Does employee ignorance undermine shared capitalism?

John Budd 04 September 2008

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In the intense competitive marketplace of the global economy, policymakers and managers continue to struggle with ways to motivate and reward employees that promote competitiveness and worker well-being. One approach championed by some blurs the traditional lines between capital and labour. It increases workers’ financial stakes in their companies through pay-for-performance and stock ownership plans and increases employee decision-making. This has been called “shared capitalism” (Gates 1998; Freeman 2001).

Shared capitalism is not just a private issue for corporate human resource managers. At the EU level, employee financial participation has been the subject of two PEPPER (Promotion of Employee Participation in Profit and Enterprise Results) reports (1991 and 1996), a Commission Communication (“On a framework for the promotion of employee financial participation”), and additional activities by the European Economic and Social Committee and the European Parliament (Pendleton and Poutsma 2004).
But shared capitalism will likely only be successful in motivating and benefiting employees and their employers if employees know about and understand such plans. Previous research shows that employee ignorance of privately- and publicly-provided employee benefits is not a trivial concern. Research using the British Workplace Employee Relations Survey, for example, reveals that most employees are not aware of the family-friendly benefits offered by their employers (Budd and Mumford 2006). North American studies similarly find significant levels of employee ignorance about employer-provided retirement plans and a wide-range of publicly provided benefits (see Budd 2008).

It therefore appears reasonable to hypothesise that some employees are ignorant about shared capitalism programmes in their workplaces. To test this hypothesis, I analysed over 20,000 employee surveys linked to employer-provided shared capitalism coverage information from 10-14 private sector companies collected under the NBER Shared Capitalism research project (Budd 2008). Consistent with the literature on other aspects of the employment relationship, significant levels of misunderstanding and inaccuracy are uncovered. Employee ignorance might very well undermine shared capitalism.

Evidence of ignorance

The NBER Shared Capitalism data set was collected by a research team directed by Joseph Blasi, Richard Freeman, and Doug Kruse that administered surveys to over 100,000 employees across fourteen companies. The goal of this data collection effort was to allow the research team to analyse the effect of shared capitalism programmes on workers and companies (e.g., Kruse, Freeman, and Blasi, 2008). Focusing on the companies for which managers and individual employees separately report the presence of shared capitalism programmes, I analyse employee ignorance – that is, the fraction of employees that fail to recognise that they are covered by such a programme. For company-level profit-sharing plans, 23% of employees incorrectly report that they are not covered by this type of financial participation plan. Across individual, group, and company-level performance-based pay plans, the ignorance rate is around 15%. A similar level of imperfect awareness of employee stock ownership plans is also estimated.

Multivariate econometric methods can also be used to analyse the predictors of employee ignorance. Higher-paid workers, those that expect to work for their employer for a long time, and those with higher levels of education are less likely to be unaware that they are covered by shared capitalism programmes. The probability of being ignorant about the existence of a profit-sharing plan is 62% for a single, 21 year-old, non-white, high school dropout father of two making $25,000 per year with no expectation of working for a long time for his 200-employee company of one year in a union-represented, non-sales, hourly job in the United States. In contrast to this less-educated, low-paid, young worker profile, consider a better-educated, salaried, experienced worker profile: a married, 45 year-old, white, college-educated, childless woman making $75,000 per year with expectations of working for a long time in her 200 person company of 15 years in a non-union, non-sales, salaried job in the United States only has a 4% chance of failing to correctly realise that she is covered by a profit-sharing plan.

Another aspect of employee ignorance relevant to financial participation plans is a lack of information needed for on-the-job decision-making. Though these questions were only asked at one to three companies, they are revealing. Nearly 30% of employees believe that their company only occasionally or never reaches out to them to provide them with information about company goals and workplace changes. Nearly 45% report that they personally seek out such information on their own only occasionally or never. A quarter of employees failed to agree with the statement that they have the information needed to their job. Around 40% failed to agree with the statements that they are kept abreast of important issues in the organisation and in their jobs.

Conclusion

An analysis of the NBER Shared Capitalism data set of thousands of employee responses linked to company-provided information from ten to fourteen private-sector organisations reveals significant fractions of employees whose perceptions of whether or not they are covered by various shared capitalism programmes do not match their employers’ policies. Such shared capitalism programmes seek to tie employee pay to performance. If this is intended simply as a risk-sharing mechanism between employers and their employees, then ignorance of shared capitalism plans is detrimental to employees, but is probably not a significant concern with respect to corporate performance. In contrast, if a goal of shared capitalism programmes is to provide incentives for employee performance, then employee ignorance has the potential to undermine this goal. Put simply, how can incentives work if employees are not aware of their existence?

The results of these analyses strongly suggest that corporations with shared capitalism programmes need to improve their employee communications programmes. Shared capitalism programmes are not free – they involve cash and/or stock outlays to employees as well as administrative costs. These costs are presumably only justified if they generate returns for the corporation through enhanced employee performance. Similarly, public policymakers need to realise that the envisioned benefits of various employee financial participation programmes might be limited by informational problems. Without effective communications programmes, the benefits of shared capitalism will likely be dampened by employee ignorance, and the expenses or governmental support of shared capitalism programmes might not be justified.

References

Budd, John W. 2008. “Does Employee Ignorance Undermine Shared Capitalism?” NBER Working Paper No. 14236.

Budd, John W., and Karen Mumford. 2006. “Family-Friendly Work Practices in Britain: Availability and Perceived Accessibility.” Human Resource Management Journal, vol. 45, pp. 23-42.

Freeman, Richard B. 2001. “The Shared Capitalist Model of Work and Compensation.” Reflets et Perspectives de la vie Economique, vol. XL, pp. 169-181.

Gates, Jeffrey R. 1998. The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century. Reading, MA: Addison-Wesley.

Kruse, Douglas, Richard B. Freeman, and Joseph Blasi. 2008. “Do Workers Gain by Sharing? Employee Outcomes under Employee Ownership, Profit Sharing, and Broad-based Stock Options.” NBER Working Paper No. 14233.

Pendleton, Andrew and Poutsma, Erik. 2004. “Financial Participation: The Role of Governments and Social Partners,” Dublin: European Foundation for the Improvement of Living and Working Conditions.

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Topics:  Labour markets

Tags:  Shared capitalism, performance pay

Industrial Relations Land Grant Chair, Carlson School of Management, University of Minnesota

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