believe any of these effects to have been.

The existing literature Before turning to these interviews and focus groups, we will put them in context by reporting on the academic research addressing these questions. Grouping the effects into their three categories, there is evidence to support the Chancellor’s view that financial participation is positively related to financial performance (McNabb and Whitfield, 1998). As also reported above, that work does suggest that these factors are inextricably linked to other types of employee participation schemes,. This supports the broader view we have sketched, whereby different progressive HRM policies may reinforce each other and indeed be linked causally.

This is related to another finding from the ‘High Commitment Work Systems’ literature, that the effect of introducing progressive HRM policies may depend on how these are combined (or ‘bundled’). There are both theoretical reasons and empirical evidence for believing that such practices may be more than the sum of their parts if implemented appropriately. Conversely, pursuing one or more policies may be a waste of effort if other symbiotic policies are not also being implemented. It may be a waste of resources to train an employee if they don’t have the motivation to contribute, or if there is not the appropriate work organisation to allow them to make a greater contribution. Likewise, motivation itself may be insufficient if other factors are not in place.

As regards the second grouping of effects, of participation and involvement on motivation and commitment, and from there to increased productivity and profitability, the bulk of the research to date has been in the US, and on manufacturing. That work generally finds significantly positive linkages. 4 The work in the UK, using the 1990 Workplace Industrial Relations Survey (WIRS) and 1998 Workplace Employee Relations Survey (WERS) datasets has found similarly posi- 3. The idea that the future of work would mean ‘flexibility’ in the form of reduced tenure, increased turnover,‘portfolio’ working and the rest has increasingly been seen to be superficial, not grounded in any serious analysis or research, and misleading as a guide to policy; see the welcome statements to this effect from the Minister for Trade and Industry and, for report of the relevant research from the ESRC’s Future of Work programme, Nolan (2002). 4. See, for example, Appelbaum et al (2000) which also refers to much of the previous literature (as do most of the other papers cited in the footnotes that follow). E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 9 tive linkages to outcomes,5 including on increased innovation. 6 However, there are limits to how much those datasets can reveal. Drawing upon data from a ten-year study of over a hundred small and medium-sized manufacturing enterprises in the UK, Patterson et al (1997) found that HRM practices were the most powerful predictors of company performance.

Conducting our own surveys, we also found significantly positive linkages, particularly with innovation as an outcome, and with the causal links sketched above seeming to correctly describe the underlying processes at work. However, our latest survey 7 studies indicate the importance of firm-level employee relations, human resource policies, and other circumstances. ’ Kruse and Blasi report that there has been little study of the salient organisational mechanisms that might help explain the actual connection between employee ownership and performance. They call for further research on complementary HRM policies and practices, and ESOPs, which might jointly produce positive effects on corporate performance. Logue and Yates (2001) discuss much of the existing (US) literature, and also analyse survey data.

They argue that there are, potentially, strong positive links from collective employee shareholding to corporate outcomes, but only where these are combined with policies of participation and involvement. For the UK, Conyon and Freeman (2001) analysed the 1998 WERS data, linking the financial performance and labour productivity of each establishment to the percentage of non-managerial workers covered by the Inland Revenue-approved employee ownership schemes. Their analysis took account of differences in number of employees, age of establishment, industry, distribution of workforce by skill and gender, and the degree of competition in the sector. The relationship between employee share ownership and economic performance (financial performance and labour productivity) was found to be positive. inds rather mixed results when looking at productivity and profitability, with the regression coefficients on many of the links shown in Figure 2 not being statistically significant. 8 The ‘third group’ of effects might lead to a greater boost to productivity as a result of government policy than would be forthcoming from the simple ‘financial incentive’ mechanism alone, at least if those policies were developed to capture these additional benefits. Here the existing literature is weakest. Whether the existence of employee share ownership will lead to employees feeling that they have a collective voice will depend on whether the shares are held collectively in a trust or some other such arrangement.

