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Employee Share Ownership and Performance: Golden Path or Golden
Handcuffs?
Sukanya SenGupta (University of Warwick), Keith Whitfield and Robert
McNabb (Cardiff University)
Paper presented to the Annual Meeting of the Labor and Employment Relations Association, Boston,
January 2006
Abstract Using matched employer-employee data collected as part of the 1998 British Workplace Employee Relations Survey, the paper suggests that the presence of employee share-ownership at a workplace is not significantly associated with employee commitment to the values of the organisation. However, there is evidence of a significant negative relationship between share-ownership and workplace turnover which seems to explain part of the positive share-ownership/performance relationship. This calls into question the postulate that share-ownership has its main impact upon performance via the closer alignment of employees’ and employers’ values and interests – the golden path. It also raises doubts about the degree to which share-ownership can be seen as a component of the practices underpinning the high commitment workplace. However, there is evidence that share-ownership has an impact upon performance via the lowering of employee turnover – the golden handcuffs.
Introduction
Recent years have seen the advent of a wide range of holistic approaches by firms in
search of improved competitive performance in their product markets (Appelbaum
and Batt, 1994; Osterman, 1994; Paauwe, 2004; Whitfield and Poole, 1997).
Employee share-ownership has been accorded a pivotal role in this process. It is seen
by many of its advocates as encouraging employees to identify more closely with
their employing organisation, taking on board its values more fully, and thereby
making a stronger contribution to its continued development. (Rosen 1990; Blasi et al.
2003; Conte and Svejnar 1988; Klein 1983)
There is substantial, though not universal, evidence that firms with employee share
ownership schemes have better performance than those that do not (Bradley et al.
1990; Long 1978; Pendleton 1997). Research on the underlying rationale for this
positive relationship is, however, not only much less abundant, but is also less clear in
its conclusions. While some have suggested that higher levels of employee
commitment are pivotal in this respect (Long 1978a; Pierce et al. 1991; Rosen 1990),
others have suggested alternative causal routes, such as low labour turnover
(Richardson and Nejad 1986; Wilson et al. 1990).
The main aim of this paper is to investigate whether there is any evidence that share-
ownership has an impact upon performance via commitment and/or turnover. It uses
matched employee-employer data from the 1998 British Workplace Employee
Relations Survey (WERS98), a nationally-representative survey of workplaces with
10 or more employees. First, multivariate analyses are undertaken of the associations
between employee share-ownership and both employee commitment and workplace
labour turnover, to see whether these intermediate outcomes are higher in the
presence of share-ownership. Second, fitted values from workplace-level analyses of
turnover are entered into equations examining the correlates of performance, with the
aim of seeing if this affects the relationship between share-ownership and
performance such as to suggest a possible moderating influence.
2
Theoretical Considerations
Theoretical work on the relationship between share-ownership and performance has
been extremely limited (Guest 1997). Most work on this subject has been highly
empirical with little, if any, theoretical content (e.g. Addison and Belfield 2000 and
2001; French 1987; Goldstein 1976). Consequently, the view that ESO schemes have
their main impact upon performance through enhanced commitment levels was a view
propagated by advocates for share-ownership, rather something that originated from a
strong theoretical understanding. Only a few studies explicitly have built a theoretical
model that attempts to operationalise the links between share-ownership, performance
and underlying intermediate variables (e.g. Blasi et al. 1994; Long 1978a; Richardson
and Nejad 1986). Most of these studies focus on the links between share-ownership,
performance and commitment (for example, Klein 1987), and ignore the links
between ESO schemes, employee turnover and organisational performance. At best,
employee turnover is viewed as one of the many behavioural outcomes associated
with the higher commitment fostered by share-ownership (Addison and Belfield
2001).
Those studies that do have an explicit underlying theoretical underpinning use a
variety of approaches. Some use a variant of principal/agent theory (e.g. Blasi et al.
1996), others use socio-psychological rationales (e.g. Long 1978a), and still others
use self-selection models (e.g. Blair and Kruse 1999; Richardson and Nejad 1986).
These are not mutually exclusive, and many models are an amalgam of elements from
each.
The starting point of most models is the perception of a conflict between the interests
of the owners of the firm (the principals) and the workers (the agents) (e.g. Blasi et al.
1996; Conte and Svejnar 1988). These can potentially be reconciled in a variety of
ways, one of which is to increase the degree to which key agents within the firm view
themselves as having the same interests as agents. This can potentially be achieved
by encouraging them to become owners of the firm’s capital via an employee share
ownership scheme. In principle, the greater the agent’s share-holding, the greater the
degree to which his/her increase in wealth results from the success of the company as
3
a whole, and therefore the more that his/her interests are aligned with those of the firm
(Klein 1987; Florkowski 1987; Gamble et al. 2002). This alignment of employee
interests with those of their organisation is seen to encourage profit-maximising
behaviour such as greater employee effort, workplace innovation and the reduction of
wastage. Furthermore, Alchian and Demsetz´s (1972) incentive contract theory
suggests that alignment of interests will also result in self- and peer–monitoring,
leading to reduced monitoring costs. The increased effort combined with reduced
monitoring costs will, in turn, contribute to higher financial performance and labour
productivity.
How precisely this alignment of interests happens in practice, however, is a subject of
much debate. For most workers, the amount of capital that they own is far less than is
necessary to result in a greater return from their assets in the firm rather than their role
as workers. There is also the free rider problem, which states that an agent owning
capital can do little to influence the returns on that capital, and is therefore unlikely to
make a greater commitment to the firm on the basis of holding capital in it.
One explanation of the potential role of share ownership in promoting firm
performance is that workers owning capital in their firms become more committed to
its goals and values. Long (1978a), for example, postulates that share ownership
increases organisational identification, which in turn has a positive impact upon firm
performance. Organisational identification is seen to be composed of integration,
involvement and commitment. Involvement and integration are said to promote
organisational commitment and, in turn, lower turnover, less absenteeism, and an
increased willingness to innovate and support change.
