Shared Capitalism in the U.S. Economy: Prevalence, Characteristics and Employee Views of Financial Participation in Enterprises

By Douglas Kruse, Joseph Blasi and Rhokeun Park, Rutgers Univeristy
Reviewed by David Binns, Beyster Institute Staff

This is the first of several articles reporting on new research findings from the Shared Capitalism Research Project conducted under the auspices of the National Bureau of Economic Research. Funded by the Russell Sage and Rockefeller Foundations¹, the Shared Capitalism project is a multi-year research effort assessing the impact of a variety of employee financial participation programs. This most recent NBER data was obtained from questions added to the 2002 General Social Survey, a biennial survey conducted by the National Opinion Research Center, and from more than 40,000 employee surveys from 14 companies with different combinations of shared capitalism plans. Research results were presented at the Shared Capitalism Research Conference held on October 6 and 7, 2006 at the Russell Sage Foundation in New York City.

The past several decades have seen a dramatic increase in direct employee participation in the financial performance of private companies. From profit sharing, gain sharing and bonuses to a variety of employee ownership plans and broad-based stock options, employees in U.S. companies are increasingly receiving part of their compensation in performance-based “shared capitalism” plans. Concomitant to the growth of employee financial participation, new forms of workplace organization and human resource practices have arisen that place increasing importance on teamwork and employee participation in decision-making. This nexus of shared capitalism with high-performance work organizations has been the focus of numerous studies attempting to measure the impact of these new dynamics on company performance and worker productivity as well as on wealth creation, income distribution and economic growth.

Responses to the 2002 General Social Survey (GSS) data indicate that about one-third of employees report that they are covered by some form of profit sharing plan. Gain sharing plans, which typically tie employee compensation to a group-based operational measure such as physical output, productivity, quality, safety, customer satisfaction, or cost control – as opposed to company-wide measures such as profitability or equity value – cover approximately one-fourth of employees based on the combined survey data.

An estimated 5 to 6 percent of employees are participants in employee stock ownership plans (ESOPs) with an additional 11 percent of workers owning stock through non-ESOP 401(k) plans, and a further one percent participate in other defined contribution plans holding employer stock such as stock bonus plans and deferred profit sharing plans holding some of their assets in company stock. Employee Stock Purchase Plans (ESPPs) that allow employees to buy stock through payroll deductions cover an additional 5 to 6 percent of workers. Overall, roughly one-fifth (17 to 24 percent of employees) participate in some form of employee ownership.

Survey data of broad-based stock option plans (defined as those plans that offered options to at least 50 percent of eligible employees as opposed to management incentive plans) produced conflicting results. The authors note that “while 13 percent of employees reported holding stock options in a 2002 survey, firms reported that only eight percent of employees were eligible for stock options in a 2003 survey.”

Taken as a whole, “the prevalence of any type of shared capitalism is high,” with anywhere from one-third to one-half of employees reporting participation in some form of plan. The 2002 GSS data also show that “close to 15 percent of employees received a profit- or gain-sharing bonus in the prior year but do not own company stock or hold stock options, while five percent just own company stock and less than one percent just hold stock options. About 10 percent had two of the three forms of shared capitalism, while six percent had all three.” The authors note that “the important point here is that employee ownership and stock option holding are uncommon on their own, and [are] typically paired with another type of shared capitalism.”

In regard to employee participation in workplace decision-making, the GSS data shows that “about one-sixth of workers are reported to be in self-managed teams. . . [and] “just over half participate in work-related meetings, while about one-third to one-half of employees report having a lot of influence in decisions or say they often participate with others in job decisions.” About one-third of employers report having self-managed teams for non-managers, one-half have employee involvement committees and worker safety committees, and three-fourths have work-related meetings for non-managers.

In addition to the 2002 GSS data, the second component of the NBER Shared Capitalism project collected survey data from 41,206 employees in 14 companies with a variety of shared capitalism programs. All of these firms have some sort of broad-based employee ownership plan (eight ESOPs, one KSOP, four ESPPs and three 401(k)s with company stock). Eleven of the firms have broad-based profit-sharing, while five have broad-based stock options. Six of the firms have fewer than 1,000 employees and three have more than 10,000 workers. Eight of the firms are in manufacturing, four in service/financial and two high-tech/Internet.

Whereas the median profit sharing and gain sharing bonus in the GSS is $1,300 or about four percent of annual pay, and employer stock totals $10,000 or 21 percent of annual pay for the median employee-owner, the data from the participating NBER companies, which were selected on the basis of their having shared capitalism programs, reported much more substantial data. The paper reports that “71 percent of workers in the NBER companies report being paid by profit sharing, 21 percent report gain sharing, 64 percent report owning employer stock, and 22 percent report holding stock options. Overall, 86 percent of surveyed workers report having at least one of these programs.”

The size of the median profit-sharing and gain-sharing stake in the NBER companies is 5.7 percent of annual pay, the median value of employee stock holdings is 30.6 percent of annual pay, and the median stock option holding is $75,000 (counting the estimated profit of both vested and unvested options if they were exercised on the day of the survey). The options holdings represented 100 percent of annual pay and 29 percent of total wealth.

In terms of the percentage of employees covered by shared capitalism programs, the authors note that “the idea that shared capitalism is most likely in performance-sensitive jobs is supported by the finding the profit/gainsharing is most common among sales and management employees (54 percent and 47 percent), but the incidence remains substantial among all but service employees (13 percent). Managers are also the most likely to own company stock (32 percent), but are not particularly more likely to hold stock options (17 percent). The NBER data show high levels of participation in profit/gainsharing and employee ownership for all occupational groups, and low levels of stock options only among production workers and service employees.”

Though the free rider or “1/N” problem predicts that group incentives suffer from the increasingly weak link between individual performance and rewards as the size of the group expands, the authors found that “contrary to this prediction, larger establishments are more likely to have each of the types of shared capitalism. Profit/gainsharing appears to be most common in establishments of 100 to 999 employees (43 percent), while stock ownership and stock options are highest in establishments with 1,000 or more employees (43 percent and 24 percent).”

With respect to the affect of shared capitalism on work organization, Kruse, Blasi and Park report that “profit/gainsharing employees are more likely to work in teams, to be able to observe co-worker performance, and to have low levels of supervision.” They note that “the patterns are mixed, however, for employee-owners and stock option holders. The stock option holders are more likely to work in teams and to have low levels of supervision, but are no more likely (and may be less likely) to easily observe co-worker performance.” Since employee-owners are not more likely to work in teams or observe co-workers, the authors suggest that “profit/gainsharing may be the primary method for encouraging cooperative teamwork in day-to-day work, while employee ownership and stock options may affect other outcomes (e.g., identification, loyalty, turnover).”

The NBER data also suggests that shared capitalism employees have higher levels of “both the objective measure of participation (being in an employee involvement team) and the subjective measures (having say/influence in one’s job, or participation with others in decisions affecting one’s job).”

Skeptics of shared capitalism sometimes suggest that workers’ propensity to risk aversion would make these plans sub-optimal, but the authors note that “an examination of risk aversion in the NBER dataset shows that, as expected, risk aversion is linked to lower participation in several types of plans and less positive views of shared capitalism, but even among the most risk averse employees, two-thirds prefer to have some form of shared capitalism in their pay package.”

¹ Additional funding for the General Social Survey questions was provided by the Beyster Institute, the ESOP Association, the Employee Ownership Foundation, Hewitt Associates, the National Center for Employee Ownership, the Profit Sharing Council of America and American Capital, Inc.

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