The literature does suggest that a collective holding may encourage a teamwork culture and a co-operative company spirit that would deliver productivity benefits which would not follow from individual employee share holding because of the ‘free rider’ problem (ie, where individual effort and reward cannot be clearly identified and where to improve productivity and hence financial return requires a collective rather than just an individual effort (Conyon and Freeman, 2001)). 9 Quantitative and qualitative research These quantitative studies, analysing large datasets, are inevitably limited to the questions asked in the surveys and the quality of the responses given.

The WIRS and WERS datasets are impressive in scope, but are of limited use in attempting to go beyond testing for the sorts of statistical correlations reported above. To discover the causal mechanisms, in order to design policies that can take advantage of these, requires an exploration of people’s motivations and behaviour. This requires an interactive process whereby responses can be questioned and explored – ie, interviews and discussion. The existing quantitative work reported above was therefore built on in the current project by asking both managers and employees about motivations, attitudes and behaviour in the workplace. This was done first by visiting a number of workplaces, described in Chapter 2.

We also conducted our own surveys, primarily among companies already committed to the idea of employee ownership, to test whether the preconceptions of the individuals concerned had been borne out in practice. Finally, as reported in Chapter 4, we revisited most of the workplaces to conduct focus group discussions with selected groups of employees. In 1987, the US General Accounting Office study found that Employee Stock Ownership Plans (ESOPs) had an inconclusive impact on outcomes, except when employee ownership was coupled with employee participation in management decision making (GAO, 1987, pp. 30–31) – ie, the link depicted by Arrow 11 (the enhanced Arrow 8). Since then research findings have suggested a more positive link.

Kruse and Blasi (1995) review ‘the accumulated evidence concerning the prevalence, causes, and effects of employee ownership, covering 25 studies of employee attitudes and behaviours, and 27 studies of productivity and profitability (with both cross-sectional and pre/post comparisons)’. They find that:‘Perceived participation in decisions is not in itself automatically increased through employee ownership, but may interact positively with employee ownership in affecting attitudes… The dispersed results among attitudinal and performance 5. On the 1990 WIRS, see Michie and Sheehan (1999a) and Guest et al on the 1998 WERS. 6. On the link from participation and involvement to increased product and process innovation, see Michie and Sheehan (1999b). 7. One of these surveys was funded by the Leverhulme Trust (grant F/112/AL). On the link from participation and involvement to innovation, see Michie and Sheehan (2003). On the ink to good corporate performance more generally, see Michie and Sheehan-Quinn (2001). 8. This project was funded by the ESRC’s Future of Work programme (grant L212252040); see Guest et al (2001). 9. See also Blasi et al (1996), Kandel and Lazear (1992), Kruse and Blasi (1995) and Lazear (1995). Page 10 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 2. Site visits and interviews To explore the ‘qualitative’ links between these various factors – of share ownership, consultation and participation, motivation and commitment, and performance outcomes – we selected a range of companies to visit and to interview management and employees.

Ten companies were chosen to include: plcs and non-plcs those with extensive employee share ownership and those for whom employee share ownership was less extensive those with some type of collective or trust arrangement for employee shares, and those where such shares were just held individually firms with different motivations for using employee share ownership (employee motivation, family succession, privatisation). Four of the companies volunteered to be identified (Coolkeeragh, Stagecoach, St Luke’s and Tullis Russell), and at another (the airline) the company itself was not involved in the research, but we did interview a range of employees. The other five companies are simply described rather than named.

The nature of the businesses was as follows: the generation and supply of electricity (Coolkeeragh) a leading UK airline a leading business consultancy, IT and outsourcing company an independent Scottish papermaker (Tullis Russell) a partnership of fuel efficiency experts with a special objective of eradicating fuel poverty a national bus and rail company (Stagecoach – bus interests only) an advertising agency (St Luke’s) a family-owned department store a telecommunications company a computing consultancy firm We also interviewed David Young, the then deputy chairman of the John Lewis Partnership. employees belong to one of three recognised trade unions.

The institutional investors had at first opposed the idea of the employees’ shares being held collectively in a trust, but had eventually conceded. We interviewed a number of employees, all of whom were share owners through the Trust, and all of whom were members of one of the trade unions, although they were not all trade union representatives or activists. We also interviewed a senior manager. There has been much more employee involvement since the introduction of employee share ownership, and this has fed through to greater commitment. There has been a massive culture change and a reduction in demarcation, and a large part of this was said to be due to employee share ownership.

