Employee Ownership: Impact on Firm Performance and Employee Economics

Employee ownership has garnered significant attention for its potential to enhance firm performance and improve employee economic outcomes(1). This report delves into the research on the benefits of employee ownership, focusing on two key aspects:

1. The quantifiable economic benefits for employees compared to their pre-ownership financial status.
2. The impact of broad-based versus selective employee ownership on firm performance.

Research Methodology

The research process involved a comprehensive review of academic papers, articles, and case studies related to employee ownership. The following steps were undertaken:

1. Identification of Relevant Literature: A thorough search was conducted to identify research papers and articles on the firm performance benefits of employee ownership.
2. Analysis of Economic Benefits: Studies that specifically addressed the numerical economic benefit for employees compared to pre-ownership economics were analyzed.
3. Examination of Ownership Models: Research on the impact of broad-based versus selective employee ownership on firm performance was reviewed.
4. Summary of Findings: The findings of the research on both employee economic benefits and the impact of different ownership models were summarized.
5. Case Study Analysis: Case studies of companies that have implemented employee ownership were examined to understand the impact on their performance and employee economics.
6. Identification of Potential Drawbacks: Research on potential drawbacks or challenges associated with employee ownership was reviewed.

Firm Performance Benefits of Employee Ownership

Companies with long-term outlooks often invest more in their employees, and this is frequently linked to employee ownership(2). Employee ownership, in its various forms, has been linked to several positive outcomes for both employees and the companies they work for. Studies indicate that employee-owned companies tend to exhibit:

• Improved Productivity: Employees with an ownership stake are often more motivated and engaged, leading to increased productivity and efficiency(1).
• Enhanced Job Stability: Employee-owned companies demonstrate higher survival rates and are less prone to layoffs during economic downturns, contributing to greater job security for employees and potentially leading to lower unemployment in the overall economy(1). This can contribute to a more stable macroeconomy by mitigating the negative impacts of recessions(1).
• Increased Profitability: Evidence shows a correlation between employee ownership and improved profitability, with employee-owned companies often outperforming their non-employee-owned counterparts(5).

Economic Benefits for Employees

Employee ownership can generate substantial financial gains for employees. Findings demonstrate that employee-owners often experience:

• Higher Wages and Increased Wealth: Studies have shown that employees in employee-owned companies tend to have higher wages and accumulate more wealth compared to their counterparts in non-employee-owned companies(6). For example, a 2017 NCEO study found that being in an ESOP was associated with 92% higher median household net wealth and 33% higher median income from wages6.
• Greater Retirement Security: Employee Stock Ownership Plans (ESOPs) and other employee ownership models can serve as valuable retirement savings vehicles, supplementing traditional retirement benefits(7).
• Enhanced Benefits: Employee-owned companies are more likely to offer comprehensive benefits packages, including healthcare, retirement plans, and tuition assistance(8).
• Improved Workplace Health and Safety: Research by the Rutgers School of Management and Labor Relations and the Employee Ownership Foundation found that employee-owned companies outperformed non-employee-owned companies in job retention, pay, and workplace health safety throughout the COVID-19 pandemic(9).
• Increased Job Satisfaction and Sense of Belonging: A Harvard Business Review study found a strong link between a sense of belonging at work and improved company performance5. When employees feel like they belong, companies see a 56% increase in job performance, a 50% drop in turnover risk, and a 75% reduction in sick days5.

Employee ownership can be a powerful tool for reducing economic inequality by increasing wealth and income, particularly for millennials, workers of color, low-income workers, and single parents(6).

Broad-Based vs. Selective Employee Ownership

While the benefits of employee ownership are generally acknowledged, the impact of broad-based versus selective employee ownership on firm performance is an area of ongoing research. It has been argued that workers should have greater ownership stakes in the technologies that increasingly substitute for their labor(3).

Let's first define these two types of employee ownership:

• Broad-based employee ownership: This model involves a significant portion of the workforce having an ownership stake in the company.
• Selective employee ownership: In this model, ownership is limited to a select group of employees, such as executives or senior management.

Broad-based employee ownership is often associated with:

• Increased Productivity: When a larger number of employees have a stake in the company's success, it can foster a stronger sense of collective responsibility and drive productivity improvements(3).
• Improved Firm Performance: Studies suggest that broad-based employee ownership can lead to better overall firm performance, including higher profitability and growth10. However, it's important to note that while broad-based employee ownership generally leads to better firm performance, the impact might not always be statistically significant(2).
• Reduced Turnover: Broad-based ownership can create a more inclusive and equitable environment, further reducing employee turnover and promoting long-term commitment(2).

Selective employee ownership may have a less pronounced impact on overall firm performance. While it can incentivize key individuals, it may not create the same level of company-wide engagement and motivation as broad-based ownership(2).

To further illustrate the different types of employee ownership models, the table below provides a comparison of three common models: Employee Stock Ownership Plan (ESOP), Worker-Owned Cooperative, and Employee Ownership Trust (EOT)(11).

Impact on Workplace Dynamics

In addition to the financial and performance benefits, employee ownership can also positively impact workplace dynamics. Evidence shows that employee ownership can reduce workplace conflict by aligning employee incentives with company performance(15). When employees have a stake in the company's success, they are more likely to work collaboratively and contribute to a more harmonious work environment.

