Would you do a better job if you owned a slice of the company you work for?
If the answer is yes, would it make sense to invest in companies with a high level of employee ownership?
People who play musical instruments on the weekend for fun are proof that intrinsic motivation beats financial rewards.
New research suggests this could be a sensible strategy – though information is patchy if you want to actually follow through.
The Employee Ownership Australian (EOA) Index launched last week, tracking the share price of listed companies with high levels of employee ownership.
The results are intriguing. In the past five and a half years, the share price of the EOA Index companies increased 40 per cent, compared with just 23 per cent for the ASX 200 overall.
The standard for inclusion in the EOA index was high. It wasn’t enough to have share options for executives or an employee share scheme gathering corporate dust.
To qualify a company had to have an employee ownership scheme open to its entire workforce, with at least 30 per cent of employees participating.
Within the ASX 200, 52 companies met the criteria.
Unfortunately for investors, Employee Ownership Australia, which created the index, will not reveal the identity of the 52 companies.
EOA chief executive Angela Perry says the reason for secrecy is the researchers had access to confidential information. She’s hopeful companies on the index might be willing to be identified in the future.
Meanwhile, Perry says investors can find out whether a listed company has an employee share scheme by looking at the annual report. What they won’t know from the public record is the participation rate.
Interestingly she said the study looked at all listed companies but there were far fewer small and mid-cap companies with broad employee ownership than inside the ASX 200.
Currently the EOA index tracks performance by looking at the share price. It might be more useful to investors if it also looked at a true measure of financial performance such as return on equity. Perry says this may happen in the future.
EOA index companies are also twice as likely to show clear evidence of equal opportunity systems, and outperform or match the ASX 200 on social sustainability factors.
Employee Ownership Australia is an organisation that works with companies implementing employee ownership schemes, so you would be right in thinking it had an interest in promoting employee ownership.
However, similar indices overseas have found comparable results. I ran it by organisational psychologist Dr Phil Harker who said the findings made sense – though not for the reason you might think.
It seems obvious: employee ownership gives employees a financial motivation to help the company succeed.
Indeed, economists have traditionally believed – dating back to Adam Smith in the 18th century – that people work for only money. If employees are motivated by the carrot of pay and the stick of unemployment, surely employee shares are just a modern carrot?
Yet, more recent research has upended the traditional economists’ view of work.
Barry Schwartz in his 2015 book Why We Work demonstrates that money makes little difference to whether someone enjoys their job, nor to how well they do it. A good job is much more about whether you have autonomy over how you do your work, and can achieve a level of mastery in the skills required.
In fact, Schwartz argues financial incentives can have a contrary effect and de-motivate people. The reason is that if you focus your mind on the financial reward, it distances you from the non-financial purpose of your work and you can lose intrinsic motivation.
Harker agrees some financial incentives are damaging. For example, he argues bonuses tied to company profitability are damaging because they’re arbitrary rather than being within the employee’s control. Bonuses can also create unhealthy competition with colleagues.
Multi-million bonuses for executives are even more harmful because it’s so much money that it diminishes intrinsic motivation. Harker says in some organisations employees actually have higher engagement than management.
“A reward once given becomes a right,” Harker says. “Even though it’s a bonus, if the next year it goes down, it feels like a kick in the teeth.”
So if money can dampen motivation and enthusiasm, why would employee ownership help companies succeed?
Harker says it works because it gives staff a sense of ownership in the company. While they do get financial ownership, the important thing is that they get psychological ownership.
Employee share schemes might work for companies but are they good for the workers? It increases your reward if things go well, but it also increases your risk if they don’t, because you don’t just rely on it for a job but also for your wealth creation strategy.
It’s not so much about how much of the company you own, but rather how much of your personal wealth is tied up in one company and one industry.
Of course the fact that money can have unexpected effects doesn’t mean you can stop paying people.
In the 1960s behavioural psychologist John Stacey Adams developed the Adams’ Equity Theory, which is still used today. The idea is that employees lose motivation if their inputs (hard work, skill level, acceptance, enthusiasm, and so on) outweigh what they get back in salary, benefits, intangibles such as recognition, and so on.
Daniel Pink in his 2009 book Drive concludes companies need to pay people enough to take money off the table, but not so much that it becomes the primary motivator.
How much you require to take money off the table will vary by person, and it comes down to both personality and skill set.
I know someone who works at a start-up and is enrolled in the employee share option scheme.
I asked him how it affected his motivation.
He says he doesn’t think about salary or share options on a day-to-day basis. What drives him is a “quest for self improvement” – that is, getting better at what he does or what Schwartz and Pink call “mastery”.
But he is also aware that he has skills that are in demand and a work ethic any employer would dream about, so he thinks about his salary package from time to time to make sure he’s not selling himself, and his family, short.
While intrinsic motivation drives him to excel, if he didn’t have a decent salary and share options he wouldn’t be there. He would still be working extremely hard – only somewhere else.