Pre-1992, people were not aware of the company’s performance; now people view their jobs much more in relation to the company. There is some degree of profit-related pay:‘In the beginning it was about stake and commitment, once profit came on stream it became stake, commitment and profit. ’ Overall, the group felt they were informed of corporate objectives, performance targets and actual performance; the latter through the company reward scheme, the bonus scheme and profit-related pay. They also felt they were given information on new initiatives. They felt that they were involved in the formulation of corporate objectives but more through the unions than the Trust.

They believed they were involved in day-to-day decision making through team working – teams make decisions about staffing levels at the plant and its day-today running. There is training for team building. However, they didn’t feel there was employee involvement in long-term strategic plans. They all felt that employee involvement increased motivation and commitment and that this resulted in increased productivity, increased profitability and a reduction in employee turnover. They felt that the Trust strengthened employee participation in day-to-day decision making, and to some extent in strategic decisionmaking, and that it reinforced employee commitment and motivation.

They agreed with the statement that the Trust makes the company more committed to informing and involving employees:‘it would not have happened otherwise’; and also that the company’s attempts to involve employees are felt to be more genuine because of the Trust. It was stressed that there had been a big culture change. The employee share ownership was felt to be important, but was seen as only part of a change in the corporate culture towards involvement and participation. The electricity supplier (Coolkeeragh) Following plans to privatise Coolkeeragh, by 1992 there was a common view that if the employees and management were unable to buy the company, there was a danger it would close. The ensuing buyout resulted in 45% of the shares being owned by the workforce through a Trust, with a further 15% owned by management, and the remaining 40% by institutions. There has since een some restructuring, but the ownership pattern has continued along these lines. There is a worker-nominated director. Ninety per cent of E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 11 The airline Around 4% of the company’s issued share capital is held by employees. We interviewed four employees: one from engineering, one from ground staff, one from administration and one flight crew member. All owned shares in the company, held both individually and through a shareholder trust. All said they received information on corporate objectives, targets and actual performance. Information on performance was disseminated electronically.

Only the flight crew member received information on new initiatives, delivered via roadshows. None felt involved in the formulation of corporate objectives and only one was involved in the formulation of performance targets, via a course for co-pilots. One of the four stated that he was involved in the design of new initiatives, but this was only through the trade union. Another said that they were pushing for a partnership approach with the company, but felt that they ‘had not got there yet’. Involvement in day-to-day decision making? The view of all four was ‘yes and no’. Given the nature of the airline business, there are many areas where they are simply following set procedures.

All four felt they were involved in the design of long-term strategic plans, and three cited the corporate suggestion scheme but felt that this didn’t really work. The annual employee opinion survey was mentioned, but it was felt that not much notice was taken of this. In response to the question:‘Do you feel that employee share ownership makes the company take employee involvement more seriously? ’, one said ‘no’ and three said ‘minimally’. In response to the question:‘Do you feel that employee share ownership makes employees feel more confident of the company’s commitment to employee involvement? ’, two said ‘no’ and two said ‘minimal effect’. In response to the question:‘Do you feel employee involvement and participation increases employee commitment and motivation? , all four said ‘yes’. Three also thought this led to a reduction in employee turnover, although one said this depended on outside conditions. All four thought that this commitment and motivation fed through to both increased productivity and increased profitability. There was no support for the statement that ‘the company’s attempts to involve employees are genuine because of the employee ownership’, although two did think that ‘without employee share ownership there would be less commitment by the company to informing and involving employees’. Another agreed that employee share ownership would have this effect on the company if it was above a certain level.

All four agreed that ‘employees would feel they had a greater stake if the voting rights of shares were pooled to provide a collective voice’, although it was said that this would need to be done in the right way and explained to employees. From further discussion the following consensus was clear: the company operates in an industry that is highly regulated, with many constraints on operating procedures due to safety, and it therefore lacks flexibility. Due to the size of the company, its formal structures, etc, people do not feel that they have a real stake in it even though they own shares. Pooling the shares would help strengthen relationships between employees and the company and provide more of a stake, so long as it genuinely gave employees a voice.