Potential Drawbacks and Challenges

While employee ownership offers numerous advantages, it's essential to acknowledge potential drawbacks and challenges:

• Complexity and Costs: Setting up and administering employee ownership plans can involve legal and administrative complexities and costs(16).
• Financial Risk: Employees may face financial risk due to the concentration of their investments in company stock(17).
• Governance Challenges: Decision-making processes may become more complex with employee ownership, requiring clear governance structures and communication(18). This can be particularly challenging when transitioning from a traditional ownership structure to an employee-owned model.
• Succession Planning: Planning for ownership transitions and buyouts can be challenging in employee-owned companies(19). This requires careful consideration of how to transfer ownership stakes and ensure the long-term sustainability of the employee ownership model.

Conclusion

Employee ownership offers a compelling model for enhancing firm performance and improving employee economic well-being. Research consistently demonstrates the positive impact of employee ownership on productivity, profitability, job stability, and employee financial health. While challenges exist, careful planning and implementation can mitigate potential drawbacks and unlock the full potential of employee ownership.

Specifically, the research highlights the following key findings:

1. Numerical Economic Benefits for Employees: Employee ownership can lead to higher wages, increased wealth accumulation, greater retirement security, and enhanced benefits for employees. Studies have shown that employee-owners tend to have significantly higher median household net wealth and income from wages compared to their counterparts in non-employee-owned companies(6).
2. Impact of Broad-based vs. Selective Employee Ownership: Broad-based employee ownership, where a larger portion of the workforce has an ownership stake, appears to be more effective in driving company-wide engagement and performance improvements compared to selective employee ownership(2). This suggests that companies seeking to maximize the benefits of employee ownership should consider implementing a broad-based model.

These findings have significant implications for companies considering employee ownership. By implementing employee ownership, companies can create a more motivated, productive, and financially secure workforce, leading to improved firm performance and a more equitable distribution of wealth. However, it's crucial to carefully consider the potential challenges and plan accordingly to ensure a successful transition and implementation.

Works cited

1. Does employee ownership improve performance? - IZA World of Labor, accessed January 10, 2025, https://wol.iza.org/articles/does-employee-ownership-improve-performance/long

2. The Long-term Payoff of Employee Ownership - FCLTGlobal, accessed January 10, 2025, https://www.fcltglobal.org/resource/the-long-term-payoff-of-employee-ownership/

3. Does employee ownership improve performance? | IZA World of Labor, accessed January 10, 2025, https://wol.iza.org/uploads/articles/613/pdfs/does-employee-ownership-improve-performance.pdf?v=1

4. DOES EMPLOYEE OWNERSHIP ENHANCE FIRM SURVIVAL? - Rutgers School of Management and Labor Relations |, accessed January 10, 2025, https://smlr.rutgers.edu/sites/smlr/files/Documents/Faculty-Staff-Docs/does employee ownership enhance firm survival.pdf

5. Benefits of employee ownership according to employee owners - Teamshares, accessed January 10, 2025, https://www.teamshares.com/resources/employee-ownership-benefits/

6. What is Employee Ownership? - NCEO, accessed January 10, 2025, https://www.nceo.org/what-is-employee-ownership

7. Five Key Advantages to Working at an Employee-Owned Company - Kiplinger, accessed January 10, 2025, https://www.kiplinger.com/personal-finance/advantages-to-working-at-an-employee-owned-company-esop

8. The Impact of Employee Ownership - CSG Partners, accessed January 10, 2025, https://www.csgpartners.com/esop-resources-news/employee-ownerships-impact

9. Employee Ownership: A Strategic Advantage - Forbes, accessed January 10, 2025, https://www.forbes.com/councils/forbesbusinesscouncil/2024/08/02/employee-ownership-a-strategic-advantage/

10. Key Studies on Employee Ownership and Corporate Performance - NCEO, accessed January 10, 2025, https://www.nceo.org/article/key-studies-employee-ownership-and-corporate-performance

11. Types of employee ownership - Project Equity, accessed January 10, 2025, https://project-equity.org/learn/types-of-employee-ownership/

12. 6 Successful Companies That Are Employee-owned - Investopedia, accessed January 10, 2025, https://www.investopedia.com/articles/insights/051316/6-successful-companies-are-employeeowned.asp

13. Three Inspiring Examples of Employee-Owners Building Life-Changing Wealth, accessed January 10, 2025, https://www.certifiedeo.com/blog-posts/three-inspiring-examples-of-employee-owners-building-life-changing-wealth

14. The Employee Ownership 100: America's Largest Majority Employee-Owned Companies - NCEO, accessed January 10, 2025, https://www.nceo.org/research/employee-ownership-100

15. Employee ownership as an employment stabilizer - Bureau of Labor Statistics, accessed January 10, 2025, https://www.bls.gov/opub/mlr/2023/book-review/employee-ownership.htm

16. Employee-Owned Companies: The Pros and Cons - BetterUp, accessed January 10, 2025, https://www.betterup.com/blog/employee-owned-companies

17. The Power of Shared Ownership: How Employee-Owned Businesses Achieve ESG Goals, accessed January 10, 2025, https://esg.wharton.upenn.edu/news/the-power-of-shared-ownership-how-employee-owned-businesses-achieve-esg-goals/

18. 14 Reasons Not To Share Ownership with Key Employees - NAVIX Consultants, accessed January 10, 2025, https://www.navixconsultants.com/the-exit-playbook/14-reasons-not-to-share-ownership-with-key-employees

19. Weighing the Pros and Cons of Employee Stock Ownership Plans | FNBO, accessed January 10, 2025, https://www.fnbo.com/insights/commercial-business/weighing-esop-pros-cons