Similarly, Pierce et al. (1991) suggest that, under certain moderating conditions, share
ownership leads to ‘psychological ownership’ and a number of positive socio-
psychological outcomes. A distinction is made between formal ownership and
psychological ownership, thereby highlighting the importance of perception in
influencing the share-ownership/performance relationship. Klein (1987) suggests that
the formal ownership rights conferred upon employee share-owners, the financial
rewards yielded by owning shares and influence in the decision-making process
4
through participatory rights all contribute towards satisfaction with the schemes,
thereby fostering commitment amongst employee-owners.
Klein’s satisfaction models have been widely used as a theoretical basis for explaining
the relationship between share-ownership and commitment (Ben-Ner and Jones 1992;
Buchko 1992; Gamble et al. 2002; Keef 1998; Long 1978a; Pierce et al. 1991),
particularly the ‘extrinsic satisfaction’ model which focuses on the relevance of
financial rewards in determining the commitment levels of employee-owners (Buchko
1992; French 1987; Klein 1987; Klein and Hall 1988; Pendleton 2001).
In such a situation, one would expect workers in firms operating share-ownership
schemes to exhibit a greater commitment to the firm and its values. This could, in
turn, be expected to yield a higher level of work effort and a greater willingness to
undertake activities that are in the firm’s interests, while not necessarily being in the
worker’s own immediate self-interest. This yields hypothesis one, which states that
employees in firms operating employee share-ownership schemes will exhibit
higher levels of commitment to the values of their organisation, other things equal.
The enhanced commitment or “golden path” approach to the share-
ownership/performance relationship has strong links to the wider literature on high
commitment work organisations (Beer et al. 1985). Within this literature the (often
implicit) assumption is that the moderating variable in linking HRM initiatives to
enhanced performance is employee commitment. This is generally associated with
the so-called “soft” approach to HRM (Redman and Wilkinson, 2001).
An alternative view of the share-ownership/performance relationship is, however,
sceptical of such a golden path involving enhanced commitment. This approach
suggests that share ownership schemes are primarily an effective worker retention
tool and reduce labour turnover by making it financially expensive for workers to
leave the firm’s employment – the “golden handcuffs hypothesis”. In the presence of
specific human capital, this can yield a turnover rate that is closer to the firm’s
optimum, thereby economising on a mix of hiring and firing and training costs (Blair
and Kruse 1999; Richardson and Nejad 1986). This yields the second hypothesis that
share ownership firms will have lower turnover rates, other things equal.
5
The difference between the golden path and golden handcuffs hypotheses can be most
clearly articulated using Meyer and Allen’s distinction between affective and
continuance commitment. The first relates to an employee’s emotional attachment to,
identification with and involvement in the organisation. It is the form of commitment
that is typically seen to be the key intermediary variable in the share-
ownership/performance relationship. Continuance commitment involves simply
remaining with the organisation. It might result from affective commitment, but it
might be independent of it. Indeed, to the extent that continuance commitment results
from some form of compulsion, it might even have a negative impact on affective
commitment.
The golden handcuff hypothesis, however, is not without its critics. For example,
Culpepper et al. (2004) state that the high financial rewards associated with share-
ownership schemes would make employees feel freer to leave the firm. In this view,
it is likely that share-ownership firms can be expected to have higher rather than
lower turnover rates, other things equal. However, this scenario is likely to be most
effective if the schemes are stand-alone initiatives and employee-owners make large
windfall gains. Under these conditions, there is little financial incentive for remaining
with the firm. In reality, this is rarely likely to be the case. Moreover, firms can
influence this situation by manipulating the vesting schedule to encourage continued
employment. For example, some opt for the staggered vesting schedule whereby the
proportion of shares allocated to employees is directly proportional to the number of
years in employment. Others opt for the cliff vesting schedule whereby employees are
allocated shares when they have been with the firm for a certain period of time.
There is also considerable debate as to whether the lower employee turnover induced
by financial rewards can raise performance, given that it is possible that the less
productive workers will be more likely to remain with the firm (Luchak, 2003;
Glebeek and Bax, 2004). An argument working in the opposite direction is that a
performance-linked compensation scheme is likely to attract more high-performing
workers to the firm (Conte and Svejnar, 1990; Richardson and Nejad, 1986).
6
The golden handcuff hypothesis is closely linked to the so-called “hard” models of the
HRM/performance debate (Redman and Wilkinson, 2001). It suggests that firms gain
competitive advantage by minimising the costs associated with employing labour.
Share ownership is seen as a vital component in economising on the substantial costs
associated with the turnover of key workers. It is widely argued that lower levels of
employee turnover often encourage greater firm-specific capital investment which
contributes towards greater labour productivity and subsequently higher financial
performance (Lincoln and Kalleberg 2003; Richardson and Nejad 1986; Staw 1980).
To the extent that it is effective, one would anticipate that the positive relationship
between share-ownership and performance would be lower in statistical equations
where the impact of turnover had been allowed for, reflecting the moderating
influence of the latter. This yields the third hypothesis that part of any positive
association between share-ownership and performance can be attributed to a
negative impact of share-ownership on labour turnover.
Previous Empirical Work
Share Ownership and Commitment. Evidence on the relationship between share-
ownership and commitment is mixed. A majority of studies report higher
commitment levels in share-ownership firms (Long, 1978; Pendleton, 2001;
Pendleton et al., 1998; Jochim, 1979; Bell and Hanson, 1984; Oliver, 1984; Bell and
Hanson, 1989; Marsh and McAllister, 1981; Russell et al., 1979; Rhodes and Steers,
1981; Long, 1980; Buchko, 1992; Goldstein, 1978; Tucker et al., 1989). However,
some studies suggest that share-ownership schemes do not seem to have a significant
impact on commitment (Dunn et al., 1991; French and Rosenstein, 1984; Hyman et
al., 1989; Marchington et al., 1994; Wilkinson et al., 1994; Poole and Jenkins, 1990),
and others indicate that they are associated with reduced levels of commitment (Keef,
1998; Long, 1982; Kruse, 1984).