Of the four categories of employees, it appeared to be the flight crew members that the company was making most effort with as regards information sharing and participation. We therefore followed up these interviews with a questionnaire survey to a further 30 flight crew employees, to gauge how representative the responses from the flight crew member had been. We received ten usable returns, as reported in Chapter 3. These broadly confirm the above results, that flight crew employees saw potential in employee share ownership, but that this potential was not yet being fully realised. The business consultancy, IT and outsourcing company This company is one of the UK’s largest IT services groups, with a market capitalisation of ? . 2 billion. There was a workforce buyout in 1991 and the company was floated in 1996 with a valuation of around ? 60 million. There are three employee share ownership vehicles: the Employee Trust (ET) with four employee elected directors and five Company nominees a Qualifying Employee Share Ownership Trust (QUEST) with four elected directors, four nominated by the company and one independent an all-employee share ownership plan. We interviewed two people: the company’s corporate finance officer with responsibilities for performance and sales measurement (an employee-elected trustee of the QUEST since 1995), and the deputy company secretary.

Much of the company’s success is attributed to the high proportion Page 12 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 of employee share ownership – between 95% and 100% of employees participating, owning 28% of the shares – and the corporate culture it has engendered: ‘If a large number of your workforce is sitting on what is quite a nest-egg to them, they are going to behave differently, and really engage in understanding what our strategy is, what we are doing next and how they can make a difference. ’ The ET also works on community policy. ‘People are willing to go the extra mile because this is our company, people treat the assets differently, they take more care.

We’re a people company, clients are buying project managers. ’ ‘We consult with shareholders and encourage them to vote. ’ The widespread employee share ownership makes the company unattractive to hostile bids. Tullis Russell The extensive workforce shareholding also means that when the group makes important decisions, it is the workforce rather than the institutions that the board must convince: ‘Institutions are still very passive on votes, whereas most of the employees will exercise their vote on any big decision – for example, the acquisitions that we have made which require shareholder approval. It is the employees that really carry the vote. The Trust does more than own and vote shares: employees are also beneficiaries in terms of self-development, from IT courses to skydiving. The Trust Fund finances these awards for self-development, with people following training activities that they wish to pursue. There is a participative management style. A number of forums have been set up. Every two years there is an employee attitude survey with the results formulated into action plans, which in turn are used for career frameworks and training. The Employee Trust is independent from the company. There are roadshows around the company that are used to explain activities prior to voting. The Trust ballots all employees before EGMs and AGMs (UK and overseas).

Other points from the interviews included: Employee share ownership and participation has a big effect on retention (length of service):‘Continuity of project account manager is vital because repeat business is so important. Commitment and loyalty are vital. ’ ‘There are a number of HR initiatives; it’s about taking a number of things together. ’ AGMs are held on a Sunday to encourage participation. The ET meets with the board formally once per year and informally more often. Trustees visit employees on a one-to-one basis and visit project teams on site. The visits aim to raise awareness and educate. Tullis Russell is joint wholly-owned by a Trust (28%) and its employees, with the employee share being the majority.

The employee holding is itself partly via an employee shareholder trust (around 40% of share total), and partly through individual share holding (around 30%). There is a Share Council which has significant powers. The majority of its members are elected by employees, and the remainder appointed by the board of directors. The Council has quarterly meetings. (On the employee shareholder trust, which plays a lesser role than the Share Council, trustees are 50% elected and 50% appointed. ) We interviewed the following people. The chief executive, who believes that the employee ownership plays an important role but that it is crucial this be combined with a commitment from management at all levels to openness, participation and involvement.

The manager in charge of personnel/HRM matters. A previous employee who had worked at the company for many years, a s a secretary/PA. She was also heavily involved with the Share Council, in effect servicing it. She worked in particular at trying to publicise the work of the Council among the workforce. She thought the Council had a strongly positive influence, but that this was largely confined to a minority of employees and that more needed to be done to reach out to the whole workforce. The training and development co-ordinator, originally a ‘shop floor’ employee, before subsequently being promoted to a supervisory post, and also now the deputy chair of the Share Council.

