Employee stock ownership as gift exchange Andrew Pendleton - - PowerPoint PPT Presentation

Employee stock ownership as gift exchange

Andrew Pendleton University of York

The theory of ESO

• Nearly all research and writing locates in ESO primarily in

principal-agent framework. Provide incentives to get risk- averse agents to devote more effort to principal’s

• bjectives.
• BUT – ESO is probably a bad way of providing incentives in

most cases

– Risk – Illiquid (reward deferred in most cases) – Free-riding

• ‘An incentive with no incentive effects’!
• Some writers draw attention to alternatives – sorting

(Lazear), retention (Oyer), protect human capital investments (Blair).

ESO covers a ‘multitude of sins’

• A fundamental problem in the literature is that we don’t

differentiate different types of ESO.

– Majority ownership. Owner gifts company to employees or leveraged buy-out. Sense of ownership important. Not primarily an incentive – Employer makes equity available to employees on favourable terms – s.423, s. 401k and/or provides free/discounted matches. Not primarily an incentive – Employer awards free shares – too blunt to be an incentive. Reward all equally or on some principle other than individual contribution, so incentive effects confused. – Employer awards options. May be an incentive depending on setting (eg high tech companies)

• Key consideration is the context in which ESO occurs, and the
• bjectives and understanding of the actors involved. Only in a small

number of instances is ESO clearly used as an incentive (eg. Execs)

The limitations of hard incentives

• Noise
• Manipulation of asymmetric information
• Partial metrics
• Weakens intrinsic motivation. ‘Crowding out’ (Frey and Oberholzer-

Gee AER 1997)

• A signal of distrust and limitation of choice (Falk and Kosfeld AER

2006)

• Conveys bad news about the task and agent’s ability (Benabou and

Tirole AER 2006)

• Signals task has hidden worth to the principal – aim for a better

deal? Recent work in economics suggests that low-powered incentives may work better than high-powered incentives, and experimental work that gifts have positive outcomes.

The role of gifts in employment relationships

• Long tradition of work on gifts, trust, and reciprocity in economics

and sociology (Gouldner 1960; Blau 1964; Bourdieu , Akerlof 1982).

• Key characteristics of a gift

– ‘given without clear specification of reciprocal action’ – But possible expectation that something will be done in return – Expresses a relationship that is something other than a simple transactional /market relationship. – Signals a desire to enter into a relationship – Expresses altruism to the recipient – Hope that the value of the gift to recipient exceeds the cost to the donor (reverse to position with incentives) – Expresses and generates trust – Generates and maintains social cohesion

• Recent experimental work in economics suggests gifts may raise
• utput

In what ways is ESO a gift?

• A free gift where free share awards
• Gives access to equity at advantageous prices with

minimal transaction costs plus tax breaks

• Gift of access to rising stock markets (beta can be more

important than alpha)

• The gift is not precisely linked to either past or future

performance of the recipient

• It has lasting value (normally) (unlike profit sharing

payment). More than just the money

• ESO ‘framed’ outside of normal work-effort

relationships.

Evidence that ESO a gift

• Language used by companies: ‘ sharing in

success, sharing the benefits of performance’

• Share invitations normally use language of

gifts – access to opportunities etc

• Evidence that managers not looking to provide

an incentive as such but something more diffuse eg. Create/maintain a relationship, promote identity, create a ‘happy family’

Why give a gift of ESO?

• Signalling very important. The employer values the

employee and the relationship

• Invites (though doesn’t specify) reciprocal action eg.

Employee commitment. The recipient will think well of you.

• Attempt to go beyond instrumentalism of marketised

employment relationship. Create ‘family’. Create identity (see Akerlof)

• It’s the norm (isomorphism and sectoral effects)
• Guilt (top exec pay etc)
• Doesn’t cost that much (see Murphy). Externalised

admin, tax breaks, new issues (prior to expensing) etc

How does it work?

• Employees reciprocate with a gift – commitment, effort
• etc. Acceptance of the company’s gift signals that

employees want to enter into gift relationship

• Creates identity of the ‘company family’
• Employees want to continue to receive gifts (retention)
• Positive signals to new recruits
• Moderates perception of other company actions.

Given that the gift is a choice, employees will see other policies as unavoidable (ie only do bad things because they have to)

• Gift ‘framed’ separately from other rewards, hence big

bang for the bucks.

Implications

• ESO may work on its own. Participation in decisions no

longer necessary to explain success of schemes.

• BUT provision of information complementary. Trust

means information sharing. Withholding information could undermine the gift

• ESO can co-exist with high-powered incentives (cp.

Alchian& Demsetz based perspectives).

• Illiquidity of ESO may be a strength not weakness
• Very important to protect employees from ESO going
• wrong. Sense of grievance when share price collapses

Empirical implications

• Need examination of employee (and

employer) views of the meaning and value of ESO

• Re-think and examine complementarities with
• ther HR practices in terms of impact on
• utcomes. Role of other gifts?
• Re-examine configurations of ESO, reward,

and HR practices

Conclusions

• Viewing ESO as a gift fits with much of the

language that is used to talk about ESO by companies

• Removes difficulties encountered when view ESO

as an incentive device eg the free rider problem.

• Vital that we differentiate between settings and
• bjectives of ESO.
• Viewing ESO as gift exchange generates exciting

new research agenda