A number of reasons could be suggested for these differences in results. One of these
relates to the methodology adopted. Studies that investigate the responses of share-
owners before and after the setting-up of the scheme generally report increases in the
level of organisational commitment (for example, Pendleton, 2001; Jochim, 1979).
Those comparing share-owners and non-owners within the same firm are much more
7
mixed (for example, Russell et al., 1979; Long, 1980; Poole and Jenkins, 1988; Keef,
1998; Hyman et al., 1989).
Another factor would seem to be the amount of time that has elapsed between setting-
up the scheme and the measurement of commitment. Some studies that trace changes
in commitment levels in share-ownership firms over time generally find that there is
an improvement in commitment soon after the scheme is set up, but that the positive
effect seems to disappear over time (Keef, 1998; Kruse, 1984; Dunn et al., 1991).
However, other studies find no effect subsequent to the introduction of the scheme
(Hammer and Stern, 1980; Long, 1982), and one found a substantial positive impact
after six years.
Studies based on case study methods show a range of relationships between share-
ownership and commitment, but those using survey methods are more likely to show
a positive relationship. A further issue concerns the proxy measure/measures used for
commitment. In general, those using the Mowday et al. (1979) framework tend to
show more positive results. This involves the undertaking of a questionnaire that has
15 items relating to organisational commitment. Those using the Cook/Wall
framework, which looks at identification, involvement and loyalty, are more mixed.
A key contextual factor underlying the share-ownership/commitment relationship is
the amount of organisational re-structuring that accompanies the introduction of the
scheme. For example, Keef (1998) found that layoffs due to organisational
restructuring contributed to reduced employee morale and hence reduced levels of
commitment. Similar results were obtained by Long (1982) and Marchington et al.,
(1994).
The introduction of share-ownership schemes is often accompanied by enhanced
participation in decision-making. The evidence suggests that participation has a
stronger positive impact on commitment (Long 1978, 1980, 1981; Goldstein, 1978;
Dachler and Wilpert; 1978; Katz et al., 1983; Sockell, 1985). Moreover, there is
evidence that the failure to introduce participation alongside share-ownership results
in either no change or even decreased levels of commitment (Kruse, 1984; Wilkinson
et al., 1994; Sockell; 1985). This seemingly reflected a feeling among the employee
8
share-owners of unmet expectations with regard to greater information disclosure and
a greater say in decision-making.
Share-ownership and turnover. A small number of studies have investigated the
relationship between share-ownership and turnover, but none have looked directly at
the question of share-ownership, turnover and performance. Most studies report a
strong and negative relationship between share-ownership and turnover (Buchko,
1992; Long, 1980; Rhodes and Steers, 1981; Wilson et al., 1990), though some
suggest that only certain types of scheme reduce turnover (Fernie and Metcalf, 1995;
Addison and Belfield, 2001).
In general, case studies (for example, Buchko 1992) are more likely to find a strong,
negative relationship than survey analyses (Addison and Belfield 2001; Fernie and
Metcalf 1995). Those studies comparing turnover before and after share-ownership
introduction (Buchko 1992) tend to show a stronger negative relationship than those
comparing share-ownership and non-share-ownership firms or share-owners and non-
owners within the same firm (Addison and Belfield 2001; Fernie and Metcalf 1995).
There is also evidence that the greater the coverage of the share-ownership scheme,
the more likely that either turnover intention or actual turnover were reduced.
Methodology
Data. The analysis uses the 1998 Workplace Employee Relations Survey (WERS98).
It differs from its predecessors in collecting matched employer-employee information.
It has comprehensive information on a nationally-representative sample of 2,191
establishments employing 10 or more employees and on 28,323 employees who work
in these establishments. (Cully et al., 1998). Data on the establishments include
information on their structural characteristics, management employment practices,
product markets, labour force composition and the nature of their collective
employment relations. The data on employees include weekly pay, occupational
group, qualifications, marital status, age, gender, union membership, hours worked
and tenure.
9
Financial Performance and Labour Productivity Variables. In WERS98, the
measures of performance are qualitative, and are derived from manager assessments
of what is happening in their own establishment relative to what they believe is
happening in other establishments in the same industry. For measuring financial
performance, the particular question asked is:
How would you assess the financial performance of this establishment compared with
the establishments and firms in the same industry?
(i) a lot better than average (ii) better than average (iii) about average for
industry (iv) below average (v) a lot below average.
A similar question was asked for measuring labour productivity i.e.:
How would you assess the labour productivity of this establishment compared with
the establishments and firms in the same industry?
(i) a lot better than average (ii) better than average (iii) about average for
industry (iv) below average (v) a lot below average
The variables used in the performance analyses are binary, taking the value “1” if the
workplace has above average performance and “0” otherwise. This is because some
of the cells in the five-part variable are too small for meaningful maximum likelihood
analysis.
There is some scepticism regarding the reliability of the performance measures which
are based upon subjective evaluations of organisational performance by managers.
However, Machin and Stewart (1996) validated the performance measures by
tabulating plant closure in 1984-1990 against the reported financial performance in
1984 (using the Workplace Industrial Relations Survey panel data for 1984 and 1990).
They found that those establishments reporting below average financial performance
vis à vis their competitors in 1984 were significantly more likely to have closed down
between 1984 and 1990. This significant correlation clearly adds more weight to the
validity of the performance measure (ibid: 220). Besides, the subjective measures are
articulated as a useful alternative to objective performance measures which have
limitations of their own (Machin and Stewart 1996).
10
Commitment Variable. The commitment variable is based on a question asked in the
employee questionnaire which seeks to determine the extent to which the respondent
agrees or disagrees with the statement, “I have a sense of loyalty towards the
establishment,” on a 5-part scale from “strongly disagree” to “strongly agree”, with
“neither agree nor disagree” as the middle category.
Turnover Variable. The turnover variable is based on a question asked of the
manager most responsible for personnel about the number of permanent employees
who stopped working at the workplace in the last five years because they resigned
voluntarily, expressed in logarithmic form.