The respondents agreed that owning shares makes them more motivated/committed to the organisation, as does the fact that the Trust has a voice – though this is because of the collective voice rather than the financial incentive. They also agreed that owning shares makes them more likely to stay at the firm, again because of the collective voice and not the financial incentive, and that owning shares gives them a say. E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 13 Note that these answers were from people involved in the Share Council, and for other employees they thought that the financial effect of the dividend payment was probably more significant than the collective voice.

All four agreed that the share ownership made both management and employees more committed to training, made recruitment easier and reduced turnover. On training commitment, however, it was stressed that this effect is related to ‘ownership and HR practices’. Recruitment and turnover effects are attributed to the ‘good employer’ effect (which may in turn be connected to employee share ownership). Asked about whether employee share ownership encouraged employee participation in the running of the company, there was agreement that this was indeed the case, but caution about how this should be interpreted, given that managers still have to manage.

There had in the past been disagreement over whether there should be an Executive Share Ownership Scheme and, following some debate, the Scheme was abolished. It was reported that there were no managers on the night shift, and that this was made possible because of the commitment of the employees as a result of the culture of involvement and participation. It was said that other companies in the area did not and could not pursue such a policy – supervision would be required. (This was confirmed by the ex-employee described above, whose partner works for another major employer in the area, and who was amazed at such a practice, feeling that it simply would not work in his company. ) It was reported that the company was regarded as a ‘good employer’ in the area.

It was company policy to pay well, and it benchmarked its wages against other companies to ensure that this was maintained. This illustrates both the complex relationships between employee ownership and other aspects of HRM, and the difficult ‘chicken and egg’ question of whether companies with employee ownership are more successful, or whether more successful companies are more likely to pursue employee ownership. It was said that the key HR practice leading to increased motivation was the commitment to job security. This was not absolute, and redundancies had been made, but the employee share ownership meant that this commitment could be prioritised if necessary.

Training for Share Councillors was provided and was thought to be crucial. It was thought that for those employees who had been involved in the Share Council, the feelings of involvement and motivation were strong, but that for other employees they were far weaker or non-existent. The key conclusion from the interviews, supported in different ways from the responses received from all four, is that employee share ownership in and by itself makes little or no difference to employees. For it to make a difference requires an active commitment to progressive human resource management and other policies to improve communication and engender a sense of commitment.

Such policies could be pursued in the absence of ownership, but not as successfully. It was felt that the large ownership stake of the employees meant that such ‘pro-employee’ practices had a material underpinning and were not simply at the whim of the current management. Additionally, if and when key decisions come to be faced, this employee voice is indeed significant. So ownership on its own made little difference – what counted were policies of involvement. But without ownership, such policies were less likely to be pursued and even if pursued, would be less secure and less significant. By encouraging and underpinning such policies, ownership did indeed play a positive and significant role.

Partnership of fuel efficiency experts The company manages energy efficiency schemes. It is an employeeowned company, which operates under a Partnership Constitution. The Trust owns 100% of the company and individual shares are not issued to employees. Employees are represented by their democratically elected Staff Council, with a board of eight directors driving the overall business. The head office employs over 150 staff and nationally the company employs over 400 staff. The Council has two meetings a year formally, but meets informally almost every month. The company has an intranet on which the Staff Council communicates its announcements.

We interviewed: A director, who believes that the Partnership is based upon democratic principles, social values and commercial drive and that partners share the benefits of ownership, profit, knowledge and power. However, he also suggested that employee share ownership has the disadvantage of not allowing space to attract outstanding achievers at senior management level. An office administrator, working for the company for a large number of years. Her attitude to employee share ownership was strongly positive, believing that it differentiates the company and that it results in higher productivity and reduced employee turnover. An assistant to the personnel manager, a new joiner (she had at Page 14

E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 the time been with the firm three months), who was attracted by the benefits that the employees enjoy. In general, the information dissemination process was seen as being fairly comprehensive. Information on corporate objectives is given to employees via Staff Council announcements, seminars, and the intranet, while information on performance targets is given via departmental managers (though not on specific targets). Information on new initiatives is given in a monthly report distributed by departmental managers and reviewed on a six-month basis, as well as through the Staff Council or a letter.

