Across Britain, around half of all listed organisations run some kind of all-employee stock purchase plan (ESPP), offering workers the opportunity to buy shares in the firm at discounted rates.
In How does shared capitalism affect economic performance in the UK?, Bryson and Freeman, 2010, we found plan members behave differently than non-members in ways that raise worker productivity and improve organsiational performance.
Until now, ESPPs have been regarded simply as a form of group incentive pay which, like other group incentives, encourage employees to raise their efforts, knowing they will be rewarded for doing so. However, in a forthcoming study, we will argue that, while share plans operate as group incentive schemes, part of their effect on employee behaviour comes via a second mechanism: gift exchange.
In the classic gift exchange model, the organisation gives the worker a higher wage or new benefit in the expectation that the worker will reciprocate with greater effort. The discounted rate for share purchase creates a gift exchange, where the employer hopes that workers who accept the gift will reciprocate with greater loyalty and effort, but it differs from the traditional model in that the worker can reject the gift up front by not buying shares at the discounted price. The worker who purchases the shares should be more likely to reciprocate with greater effort than the one who rejects the gift.
The study focuses on a multinational service sector organisation that puts the ESPP at the heart of its compensation policy. ESPP members have lower turnover intentions and do less on-the-job search, and also put in greater work effort, longer hours, and have lower absence rates than observationally similar non-members, all of whom were offered the same gift of being able to buy lower-priced shares.
We find the lower turnover intentions and on-the-job search are mediated by greater perceptions of co-ownership and loyalty which, we argue, are the result of gift exchange.
These results suggest that all-employee share plans generate productivity-enhancing behaviours on the part of workers who buy shares through gift exchange and group incentives, making ESPPs a unique dual form of compensation.
However, ESPPs diverge from standard gift exchange. Employees have to invest some of their own money by purchasing shares at the discounted rate to accept the gift. A sizeable number choose to reject the gift.
In addition, the value of the ESPP gift varies with the share price, and thus with the performance of the organisation and the effort of workers in total. For workers who buy subsidised shares, an ESPP sets up a group incentive pay system analogous to profit sharing, all-employee stock options, or an employment ownership scheme that makes part of workers’ compensation depend on company performance.
Professor Alex Bryson (pictured) is professor of quantitative social science, University College London, and Professor Richard Freeman holds the Herbert Ascherman chair in economics at Harvard University