Pay and Benefits

While Nick Clegg’s speech on the importance of employee ownership is encouraging, allowing employees to demand shares in their company is simply not going to achieve what he wants. I am the founder of the National Center for Employee Ownership in the U.S. We and many academics have long studied what makes employee ownership work. Plans must cover most or all employees (not just those who can afford to buy shares), companies must practice open-book management, and companies need to provide structured opportunities for employee input into decisions affecting their jobs. These companies, the research shows, grow about 6% or more per year than would have been expected absent these plans.
In the U.S. the main mechanism for employee ownership is the employee stock ownership plan (ESOP), which provides tax incentives to employers to contribute shares to an employee trust that holds the shares for most or all employees, with shares allocated relative to pay (up to a maximum of $245,000 per year) and distributed only after people leave. This allows the trust to acquire large stakes in the companies, often 100% in closely held companies where ESOPs are most often used to buy shares of departing owners of successful firms. ESOPs have the greatest impact of the various employee ownership plans on performance and provide employees with retirement assets two to three times that of what they would have had otherwise.
Another popular approach is broad-based option and similar equity plans. These companies also perform better, but not as dramatically as ESOPs, probably because the employees do not accumulate large percentages of their companies through these plans and the companies tend to be less committed to the kind of John Lewis ownership culture so much praised in the U.K. (and very common in ESOP companies).
By contrast, plans that allow employees various tax incentives to buy shares, or offer them at a discount, have relatively low rates of participation (in the 30% range), are skewed towards higher income employees, and have no discernible effect on performance. These companies are no more likely to open book or have high involvement management systems than other companies. Having some employees own some stock is simply not enough to make management want to change. An ESOP with a large percentage of stock usually is. Some of these plans also induce more risk for many employees than they should carry because unlike options and ESOPs, it is their own money they are investing.
John Lewis is majority employee owned and will stay that way. Its culture is aligned with its ownership. To expect that corporate performance or corporate governance will change based on a minority of employees buying a minority of the shares is, sadly, delusional, even if well intentioned.
The U.S. has more experience with this area than any other country. Employee ownership is a major part of our economy (there are 13 million participants in ESOPs and 9 million in broad-based option plans). It would be wise for the U.K. to look at what we have learned here before moving forward.

Corey Rosen
National Center for Employee Ownership