Defining Employee Share Ownership. The base definition of employee share
ownership used in the analysis is derived from a question asked of the manager most
responsible for personnel matters as to whether any employees receive payments from
employee share ownership schemes (ESO presence). There was also a variable for
whether sixty or more per cent of non-managerial workers participate in an employee
share ownership scheme (ESO participation).
Estimation. The paper estimates three sets of equation. The first is a series of ordered
probit equations with organisational commitment as the dependent variable. Data are
derived from both the establishment and employee questionnaires. The equations take
the form:
COMMij = α + β1ESj + β2Zj + β3Xij + eij,
where COMMij is a measure of employee commitment (as defined above), ESj is a
measure of share-ownership at the establishment, Xij is a vector of employee
characteristics, and Zji is a vector of establishment characteristics. The vector of
employee characteristics include controls for gender, ethnic background, age, marital
status, tenure, qualification, occupational status, job characteristics and pay levels.
The establishment vector is classified into organisation size, market characteristics,
ownership status (public, foreign, independent), time of operation and union
representation.
11
Because the data used in the analysis are multi-level the error term can be written as,
jijij θϕε +=
where ijϕ represents that part of the error term that varies independently across
individuals both within and between establishments and jθ measures that part that
varies across establishments but which is constant for workers within establishments.
This error structure describes a random effects model and the efficient estimator is
feasible generalised least squares.
The second set of equations is a series of least squares regressions with establishment
turnover as the dependent variable. They use data derived from the establishment
questionnaire. The equations take the form:
T/Oj = α + β1ESj + β2Zj + β3Yij + ej,
where T/Oj measures the level of turnover at the establishment (as defined above), ESj
is a measure of share-ownership at the establishment, and Zj is a vector of
establishment characteristics and Yij is a vector for employee characteristics as well
as workforce composition. The Yij vector includes controls for age of workforce,
gender, ethnic background, skill level, occupational distribution, employment status
and levels of pay are identified as important characteristics that influence employee
turnover (Addison and Belfield 2001; Fernie and Metcalf 1995). Except for the
workforce characteristics related to age and pay, the other workforce characteristics
are based upon Fernie and Metcalf’s (1995) model.
The third set of equations are based on the two proxies for performance used in this
study, labour productivity and financial performance. They use data derived from the
establishment questionnaires. The equations take the form:
12
PERFij = α + β1ESj + β2Zj + ej,
, technology, establishment age, industry, size and market
acteristics.
nitions of the variables used in the analysis are shown in the Appendices 1, 2 and
.
where PERF measures whether the establishment has above average performance or
not, ESj measures whether share-ownership exists at the establishment, and Zj is a
vector of establishment characteristics. The control variables include proxies for
union presence
char
Defi
3
13
Results
Share-Ownership and Commitment. The ordered probit analysis of employee
commitment is summarised in Table One. Contrary to hypothesis one, the analysis
suggests that workplaces with share-ownership schemes in place do not have higher
level of commitment, other things equal. Indeed, the evidence suggests that they may
have lower levels. The coefficient estimates for the variables based on whether the
employee’s workplace has a share ownership scheme in place both have a negative
sign, neither of which are not significant at the ten per cent level. This applies for
both definitions of share-ownership used – presence and participation.
A plausible interpretation of this result is that the presence of share-ownership causes
reduced levels of affective commitment. This interpretation is favoured particularly
since there is a strong theoretical rationale as well as some empirical evidence to
suggest that share-ownership schemes influence affective commitment rather than the
other way round (Dunn et al. 1988).
Such a result calls into question the widely-held view that share-ownership has its
main impact on performance via enhanced employee commitment, and the related
belief that share-ownership is a key component in the generation of a high
commitment workplace (Conte 1982; Florkowski 1987; Long 1978a; Pierce et al.
1991; Rhodes and Steers 1981; NCEO 2002, 2004). One possible explanation for this
result builds on the theory of unmet expectations. Kruse (1984) suggests that the
existence of share-ownership schemes raises expectations with respect to greater
participatory rights amongst the employees in these workplaces. Inability of the share-
ownership schemes to fulfil these expectations may result in disillusionment and
hence a decline in the levels of commitment amongst employees in some share-
ownership establishments.
Share-Ownership and Turnover. The analysis of establishment labour turnover is
summarised in Table Two. In support of hypothesis two, it suggests that there is a
strong negative relationship between share-ownership and turnover, other things
equal. This result applies to both proxies for employee share-ownership, the
coefficient estimate being slightly higher for the participation than for the presence
14
variable. However, the differences are minimal. These coefficients are both
significant at the one per cent level.
The possibility that the lower levels of employee turnover in share-ownership
establishments are attributable to the high wages paid in these establishments (Renaud
et al. 2004; Blair and Kruse 1999) is tested by controlling for the level of yearly
earnings for full-time employees.
The suggestion therefore is that the often found positive relationship between share-
ownership and performance could result from its influence on the quit-rate, by helping
the firm to economise on hiring/firing costs and protect valuable investments in
specific human capital. This would suggest a hard HRM, “golden handcuffs”
explanation of the positive share-ownership/performance relationship.
Share-Ownership, Financial Performance and Labour productivity. The probit
analysis relating share-ownership and relative financial performance is shown in
Table Three. It indicates that employee share-ownership is positively associated with
financial performance and the relationship is significant at the one per cent level for
the presence measure of share-ownership.
Adding the fitted values for turnover derived from the analyses summarised in Table
Two reduces the coefficient on the share-ownership variable by 14 per cent for the
presence variable and 16 per cent for the participation variable. In both cases, the
fitted value variable is negative, but not significant at the ten per cent level. This
suggests that a part of the positive relationship between share-ownership and financial
performance is due to the impact of share-ownership on labour turnover, thereby
offering support for hypothesis three.
Further support for hypothesis three exists when performance is measured in terms of
labour productivity. Table Four shows the results of the probit analysis relating to
share-ownership and labour productivity. The result indicates that employee share-
ownership is positively associated with labour productivity and the relationship is
significant at the one per cent level for the presence measure of share-ownership.
