Volume 16, Number 1 Article by Rajesh Kumar B March, 2004
Effect of ESOPs on Performance,Productivity and Risk :
Employee stock ownership is widely recognised as an effective means of improving corporate performance by enabling employees to participate in the creation and sharing of wealth they create in an organisation. The rationale is that Employee Stock Ownership Plans (ESOPs) align individual goals with corporate goals and help companies to retain staff, attract talent, motivate employees and enable them to share the long-term growth of the company. However, to be economically viable, ESOPs must improve productivity and firm performance through greater employee involvement, morale and satisfaction.
Employee stock ownership is widely recognised as an effective means of improving corporate performance by enabling employees to participate in the creation and sharing of wealth they create in an organisation. The rationale is that Employee Stock Ownership Plans (ESOPs) align individual goals with corporate goals and help companies to retain staff, attract talent, motivate employees and enable them to share the long-term growth of the company. However, to be economically viable, ESOPs must improve productivity and firm performance through greater employee involvement, morale and satisfaction.
Changes in productivity measures showed negative deterioration following ESOP adoption. Some of the performance measures showed a positive impact. Significant positive relationship was found between market performance and presence of ESOPs. Collective results indicate that ESOPs have no significant effect on a firm's productivity and performance. ESOP firms have higher systematic risk compared to non ESOP firms. Thus investors tend to consider firms with ESOPs to be more risky. Rajesh Kumar ascribes these findings to agency theory predictions, organisational complexity and free rider problems, and the fact that long term incentive effects are reduced because the plans reward employees for previous, and not future, performance. The perceived benefits of ESOPs could perhaps be attained in a scenario where the incentive-productivity-performance link is more clearly perceived by the participating employees.
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