Respondents did not feel that employees are involved in the formulation of corporate objectives (this was seen as the directors’ role), performance targets, the design of new initiatives, decision making, or long-term planning. As in Tullis Russell, respondents agreed that ownership increases their motivation and commitment, their likelihood of staying at the firm, and makes employees more motivated to work – again because of the collective voice rather than the financial incentive. Overall the director felt that employee involvement and participation – through the Staff Council – increases commitment and motivation and gives employees a sense of security.

From his experience, the Partnership has allowed the attention of employees to be focused on performance rather than day-to-day politics. He feels that employees now ask ‘why? ’ more often, especially relating to expenses. The representation through the Staff Council ‘allows a lot of questioning to take place’. Anyone can anonymously forward questions to the Council. The office administrator believed that becoming a Partnership (in 2000) had strengthened employee commitment and motivation, and that the employee involvement through the Staff Council had increased productivity and profitability. ‘Everyone feels the need for the company to perform well. ’ The assistant reported that the company was regarded as an ‘excellent employer’ in the area.

Although she has not yet directly benefited from the Partnership (having at the time been with the firm less than the one year required to receive benefits), she feels that the Partnership is a better environment in which to work. She believes that, through the Staff Council, she has all the available means to communicate her ideas at senior level and to be taken seriously. The key conclusion from the interviews was that the Partnership was directly linked with other policies that improve communication with and involvement of employees, and that this in turn leads to increased job satisfaction and performance. Stagecoach Stagecoach Group plc, a transport services company, employs 39,000 people worldwide.

It has 21 bus subsidiaries, and is one of the biggest franchises of its kind. It operates in the UK, 33 states in the US (buses and taxis), Canada, China and New Zealand. Stagecoach is a public limited company, partly owned by the employees, using the nonstatutory ESOP scheme. Stagecoach uses three Trusts. An approved Profit Share Trust, an Employee Stock Ownership Plan (ESOP), and a QUEST. The Stagecoach ESOP holds some 5% of the Stagecoach shares, and allocates 3% of profits each year to the employees using the Profit Sharing Scheme. The ESOP board has 13 members, 3 elected by management, 9 by employees and 1 independent advisor (a lawyer).

The ESOP Trustees are elected once and serve until their retirement. We interviewed the company secretary and two bus drivers. Again, they felt that information on corporate objectives, performance targets, actual performance and new initiatives is given to employees, but that employees are not involved in the formulation of any of these or in decision making or long-term planning. Also, they disagreed that ownership makes them more motivated to work/committed to the organisation, though it does make them and employees more likely to stay at the firm. This time, this is because of the financial incentive rather than the collective voice. They also disagreed that ownership makes employees more motivated.

The company secretary added the following comments: Stagecoach seeks to promote a culture of partnership with its employees, as with any other company in the service industry, where employees have front-line client exposure. Employee share ownership is moderately important to employees that are in need of more direct cash benefits. Employee share ownership does not ‘really’ enhance employee participation in Stagecoach, where a bus driver’s career is potentially a career ‘for life’. The first bus driver made the following comments: Bus drivers are mostly interested in their day-to-day pay. Profit-related pay had been the most effective plan so far. The second bus driver made these comments: Employee share ownership has little affect in plc companies but is very important in SMEs. E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 Page 15

Information on targets and initiatives is provided through a company magazine, which concentrates on creating a positive image, rather than adding much value to Stagecoach’s communications. Employees are only involved in day-to-day decision making at a local level through the trade union. The trade unions at Stagecoach had little interest in the ESOP. The ESOP only meets once or twice a year. Employees have little interest in their shares, due to lack of education. He argued that the following recommendations needed to be implemented: The ESOP Trustees should be democratically elected and should hold office for a specific period of time, rather than till their retirement. The trade union and the company should provide better training for ESOP trustee roles. llows space for progressive human resource policies that improve communication and engender an active commitment to take place: ‘Employees are in charge of the company and this is reflected everywhere you look. ’ The family-owned department store This local department store is owned 25% by the employees and 75% by one family. The company also operates a profit share scheme. At the moment, the company is in a transition process. The CEO has decided to transfer the company to the employees. We interviewed the CEO and two employees who had been with the company for 10 and 12 years respectively. Again, their responses were fairly positive, they felt they received information on three out of the four areas (though not on corporate objectives).

