Employee Ownership And Hrm Practices Management Essay
Employee ownership is basically about "ownership." Owners of an asset generally have the right to use it in any way they like, the right to its returns, and the right to sell the asset. For employee owners this directly translates into a number of HRM practices. Firstly, the right to use the asset translates into participation in decision making and the sharing of relevant information. Besides, employees might need training to learn how to participate in decision-making processes, and to learn understand information about the business. (Maaloe, 1998) Also, as it is quite likely that consensus is not always easy to reach, a formal mechanism for resolving conflicts is a necessary HRM practice. Secondly, the right to the asset's returns translates into some form of profit-sharing. The combination of employee share ownership with the mentioned HRM practices reflects actual "ownership" as it gives employees influence, information, and an opportunity for investment. This combination sends a consistent message to the employee that their ownership is a serious affair and that management takes them seriously as owners. Hence, psychological ownership is most likely to develop if employee share ownership is consistency combined with the mentioned HRM practices. It is also in this situation that it is most likely that individual feelings of ownership transform into a collective "ownership culture" (Kaarsemaker/ Poutsma 2006; cf. Bowen/Ostroff 2004).
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Employee ownership has many appearances. Hence it needs clarification what is meant by it here. It most commonly refers to employee ownership plans, or EOPs. An EOP usually consists of a trust that a company sets up to administer the plan and its regulations. This involves for example the administration of the employees' accounts, the organisation of regular trading opportunities (in case a company is not listed) and often trustees vote on behalf of the employee owners. This setup and the plan regulations can differ significantly between companies. Legislation plays an important role as well. (Bernstein, 2005) A yet different issue is the size of the employee shareholdings, individually, and collectively - some companies are 100 percent employee-owned, whereas in others the workforce holds only a small stake. Finally, plans do not always involve actual shares - often, they involve share options, phantom stock or other derivatives. The present study is limited to EOP-type employee share ownership, i.e., plans that involve shares or share certificates, administered by a trust. (Zahra, 2000)
One of the routes through which employees develop ownership feelings is through the investment of skills, time, ideas and energy in the company - in other words: through "self-investment." (Bernstein, 2005) At work, employees get to know the company better, and they acquire knowledge, skills, and abilities that are specialized - in other words: employees obtain what Pierce and colleagues (2001, 2003) called "intimate knowledge." Intimate knowledge for example refers to knowing the right people, knowing how to get things done in the company, and it also refers to specialized substantive knowledge, skills, and abilities. Intimate knowledge is not easy to buy in the market. Knowledge, skills, and abilities that are not easy to replace, and that are of much higher value to the company than to other companies, are called firm-specific. Firm-specific human capital, because it is firm-specific and valuable to the company, is a source of sustained competitive advantage and therefore highly important to the firm (Barney/ Wright/Ketchen 2001; Barney 1991; Dierickx/Cool 1989). These items suggest that ownership in a company where one is employed can be seen as a way to realisation of this innate need. However, certain conditions need to be fulfilled; one of the most important is to work in an environment with high ownership ethics (a moral principle on the acceptability of employee co-ownership in a certain work environment).
