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Does Employee Ignorance Undermine Shared Capitalism?

By John W. Budd
08 Sep 2008 at 04:08 AM GMT-04:00

Shared
capitalism aims to motivate employees by giving them a greater
financial stake in their companies. Recent research shows that many
workers do not know about or understand such plans. How can such plans
work if employees don’t know they exist?

WASHINGTON, D.C. (voxEU.org)
-- 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 E.U. 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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