15
Upon the inclusion of the fitted value for employee turnover (columns 2 and 4 of
Table Four) the coefficient on the share-ownership variable reduces by 60% per cent
for the presence variable and 100% per cent for the participation variable. In both
cases, the fitted value variable is negative and significant at the one per cent level.
This suggests that a significant part of the positive relationship between share-
ownership and labour productivity is due to the impact of share-ownership on labour
turnover, thereby offering strong support for hypothesis three. Thus, the higher levels
of labour productivity observed in share-ownership workplaces are substantially
attributable to lower levels of employee turnover, thereby providing strong support for
hypothesis three.
Discussions, Conclusions and Implications
The analysis suggests that previous work investigating the relationship between share-
ownership and organisational performance neither provides a sufficiently clear picture
of the factors mediating the strength of this relationship, nor fully explores the routes
through which share-ownership schemes enhance performance. The findings suggest
that the “golden path” hypothesis that employee share ownership has its main impact
on organisational performance via enhanced commitment is open to question. The
evidence is that the level of employee commitment is actually lower in share-
ownership workplaces.
The analysis does, however, offer some support for the hypothesis that a substantial
part of the explanation of this positive association with labour productivity and
financial performance is due to the promotion of lower labour turnover in share-
ownership workplaces. Not only is turnover significantly lower in share-ownership
workplaces, but the positive association between share-ownership and labour
productivity is substantially lower when fitted values for turnover are included in the
labour productivity statistical equations.
While ESO schemes are associated with lower levels of employee turnover, these
schemes do not foster higher affective commitment. This challenges the dominant
view that ESO schemes influence employee turnover by fostering feelings of affective
16
commitment (Pierce et al. 1991). Instead, the findings direct attention to the ‘golden
handcuff’ theory which suggests that ESO schemes raise perceived costs of leaving
the firm because the ongoing income associated with employee-ownership can be
sustained only if organisational membership persists (Culpepper et al. 2004;
Richardson and Nejad 1986).
By advocating the ‘golden handcuff’ theory, this paper emphasises the critical role
played by financial considerations and therefore continuance rather than affective
commitment in explaining the higher productivity in share-ownership firms. These
findings endorse Culpepper et al.’s (2004) view that future research on ESO schemes
and behavioural outcomes should extend beyond affective commitment by including
other components of commitment as identified by Meyer and Allen (1997). Therefore,
this paper makes a case for distinguishing between different components of
commitment when attempting to explain the ESO/performance relationship.
Fundamentally, this paper challenges the generalisability of Culpepper et al.’s (2004)
argument that the financial rewards associated with stock ownership are more likely
to encourage employees to leave rather than increasing the perceived costs of leaving
the firm.
The higher labour productivity observed in the share-ownership firms can, to a large
extent, be attributed to lower employee turnover. Higher labour productivity can
therefore be achieved even if the employee decision to remain is primarily due to
financial considerations. This challenges Luchak’s (2003) argument that lower
employee turnover induced by financial rewards results in the retention of
unproductive employees, thus lowering labour productivity. Instead, this paper
advocates the firm-specific capital investment argument which suggests that reduced
employee turnover enhances labour productivity by maximising returns from existing
investments in human capital and encouraging greater investment in firm-specific
capital (Blair and Kruse 1999; Richardson and Nejad 1986; Wilson et al. 1990).
The conclusions that ESO schemes improve organisational performance and that they
operate through reduced employee turnover rather than enhanced affective
commitment is likely to have implications outside the academic sphere.
17
First, the findings have implications for managerial practitioners and companies
considering the implementation of a share scheme. The results would enable them to
have a more realistic view of the expected benefits and the costs associated with the
adoption of a share scheme, thereby influencing their decision whether to invest in a
share scheme. Furthermore, they will have realistic expectations regarding the
benefits associated with the ESO scheme. It is unlikely that they will perceive it as a
magical cure for poor performance. Instead, and more appropriately, they may view it
as a useful retention and recruitment device.
Second, the findings have implications for policy-makers who determine the
incentives that should be given to encourage companies to adopt share-ownership
schemes. When the mere existence of share schemes is no guarantee for boosting
organisational performance, reducing agency costs, empowering employees and
bringing about a more equitable distribution of wealth, policy-makers may wish to
reconsider whether or not to encourage their adoption or to advocate tax breaks.
Some caution must, however, be applied to the conclusions reached in this study,
however. While WERS98 has many of the key qualities that are desirable for such an
analysis, there are attributes that are less desirable. This particularly applies to the
cross–sectional nature of the data-set and the broad definitions of share-ownership
used in the survey questionnaire. Thus the results should be seen as indicative of the
need for further, more focused research, rather than definitive in their own right. The
problem of causality can be addressed by using panel data, or by designing
longitudinal studies with different samples. Qualitative data could add value by
providing insights into the causal processes. A case is thereby made for encouraging a
tradition of collaborative research employing both quantitative and qualitative
analysis techniques. Furthermore, this paper paves the way for exploring non-
attitudinal routes through which ESO schemes possibly impact upon performance.