Different forms of Employee Ownership
There are number of firms that are actually owned by the employees through buying shares. In these firms, employees also possess rights to take hold of financial matters of the firm. This type of employee ownership is known as Direct Ownership. (Smith, 1990)
Shared or Indirect Ownership possesses limited motivation to employees. Indirect ownership does not use an employee benefits trust to acquire equity at conversion. Such firms spend high costs on Management Issues. (Blasi, 2008)
Comibined Ownership is the combination of direct and indirect ownership both. Employee ownership by itself appeared to have no productivity effects, but when it was combined with participation positive effects it becomes highly profittable. (Stanic, 2001)
Various methods are utilized to increase employee ownership in a company. They include direct purchase plans, qualified retirement plans, postretirement benefit plans, and employee ownership plans. (Sengupta, 2007) The most direct method to deliver company stock into the hands of employees is by initiating direct employee purchase plans. These plans often allow employees to purchase stock in their company at a discount (e.g., 15 percent) from fair market value. In addition to the discount, employees may also benefit from low transaction costs and payments through payroll deductions. (Bernstein, 2005)
Direct employee purchase plans give employees immediate full rights of ownership, which include the right to vote, receive dividends, and to sell their stock at any time. However, the tax laws offer no special incentives for stock purchase plans. (Maaloe, 1998) Employees pay for the stock with their after-tax income. If the company matches the stock purchases, it is treated as salary and is taxed as employees' ordinary income and deducted from the company's income. (Gratton, 2003)
Another direct method to encourage employee ownership involves outright grants of company stock or stock option grants to employees. (Schine, 2005) For example, John Lewis was founded on the principle that all employees are required to purchase stock in the company. (Slaughter, 2007)
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Another technique utilizes qualified retirement plans--either pension plans or deferred profit-sharing plans [or 401(k) plans]. Pension plans may be funded with company stock, although there are legal limits on the amount of company stock that can be owned by the pension trust. Another retirement plan that is sometimes funded with company stock is a matched 401(k) plan. Under 401(k) programs, employees defer part of their salary, on a pretax basis, into a qualified retirement plan. (Slaughter, 2007) To encourage savings, the company often provides a match (usually 50 percent) of employees' contributions. (Blair, 1996) If one of the company's objectives is to encourage employee stock ownership, it can make the match in the form of company stock. In other cases, based on its performance, the company may set aside a certain amount of money to invest in a deferred profit-sharing plan. If it wishes, the firm can fund the profit-sharing plan with company stock rather than some other investment vehicles.
In addition to retirement programs, firms may provide a variety of other postretirement benefits, such as medical plans. (De Jong, 2004) They may choose to fund these plans by placing company stock inside a third party trust whose purpose is to fund postretirement medical benefits.
Finally, one of the most popular methods of providing ownership for employees is the use of employee ownership plans. Unlike other employee benefit plans, which may only invest a small portion (typically 10 to 20 percent) of their funds in the stock of their company, EOPs are created to invest primarily in the employer's stock. EOPs can either be leveraged or unleveraged. A plan that is funded with borrowed money is known as a leveraged EOP. (Gratton, 2003)
Different types of ownership
Majority ownership indicates at least 50% shares of company are owned by an Employee Shared Ownership Plan or any other one or more similar plan/ plans with a minimum of 50% full-time employees that are entitled to participate. In such organizations, data is available through Web sites, organisation responds to enquiries through email etc. Employee ownership that involve maximised participation of employee- owners in management or governance decisions are known to have Majority Ownership of employees. (Blasi, 1996)
Organisations with less than 51% shares of employees are usually called companies with minority employee ownership. They involve least participation of employee-owners in governance or management decisions etc. The important point is that employee ownership, combined with a number of other management initiatives, has yielded positive results in a number of different companies.
An employee cooperative ownership is a cooperative owned and independently controlled by its worker-owners. Such type of ownership can be practiced in several ways. For example, in cooperative organization all its worker-owner take part in decision making in a self-governing manner, and it can also refer to an organization where managers and administration is chosen by all its worker-owner, or some times it may indicate a firm where managers are seen and treated like other workers of the organisation. (Meulbroek, 2005)
Difference between Commitment and Productivity
The emotional attachment of employees of an organization with their workplace is known as Employee commitment. On the other hand, productivity is defined as the amount of production per unit of participation (including equipment, capital and labour) in a company. Productivity can be measured in a number of ways. For instance, productivity can be calculated through the number of hours it takes to produce an item in an organisation, or within the service sector it be calculated through the profits generated by an employee divided by their earnings. (Henry, 1998)
A number of studies have explained a employeeââ‚¬â„¢s commitment and its connection with productivity variables. However, most of these studies emphasise on upholding the commitment of employees to achieve organisational aims and objectives. (Culpepper, 2004) This has been observed that employee ownership, by itself cannot be expected to automatically increase employee commitment to improving quality and productivity. Other factors, such as employee participation in decision making, management style, and communication of financial and other information, are just as important in motivating employees to enhance company performance.
A study found that 70 percent of EOP companies in the sample grew 9.7 percent faster than non-EOP companies. (Van Dyne, 2004) However, factors such as percentage of ownership by the EOP, voting rights, and board representation were not important in explaining the better performance by EOP companies. Another study (Pierce, 2003) concluded that employee commitment, job satisfaction, and employee turnover were significantly related to management's commitment to employee ownership.