However, they only felt involved at implementation stage in the design of new initiatives. They agree that ownership makes them more motivated to work/committed to the organisation and more likely to stay at the firm, both because of the financial incentive and the collective voice. They also believe ownership makes employees more motivated to work, because of the financial incentive and the collective voice. The CEO added that: It is important to promote a culture of partnership between the company and its employees, to increase employee motivation and provide them with a meaningful stake and a collective voice. Employee profit sharing has contributed to the firm’s performance, reducing staff turnover and increasing productivity.

Not all employees will be committed to employee ownership (especially casual staff ), but a proportion have developed a sense of commitment since the employee buyout process started. Any company considering adopting an employee ownership scheme would greatly benefit from an independent organisation which could provide advice, including on the tax implications, as the Inland Revenue had not proved effective. ‘Employee 1’ added that: She had noticed improved performance due to the profit sharing scheme. The organisation must adopt an open culture. There had been a 15% reduction in absenteeism. The process of transferring the organisation to employees was proving quite slow.

St Luke’s Communications This creative communications company operates using a QUEST scheme (Qualifying Employee Share Ownership Trust) under a cooperative constitution. The Trust owns 100% of the company and individual shares are issued to employees. The company has 107 employees and an annual turnover of ? 35 million. We interviewed: The company secretary who had worked at the company since 1997. He believes that the QUEST is the heart of the organisation and the key to its success so far. An employee who had been with the company for two years and who believed the QUEST supports very effectively a culture of partnership between the company and its employees.

Both respondents’ attitudes are largely positive; they feel they receive information in all the areas listed previously, and they also feel involved in the formulation of corporate objectives, new initiatives, decision making and long-term planning, though not in the formulation of performance targets. They also agree that ownership makes them more motivated and committed, more likely to stay at the firm, and makes employees more motivated to work (because of both the financial incentive and the collective voice). The company secretary felt that encouraging employee participation is very important, and that the QUEST structure enhances such participation. The employee argued that the key to the Trust’s success is that it Page 16 E M P LOY E E S D I R E C T R E P O R T N O V E M B E R 2 0 0 2 ‘Employee 2’ added that: The profit sharing scheme has made her more productive (‘like everyone else’).

She thinks that employee shareholding makes employees more than just workers. investment was needed from employees. In both cases it seems to have aided survival, but there have been redundancies. Indeed, the fact that redundancies were necessary for the firms’ survival may have been what made the employees’ co-operation, facilitated through share ownership, both so vital and so successful. However, there has been a significant degree of change in work practices and structure over the past four years. There is a huge awareness of the need for the company to succeed. The whole culture of the company was said to have changed. Employees now felt they had a much greater say and stake in the company.

There was support for the following statements. ‘Without employee ownership, there would be less commitment by the company to informing and involving employees. ’ ‘There is a belief that the company’s attempts to involve employees are genuine because of the employee ownership. ’ The telecommunications company In the process of privatisation the employees had taken an equity stake in this company, and this has been increased subsequently. The employee shares are held in a Trust and voted as a block. There is 80% trade union membership. Four of the seven trustee directors are elected by employee representatives, via the trade unions, with two appointed by management, plus one solicitor.

We interviewed a number of employees, plus a trade union representative and a company executive director. Communication of objectives, performance targets, new initiatives There were mixed responses to this set of questions including: Focus groups are held and there is a bottom-up approach; performance targets are set by agreement. Information is given to the Trust, but little is really passed down, although there is an intranet for communicating to trust members. Employee share voting and company culture On the key strategic issue of a contested takeover, after the privatisation, 149 seminars had been organised by the Trust in ten days across the country. The Trust held the casting votes in the contested takeover, so it had genuine influence.

Essentially the unions and the Trust decided who was going to take over the company. The consensus was that Trust and trade union communications were

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