Finally, the existing focus on the impact of ESO schemes on performance has
neglected other important uses of share schemes, i.e. as an anti-takeover device, in
facilitating employee buy-outs, as an HR tool for attracting and retaining critical
talent, and finally as an alternative to the pension plans. This gap presents yet another
18
Table One: Random Effects Analysis of Employee Commitment Independent and Control Variables Presence Participation Constant 2.168*** 2.212*** Presence of share-ownership -0.098 - 60-100% of non-managerial employees actually participate in the share-ownership - - 60-100% of non-managerial employees eligible for share-ownership - -0.048 % of female employees -0.030 -0.040 Ethnicity: % of Black employees -0.207 -0.228 % of Asian employees 0.069 0.044 % of Chinese employees 6.680 6.428 Age group: Aged 20-24 years -0.008 -0.073 Aged 25-29 years -0.161 -0.213 Aged 30-39 years -0.198 -0.252* Aged 40-49 years -0.043 -0.124 Aged 50-59 years 0.085 0.007 Aged 60 years plus 0.220 0.139 Marital status: Married 0.177*** 0.171*** Current job tenure: 1- 2 years -0.127 -0.128 2- 5 years -0.153* -0.162* 5- 10 years -0.142* -0.135 Plus 10 years -0.158* -0.131 Education: A-level or equivalent 0.055 0.060 O-level or equivalent 0.053 0.030 Cse or equivalent 0.033 0.008 Nvq or equivalent -0.077 -0.072 Occupational distribution: % Managerial and Professional -0.064 -0.053 % Technical, scientific 0.084 0.076 % Craft -0.005 -0.005 % Clerical -0.108 -0.090 % Sales 0.098 0.153 % Operatives/unskilled -0.217* -0.202* Establishment variables: Trade union membership -0.289*** -0.288*** Temporary job -0.108 -0.117 Fixed job -0.178 -0.198 Female job 0.155* 0.164* Male job -0.207*** -0.191** High pay 0.256*** 0.294*** Low pay 0.014 0.021 Big organisation -0.104 -0.098 Small organisation -0.144* -0.131 Sectors: Manufacturing -0.148 -0.162 Electricity, gas and water 0.113 0.043
20
Construction -0.072 -0.079 Wholesale and retail -0.008 -0.040 Hotels and restaurants 0.038 0.024 Transport and communications -0.103 -0.096 Financial services -0.048 -0.055 Other business services -0.099 -0.124 Public Administration 0.095 0.089 Education 0.111 0.111 Health 0.018 0.026 Market characteristics: Product market competition (high competition for main product or services) 0.093 0.079 International market 0.030 0.026 Market growth 0.011 0.017 Market share 0.011 0.029 Establishment characteristics: Presence of a consultation committee -0.098* -0.109* Presence of a briefing committee 0.028 0.014 Presence of a performance/quality committee 0.037 0.034 Public sector 0.019 0.023 Foreign owned -0.047 -0.042 Establishment status: Independent establishment 0.105 0.125 Establishment age 0.000 9.38E-05 Recognised union at establishment 0.131* 0.136* Number of observations 14960 14420
* Significant at 10% level, ** Significant at 5% level, *** Significant at 1% level
21
Table Two: Least Squares Analysis of WorkplaceTurnover Independent and Control Variables Presence Participation Constant -1.858*** -1.787*** Presence of share-ownership -0.337** - 60-100% of non-managerial employees actually participate in the share-ownership - - 60-100% of non-managerial employees eligible for share-ownership - -0.376*** Sectors: Manufacturing -0.072 -0.043 Public Administration -0.134 -0.131 Education 0.012 0.015 Health and Social Work 0.247 0.255 Electricity, gas and water -0.367 -0.385 Construction -0.084 -0.070 Wholesale and retail -0.053 -0.031 Hotels and restaurants 0.502 0.480 Transport and communications -0.112 -0.168 Financial services -0.073 -0.145 Other business services 0.100 0.132 Number of employees (multiplied by 1000) -0.000*** -0.000*** Establishment status: Independent establishment -0.190 -0.154 Private sector 0.399** 0.350 Recognised union at establishment -0.301** -0.271 Procedures dealing with collective disputes -0.039 -0.085 Proportion of part-time workers 0.246 0.306 Proportion of female workers -0.353 -0.488 Proportion of ethnic workers -0.080 0.031 Proportion of workers aged under 21 1.158*** 1.125** Proportion of unskilled workers -0.461 -0.449*** Proportion of workers in sales -0.051 -0.222 Proportion of technical and scientific workers -0.647* -0.696** Proportion of clerical workers -0.224 -0.199 Proportion of craft workers -0.578 -0.650** Proportion of operative workers -0.617** -0.733*** Proportion of professional and managerial workers -0.321 -0.269 % full-time employees earning <£9000 p.a 0.188 0.259 % full-time employees earning <£22000 p.a -0.016 -0.034 Number of observations 1351 1308 R-squared 0.3168 0.3125
* Significant at 10% level, ** Significant at 5% level, *** Significant at 1% level
22
Table Three: Probit Analysis of Financial Performance, Turnover and Share-ownership
Presence of share-
ownership Participation in share-
ownership
Independent and Control Variables No Fitted Values
Fitted Values for Turnover
No Fitted Values
Fitted Values for Turnover
Constant -0.173 -0.883*** -0.107 -0.955** Presence of share-ownership 0.593*** 0.510*** - - 60-100% of non-managerial employees actually participate in share-ownership - - 0.481*** 0.402* Recognised union at establishment -0.155* -0.285*** -0.201 -0.370** Level of technology: % of unskilled workers 0.081 -0.126 0.018 -0.180 Establishment age: >20 years -0.007 -0.033 0.013 -0.009 Sectors: Manufacturing 0.193 0.286 0.234 0.308 Public Administration 0.875*** 0.715* 0.844 0.665 Education 0.415** 0.349 0.397 0.324 Health 0.005 0.264 0.003 0.300 Electricity, gas and water 0.159 0.006 0.371 0.244 Construction -0.103 0.342 -0.078 0.372 Wholesale and retail -0.056 0.041 -0.015 0.093 Hotels and restaurants 0.007 0.428* 0.091 0.568 Transport and communications -0.022 -0.149 0.106 -0.030 Financial services 0.182 0.091 0.158 0.024 Other business services -0.216 -0.254 -0.220 -0.235 Number of employees (multiplied by 1000) 0.000 0.000 0.000 0.000 Market characteristics: Market growth 0.455*** 0.505*** 0.445*** 0.482*** International market -0.022 -0.104 -0.042 -0.130 Product market competition (high competition for main product or services) -0.013 0.021 -0.019 0.015 Establishment status: Independent establishment 0.183** 0.019 0.110 -0.060 Fitted value of employee turnover - -0.391*** - -0.464** Number of observations 1329 1145 1284 1143 Chi Squared 82.672 97.569 56.187 87.798