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Other researchers have pointed out that most studies that have linked employee ownership to commitment and productivity have failed to consider the effects of capital intensity on company performance. For example, Steven Bloom of Harvard University's Department of Economics found that capital intensity explained a large amount of productivity improvement in employee-owned firms.
Employee Ownership and Company Performance
Research suggests that there is no direct or automatic relationship between the level of employee ownership and company performance. (Rosen, 2005) As one might expect, a number of other factors can be expected to influence company productivity, including capital intensity, the level of employee involvement in the decision making process, the type of industry, and other competitive pressures. As FORTUNE reported in an article about Staples, "Although the company has had an employee stock ownership program since it was founded, motivating employees is about much more than that." (Meyer, 1993)
Reason for Employee Ownership
Although the empirical evidence is inconclusive, a number of case studies suggest that employee ownership, coupled with a number of other management initiatives, can have a significant, positive impact on productivity and profitability. (Jacob, 1995)
Employee ownership has also been used by a number of large corporations to make takeovers more difficult. The idea is to put stock in the hands of employees who tend to side with management rather than outsiders. For example, Polaroid and Chevron used EOPs in the late 1980s to thwart takeover attempts. (Kalmi, 2005)
Another motivation to increase employee ownership is to cut direct payroll costs. In recent years, employee salary increases in many companies have been either nonexistent or very small (in the range of 3 to 4 percent of base salary). (Van Dyne, Pierce, 2004) Companies that decide to grant no salary increases in a particular year could consider making outright grants of stock or stock options instead.
Employee ownership may be prompted by employees who want to save their jobs (as in the case of Weirton Steel) or who are unhappy with management. Employee ownership may also result from concessions negotiated at the bargaining table between a union and management (typically, these involve financially-troubled companies). (Rosen, 2006)
Finally, another reason to encourage employee ownership is that it may encourage employees to behave and work as if they were owners of a company. There is a growing belief that employee ownership will lead to stronger employee commitment and motivation and, thus, an increase in productivity, higher morale, and better retention. (Hisrich, 1998)
Legislation to promote EOPs was sponsored by Senators Russell Long and Ted Kennedy during the late 1970s and early '80s. This legislation (which has subsequently been modified) provides powerful incentives for companies to set up EOPs. For example, under leveraged EOPs, a company may borrow money to buy its own stock and place it in the EOP trust. To entice companies to do this, the legislation allows borrowers to deduct 25 percent of the principal they pay on the loan, as well as interest from its income, for tax purposes. (Van Dyne, 2004) Moreover, lenders may deduct from their taxes 50 percent of the interest they receive from loans made to fund the EOP, provided that the EOP owns at least half of the company's stock after the purchase.(THIS IS NOT REQUIRED)
Special tax incentives exist to entice small companies to form EOPs. For example, the owner of a closely held company may sell its stock to an EOP to enable the employees to own more than 30 percent of the company. If the owner reinvests the proceeds in stocks or bonds within one year, the owner can defer payment of taxes from the sale of stock to the EOP until a later date. This regulation provides an effective way for an owner of a small company to cash out at retirement and ensure continuity of the company by passing ownership to its employees. (Kruse, 2002)
Employee ownership plans were rare in the early 1970s. However, a study by the National Center for Employee Ownership (NCEO) shows that the number of firms with EOPs has grown from about 1,000 in 1976 to more than 10,000 today. More than 11 million employees participate. Most of these companies (approximately 6,500) are less than 25 percent employee owned, and about 85 to 90 percent are privately held. (Barney, 2001)
On the other hand, the extent of direct stock ownership by employees is still limited. Moreover, firms that offered direct stock purchase plans tended to have other types of stock-based compensation plans (i.e., 67.9 percent had executive stock option plans, and 45.2 percent had EOPs). Because of the lack of tax incentives, it is not surprising to see that EOPs are more popular than direct stock purchase plans. (Cambridge, 2004)
