Firms with high levels of employee participation show double the profits of peers
By Karen Kahn
If it has long been known that employee participation is the secret to employee ownership success, why isn’t the practice more common? More than 30 years ago, Corey Rosen, the founder of National Center for Employee Ownership (NCEO), concluded from his research that “ESOP companies that instituted participation plans grew at a rate three to four times faster than ESOP companies that did not.” He wrote, “Regardless of company size, or the size of employee contributions, or even the percentage of the company owned by the ESOP, the most salient correlation was between corporate performance and workers’ perceptions of their managers’ attitudes toward worker participation.”
If employee participation is the secret to employee ownership success, why isn’t the practice more common?
Since that time, Rosen’s conclusions have been confirmed by Douglas Kruse, Joseph Blasi, and others. Though some evidence exists that companies that share equity broadly are also associated with employee-engagement practices such as “high-trust supervision, participation in decisions, and information sharing,” across the universe of ESOPs, far too many fail to build ownership cultures. In an ownership culture, employees think like owners–i.e., they understand the business fundamentals and how they impact the company’s overall success.
This lack of employee engagement can hurt an ESOP’s overall competitiveness, says Bill Fotsch, founder and president of Open-Book Coaching. ESOPs usually take on debt when they are formed—and they must generate cash to buy out the equity of employees when they leave. These requirements are an extra burden that competitors with traditional ownership structures don’t have. Some of the most successful ESOPs — Publix, SRC Holdings, Trinity Manufacturing, Comfort Supply, and Dorian Drake International—overcome these burdens by building strong ownership cultures that increase profits and thereby limit their need to take on more debt.
Fotsch points to Trinity Manufacturing, one of his clients, to demonstrate how this works. As owner Robert Griggs began the process of converting to an ESOP, he developed an employee engagement program using economic engagement principles, and eventually integrated it with an ongoing cost improvement program. This served the company in two important ways, says Fotsch: “The program increased the firm’s profitable growth and prepared the employees to take over more and more of the owner’s managerial responsibilities.” Employees at every level began to think and act like owners, and soon they were part owners. Worker participation, not stock ownership alone, drove their success.
Experience with firms like Trinity Manufacturing led Fotsch to want to understand more about economic engagement and its effect on profitable growth. In early 2020, he set out to track the relative success of companies as it relates to employee economic engagement. The first step was to define the variable in order to develop a tool to measure it. Working with Harvard Business School Professor Dennis Campbell and research associate Iuliana Mogosanu, Fotsch identified five key aspects of an economically engaged business (whether or not they use an ESOP):
Customer engagement. Do employees regularly reach out to costumers and understand what they value about the products and/or services the company provides? This is the starting point for economic engagement, says Fotsch, since customers define value and, thus, the economics of any business. When employees reach out to customers regularly, asking for their input and learning first-hand what they really value, it empowers them to make decisions with the value-drivers in mind. These customer interviews provide economic information as well as an increase in repeat and referral revenue.
When all employees understand how the company makes money, the firm is more successful.
–Bill Fotsch, founder and president, Open-Book Coaching
Economic understanding. When all employees understand how the company makes money, says Fotsch, the firm is more successful. To create that common understanding, the most successful businesses seek input from employees and develop consensus on the critical issues facing the company. This process can be used to identify a single economic metric that everyone can focus on, like revenue per paid hour. These performance metrics drive financial results, says Fotsch, and because they’re operational, they’re readily understood by the employees who interact with the outcomes every day.
Economic transparency. Transparency enables all employees to see how the company is doing in real time and learn from successes and failures. It clarifies each employee’s role in driving the value of the company, Fotsch asserts, increasing accountability and engagement. Rather than seeing financial results once a year, leadership can share these results on an ongoing basis, so employees understand how their work affects profitability—or in the case of an ESOP, the value of their shares.
Economic compensation. Economic engagement has the most impact when employees become economic partners in the company—i.e., when they benefit materially from their efforts to make the company more productive. An ESOP provides this direct stake—but because the ESOP is structured as a retirement plan, it is tied to long-term results rather than short-term results. That’s why it can be useful to establish some form of near-term profit sharing, says Fotsch, so feedback and profit-sharing exists on an ongoing basis, not just when an employee leaves the company.
Employee participation. When employees become more engaged, companies experience lower turnover and better relationships between managers and employees. Engaged employees also improve outcomes like profits and sales and drive repeat and referral business. Creating regular forums for continued input from employees on improving results drives economic performance, says Fotsch.
To measure company performance across these attributes of economic engagement, Fotsch and his Harvard colleagues created a 15-question survey tool, which they launched in early 2020. What they have consistently seen, across eight waves of company research that has included roughly 500 companies, is that those that fall in the top quartile on the index of economic engagement have profit growth that is double their peer group.
While this is entirely consistent with Rosen’s 1987 HBR research, there’s one difference, says Fotsch. “We now have a tool that defines and objectively measures employee participation, or economic engagement.” The data held true for ESOPs. “When we partnered with NCEO and specifically surveyed ESOPs, the top quartile’s profit growth was double the average of their peer group,” Fotsch observes.
The table below summarizes the results of the survey completed by roughly 5 percent of NCEO members. For each category, respondents answered three questions, for which they could achieve a maximum score of ten.
| Engagement Attribute | Top Quartile | Average | Sample Company |
|---|---|---|---|
| Customer Engagement | 8.33 | 4.55 | 4.10 |
| Economic Understanding | 7.08 | 5.95 | 6.13 |
| Economic Transparency | 7.50 | 6.78 | 7.23 |
| Compensation | 9.58 | 7.40 | 8.55 |
| Employee Participation | 5.13 | 4.73 | 4.93 |
| Total Economic Engagement | 7.78 | 6.28 | 6.19 |
| 3-Year Average Profit Growth | 20% | 9% | 6% |
| Average No. of Employees | 295 | 165 | 153 |
Fotsch’s research is still ongoing. All participants receive a customized report similar to the one above, comparing their scores [Sample Company] to those of their peers, along with recommendations to address their area of greatest weakness to improve growth. Anyone who would like to participate in the survey or field it with their clients or constituents, can do so for no cost. Simply contact Bill Fotsch at Bill@Fotsch.com.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.
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