* Significant at 10% level, ** Significant at 5% level, *** Significant at 1% level
23
Table Four: Probit Analysis of Labour productivity, Turnover and Share-Ownership
Presence of share-
ownership Participation in share-
ownership
Independent and Control Variables No Fitted Values
Fitted Values for Turnover
No Fitted Values
Fitted Values for Turnover
Constant 0.076 -1.236*** 0.122 -0.998** Presence of share-ownership 0.331*** 0.133 - - 60-100% of non-managerial employees actually participate in share-ownership - - 0.298* -0.026 Recognised union at establishment 0.008 -0.277** 0.013 -0.214 Level of technology: % of skilled workers 0.094 -0.055 0.028 -0.053 Establishment age: >20 years -0.177** -0.158* -0.201 -0.172 Sectors: Manufacturing -0.307 -0.368* -0.294 -0.320 Public Administration 0.393 0.021 0.361 0.069 Education 0.352 0.090 0.333 0.123 Health 0.424** 0.577*** 0.407 0.546 Electricity, gas and water -0.111 -0.553 0.083 -0.315 Construction -0.441* -1.071*** -0.439 -1.015* Wholesale and retail -0.287 -0.126 -0.200 -0.048 Hotels and restaurants -0.284 0.455 -0.239 0.389 Transport and communications -0.169 -0.505 -0.103 -0.408 Financial services -0.432* -0.581** -0.379 -0.500 Other business services -0.421** -0.313 -0.424 -0.282 Number of employees (multiplied by 1000) 0.000 0.000 0.000 0.000 Market characteristics: Market growth 0.205 0.217*** 0.184 0.186 International market 0.168 0.006 0.127 -0.022 Product market competition (high competition for main product or services) -0.020 -0.051 0.005 -0.047 Establishment status: Independent establishment 0.009 -0.084 -0.044 -0.098 Turnover - -0.764*** - -0.640*** Number of observations 1273 1101 1232 1069 Chi Squared 77.325 93.275 68.977 76.612
* Significant at 10% level, ** Significant at 5% level, *** Significant at 1% level
24
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30
Appendix 1: Definition of Variables for Share-Ownership Schemes and Affective Commitment
Variable Appendix 1: Definition
Independent and Dependent Variables
Presence of share-ownership (Empshare) Do any employees at this workplace receive payments or dividends from any of the following payment schemes? (1= employee
share-ownership scheme; 0 = profit related payments or bonuses, deferred profit sharing schemes, individual or group
performance related pay schemes, other cash bonuses)
60-100% non-managerial employees actually
participate in share-ownership
Do the majority of eligible non-managerial employees (60% or more) at this workplace participate in the employee share-
ownership schemes? (1/0, Yes/No).
Affective commitment I have a sense of loyalty to the establishment
(0 = Strongly Disagree , 1 = Disagree, 2 = Neither Agree nor Disagree , 3 = Agree or 4 = Strongly Agree)
Contextual Variables
Individual Controls
Sex of employee Are you male or female?
Male (1 = male, 0 = otherwise)
Ethnic group To which of the groups do you consider you belong?
Black 1 = Black, 0 = otherwise.
Asian 1 = Asian , 0 = otherwise.
Chinese 1 = Chinese , 0 = otherwise.
Age of employee How old are you?
20-24 yrs 1= 20-24 yrs, 0 = otherwise.
25-29 yrs 1 = 25-29 yrs, 0 = otherwise.
Variable Appendix 1: Definition
30-39 yrs 1 = 30-39 yrs, 0 = otherwise.
40-49yrs 1 = 40-49yrs, 0 = otherwise.
50-59yrs 1 = 50-59yrs, 0 = otherwise.
60 yrs or more 1 = 60 yrs or more, 0 = otherwise.
Marital status Which of the following describes your current status?
Married 1 = Living with spouse or partner , 0 = otherwise.
Job Tenure How many years in total have you been working at this workplace?
1 to less than 2yrs 1 = 1 to less than 2yrs, 0 = otherwise.
2 to less than 5 yrs 1 = 2 to less than 5 yrs, 0 = otherwise.
5 to less than 10 yrs 1 = 5 to less than 10 yrs, 0 = otherwise.
More than 10 yrs 1 = More than 10 yrs , 0 = otherwise.
Educational qualifications What is the highest educational qualification you hold?
ALEVEL 1 = A level or equivalent , 0 = otherwise.
OLEVEL 1 = O levels or equivalent/ GCSE , 0 = otherwise.
CSE 1 = CSE or equivalent/GCSE , 0 = otherwise.
NVQ (vocational) Do you hold any recognised vocational qualification such as trade apprenticeships, NVQs or a city and guilds certificate? (1/0,
Yes/No).
Occupation Which of the following occupational groups best describes your job at present?
Professional e.g. teachers, lecturer, lawyer, librarian, engineer, architect, doctor, accountant, social worker.
1 = Professionals , otherwise = 0.
Craft and skilled service e.g. tool maker, electrician , fitter, motor mechanic,
1 = Craft & skilled service = 1, 0 = otherwise.
32
Variable Appendix 1: Definition
Clerical and secretarial
e.g. typist, postal clerk, secretary, civil service
1= Clerical & secretarial , 0 = otherwise.
Sales e.g. till operator, sales assistant, sales representative, petrol pump attendant
1 = Sales = 1, 0 = otherwise.
Line and assembly. e.g. assembly line worker, packer, truck driver
1 = Operative and assembly, 0 = otherwise.
Trade union membership 1= if the employee is currently a member of a trade union or a staff association, 0 = otherwise.
Nature of job Is your job permanent or is it temporary or for a fixed term?
Temporary job 1 = Temporary contract, 0 = otherwise.
Fixed term contract 1 = Fixed term contract, 0 = otherwise.
Female work 1 = The work at this workplace is done mainly by women or only by women , 0 = otherwise.
Male work 1 = The work at this workplace is done mainly by men or only by men , 0 = otherwise.
Gross yearly Wage level How much do you get paid for the job here before a tax and other deductions are made?
Above £18,721 1 = Above £18,721 p.a. before tax , 0 = otherwise.
Between £7,281 - £ 9,360 1 = Between £7,281 - £ 9,360 p.a. before tax , 0 = otherwise.
Industry Controls Which sector does the establishment operate in?