Some of the most comprehensive studies relating employee ownership to company performance feature companies that have established EOPs. A matched sample of EOP and non-EOP companies was compared over the time period 2003 through 2008. The study found no automatic relationship between the presence of employee ownership and improved commitment, productivity or profitability, except for firms that included employees in the decision-making process. (Pierce, 2003)
Limitations of Employee Ownership Programs
There are a number of reasons why employee ownership programs of any variety may not be expected to have a significant, positive impact on productivity. The most obvious reason is that employees may possess only a tiny fraction of ownership. Moreover, many low-salaried employees cannot afford to buy stock. (Cambridge, 2004)
In most plans, employees may not harvest the rewards of ownership until they retire from, or leave, the company. This is true in an EOP. Therefore, the payoff they receive for their efforts does not coincide with the time of expected increases in productivity--which makes the timing of the reward seem very remote, or far off in the future. (Cambridge, 2004)
Another limitation is that, in many cases, employee shares are held in a trust, and employees have few or no rights to participate in the decision making process. (Sengupta, 2007) For example, under the Internal Revenue Code, EOP employees are granted voting rights in only six specific situations, including merger, liquidation, or the sale of virtually all of the company's assets. The legislative intent is to protect the operating control of top management. (Hanks, 1994)
Even when an employee representative is included on the board of directors of an EOP company, this representative is usually not elected by the employees but, rather, assigned by others such as the EOP lenders or the board itself. According to a 2006 study conducted by the General Accounting Office, only 4 percent of EOP firms had union or non-managerial representatives on their board of directors. Moreover, a 2008 survey by the EOP Association revealed that only 13 percent of EOP firms allowed full voting rights on EOP stock. In 82 percent of the firms, a trustee cast all EOP votes. (Sengupta, 2007)
The potential impact of employee ownership plans may be limited by the intent of management in establishing them. For example, employee ownership plans that are established solely for tax reasons or as a takeover defense cannot reasonably be expected to show other than one-time improvements in profitability because of the tax advantages of EOPs. (Stanic, 2001) If management or employees have no real commitment to participation in decision making and increases in productivity, employee stock ownership cannot be expected to yield results. (Tajnikar, 2000)
Employee ownership exposes employees to financial risk if the company should fail. Unlike wealthy investors, employees have relatively low income and lack the broad investment portfolios they need to spread risks. For example, employees at Carter Hawley Hale took a huge loss in their investment when the company filed for bankruptcy in 1991. (The price of the company's stock plunged from $14 a share in 1989 to less than $2 in 1991.) Another case in point is in an Airlines whose employees lost as much as 80 percent of the market value of their stock when the firm filed for bankruptcy in June 1991. (Rosen, C, 2006) When the airline emerged from bankruptcy in August 1994, it discontinued the stock option plan for all employees.
Employee ownership plans should not be used to replace part of an employee's market wage. The point was well made in a WALL STREET JOURNAL article (January 4, 1995) which reported that Wal-Mart had relied on stock incentives to add to low-paid employees' income and to give them a feeling of ownership. This strategy worked well while the stock price was increasing. However, when the stock price started to decline in February 1993, many employees became very disenchanted. The result was an unhappy work force.
Finally, no matter how dedicated and diligent its management team and employees are, a company's productivity and employee commitment will not improve if top management selects a strategy that is damaging to the company's long-term prospects. There is no substitute for insightful, strategic decision making and market positioning. (Meyer, 1991)
Ingredients for Improving Performance
Researchers agree that companies must combine employee ownership with several other factors and conditions before they can expect improvements in company performance. For example, the path-breaking study commissioned by the Department of Labor on workplace innovation reported, "Economic benefits to the companies were greatest when they successfully integrated innovations in management and technology with the appropriate employee training and 'empowerment' programs." (Rosen, 2006) Those factors and conditions include management and employee commitment, participative management, effective and open communication, and properly structured incentive compensation.