Manufacturing sector (1/0, Yes/No)
Public administration (1/0, Yes/No)
Education (1/0, Yes/No)
Health (1/0, Yes/No)
Electricity, gas and water (1/0, Yes/No)
Construction (1/0, Yes/No)
33
Variable Appendix 1: Definition
Wholesale and retail (1/0, Yes/No)
Hotels and restaurants (1/0, Yes/No)
Transport and communication (1/0, Yes/No)
Financial services (1/0, Yes/No)
Other business Services (1/0, Yes/No)
Other community services Omitted category
Establishment Controls
Establishment size How many employees are currently employed in an establishment?
10,000 plus 1 = Number of employees in the establishment is >= 10,000. , 0 = otherwise.
Less than 200 1 = Number of employees in the establishment is < 200 , 0 = otherwise.
Market Characteristics
Product market competition
Is there a high competition for main product or service produced by the establishment?
(1/0, Yes/No).
International market Is the market for the main product or service international?
(1/0, Yes/No).
Market growth Is the market in which this establishment operates growing? (1/0, Yes/No).
Above 26% UK market share The establishment’s UK market share for the main product or service is 26-50% or greater than 50% = 1, 0 = otherwise.
Communication systems
Joint consultation Are there any committees of managers and employees at this work place primarily concerned with consultation rather than
negotiation? (1/0, Yes/No)
Team briefing Do you have a system of briefings for any section or sections of the workforce here? (1/0, Yes/No)
34
Variable Appendix 1: Definition
Quality circles Do you have any groups at this workplace that solve specific problems or discuss aspects of performance or quality? (1/0,
Yes/No)
Ownership status
Private sector How would you describe the formal status of this establishment?’ Is it privately or publicly owned ?
1 = Private sector,
0 = otherwise
Foreign ownership; part/full How would you describe the ownership status of the establishment?
1 = UK and foreign owned or predominantly foreign owned (51% or more) or foreign owned or controlled,
0 = otherwise.
Independent establishment Is the establishment a single independent UK based establishment? (1/0, Yes/No).
Age of establishment For how long has this establishment been operating at this address? (Continuous variable Minimum 0 years-997 years).
Union presence Is there at least one recognised union at the establishment. (1/0, Yes/No)
Note : Most of the questions from the WERS98 data set have been rephrased in the interest defining the variables used in this thesis
35
Appendix 2: Definition of Variables for Share-Ownership Schemes and Employee Turnover Variable Appendix 2: Definition
Independent and Dependent Variables
Presence of Employee Share-Ownership Schemes and Majority
participation in Employee Share-Ownership Schemes
Same as Appendix 1
Employee Turnover (LogQuit) During the last twelve months how many permanent employees stopped working here because they resigned
voluntarily?
Log of total number of part-time and full-time employees that resigned voluntarily.
Better than average financial performance (Betterfp) How is the financial performance of this establishment compared with the establishments and firms in the same
industry? (1= a lot better than average or better than average, 0 = about average for industry, below average or a lot
below average).
Better than average labour productivity (Betterlp) How is the labour productivity of this establishment compared with the establishments and firms in the same
industry? (1= a lot better than average or better than average, 0 = about average for industry, below average or a lot
below average).
Contextual Variables
Individual Controls
Sectors Same as Appendix 1
Establishment size Same as Appendix 1
Establishment Status
Independent establishment Same as Appendix 1
Private sector How would you describe the formal status of this establishment? Is it privately or publicly owned? (1= Private
sector company or Private sector-other; 0 = Public sector)
36
Variable Appendix 2: Definition
Union Presence Same as Appendix 1
Grievance handling procedures Are there any formal procedures for dealing with collective disputes raised by any group of non-managerial
employees (1/0, Yes/No).
Pay
% full time employees getting more than £22,000 p.a % full time employees earning more than £22,000 p.a. to total full-time workforce currently in the establishment
Employment contract
% of part time employees % part-time workers to total workers to total workforce currently in the establishment.
Gender
% of female employees % of part-time and full-time female employees to total workforce currently in the establishment.
Ethnicity
% of non white employees % of current workforce from non ethnic background to the total workforce currently in the establishment.
Age
% of employees under 20years % of current workforce aged under 20 years to the total workforce currently in the establishment.
Occupational distribution
% of unskilled workers % of routine unskilled workers to the total workforce currently in the establishment.
% sales % of full-time and part-time sales staff to the total workforce currently in the establishment.
% technical and scientific % of full-time and part-time technical staff to the total workforce currently in the establishment.
% Clerical % of full-time and part-time clerical and secretarial staff to the total workforce currently in the establishment.
% craft and skilled % of full-time and part-time craft and skilled services staff to the total workforce currently in the establishment.
% operative and assembly % of full-time and part-time operative and assembly staff to the total workforce currently in the establishment.
% professional % of full-time and part-time professional services staff to the total workforce currently in the establishment.
Note : Most of the questions from the WERS98 data set have been rephrased in the interest defining the variables used in this thesis.
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Appendix 3: Definition of Variables Employee Turnover and Organisational Performance
Variable Appendix 3: Definition
Independent and Dependent Variables
share-ownership schemes and majority participation
in share-ownership schemes and Betterfp
Same as Appendix 1.
Fitted values of employee turnover
Contextual Variables
Union presence Same as Appendix 1
% of unskilled workers % of routine unskilled workers to the total workforce currently in the establishment.
Establishment Age
> 20 years Has the establishment been in operation at the current address for greater than 20 years? (1/0, Yes/No).
Sectors Same as Appendix 1
Establishment size
10 – 30,000 employees Currently how many employees do you have on the payroll at this establishment? (Continuous
variable; Minimum 10 to Maximum 30,000 employees)
Market Characteristics
Market growth Same as Appendix 1
International market Same as Appendix 1
Product market competition
Same as Appendix 1
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Variable Appendix 3: Definition
Establishment Status
Independent establishment Same as Appendix 1
Note: Most of the questions from the WERS98 data set have been rephrased in the interest defining the variables used in this thesis.
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