* Commitment. Both management and workers must be deeply committed to employee stock ownership and to the welfare of the company. (Pendleton, 2001) Top management must be willing to give up some power and control of the company and must be confident that employees will act in the company's best interests. Moreover, employees must be willing to accept the risks and rewards of actual ownership and cooperate with management to improve company performance. To achieve a meaningful level of employee commitment, the extent of employee ownership should be substantial. (Wanous, 2001)
* Participation. Employees must have the opportunity to exercise continuous influence over operating decisions through various participatory programs. This means that top management must be willing to adopt a style of management that encourages employee participation in the operation and the decision-making process. (Meulbroek, 2005) Authority and responsibility must be pushed down to the lowest level possible in the organization. In this context, employee ownership is actually a method used to continually reinforce the commitment to increases in productivity that may be expected to arise through employee participation. (Blasi, 2008)
* Communication. A company can expect increases in productivity and commitment of employees only if there is open and ongoing communication about its performance or that of a particular work unit. (Culpepper, 2004) Explanations about the importance of increases in productivity must indicate how these improvements may affect the value of the employees' stock. Obviously, management must take care to prevent sensitive financial information from reaching competitors. Therefore, it should limit communication to verbal discussions or confine it to a particular work unit. (Degeorge, 2004)
* Incentive Compensation. Properly structured monetary and nonmonetary incentives are also prime necessary ingredients. Companies must deliver these rewards on a timely basis to balance the long-term horizon of a stock ownership program. Moreover, as much as possible, these rewards must encourage team work and group decision making while still recognizing individual achievement. (Rosen, 2003)
Traditional monetary incentives include bonus and profit-sharing programs. Recently, the emphasis on team-based incentives, such as gain sharing, for a work unit has been growing. Skill-based pay is another form of monetary incentive that rewards employees for broadening their skill base. It also facilitates team work. (Wasmer, 2006) Nonmonetary recognition (ranging from a simple pat on the back to a more formal program such as "hall-of-fame" awards) can be just as effective as cash awards in encouraging improvements in productivity. (Blair, 1999) Certainly, nonmonetary recognition is inexpensive and should always be combined with monetary awards.
Change of Behaviour in Employee Owned Organisations
Companies are now paying much more attention to quality than ever before. Quality has become a critical success component for any business in today's highly competitive markets. (Antoncic, 2003) A commitment to quality must involve both management and rank-and-file employees. Companies must be committed to making adjustments in how they design and make their products, train and develop their work force, make decisions, and interact with suppliers and customers. Employees must be committed to achieving, maintaining, and improving the quality of their output--continuously and in the long term.
It is logical to assume that in instances in which employee stock ownership helps improve productivity, it may also help improve quality if the company makes a strong commitment to quality. (Meyer, 1991) However, companies must also involve their employees in decisions about quality issues. Certainly, the relationship between employee ownership and employee commitment to quality is a fruitful area for future research.
Over the last two decades, Japanese manufacturers have achieved tremendous competitive advantages in the world market. They enjoy the reputation of having produced quality products at reasonable prices. The success of Japanese manufacturers in quality and productivity rests on two critical elements--employee participation in operating decisions and employee commitment to the company. (Blasi, 2008)
In Japan, employee participation is achieved through team work. At least until now, employee commitment has been reinforced by the promise of life-long employment with the same company. (Rosen, 2003) Japanese firms maintain a practice of promoting from within. Workers cannot jump easily from one firm to another. They tend to work for the same employer for life and, thus, have a long-term stake in their company. Promotion occurs slowly. To be promoted, workers must learn multiple skills and be willing to work at many different tasks.
In conclusion, one can say that firms are discovering that to compete successfully in world and domestic markets, they must find ways to induce their employees to be more productive and increase the quality of their output. In addition, majority, minority and Cooperative employee ownership need same extent of motivation and effort in order to produce maximum output. Polaroid Chairman, President, and Chief Executive Officer MacAllister Booth succinctly summed up the need this way: ââ‚¬Å“Industry now needs the freedom to experiment with new approaches to worker-management relations and employee participation in decisions. Otherwise, it will be unable to meet the increasing expectations of its constituents--investors, customers, employees, and communities." (Bernstein, 2005)
Research indicates that employee participation programs alone may yield questionable results. Similarly, employee ownership programs, by themselves, are insufficient to lead to better company performance. (Pendleton, 2001) To be effective, Direct, Indirect and combined employee ownership must be mingled with employee participation and other short-term monetary and nonmonetary incentives. Thus, employee ownership may become the long-term reinforcer just as the lifelong employment concept has in Japan.
The relationship between employee ownership commitment and productivity is a complicated one. It is naive to believe that ownership alone will provide the magic ingredient for success. Each company must experiment to find the particular combination of employee ownership and other management initiatives that suits its unique culture and personality.
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