Employee Stock Purchase Plans: Gift or Incentive?

Transcription

1 Employee Stock Purchase Plans: Gift or Incentive? Alex Bryson (NIESR, CEP) Richard Freeman (Harvard, NBER, CEP) Society of Labor Economists Chicago 5 th May 2012 National Institute of Economic and Social Research

2 What is an ESPP? Employees allowed to purchase up to some number of shares in company at discounted price Must hold shares for specified period before they can sell Key parameters in determining their value: discount (15% normal in US; 50% in UK) tax treatment of shares expected trend in share price volatility of shares Often portrayed as a group incentive pay scheme but really a hybrid of incentive and gift exchange unlike incentives such as options, ESPP requires worker to put up own cash. unlike gift exchange, workers can and do reject it even when it seems to be a good investment

3 This study Determine if membership of ESPP is associated with proproductive behavior compared to observationally identical non-members in multinational firm ShareCo where ESPP is central to compensation. Highlight the distinct place of subsidized ESPP s in the spectrum of group incentive schemes and gift exchanges Main tool is survey we designed with the firm that gives information on workplace behaviour, plan participation and participation by peers Tackle non-random plan participation (inclusion of risk preferences, IV, work unit fixed effects, direct employee responses)

4 ShareCo's ESPP Employees purchase shares in company and receive matching shares (1-for-1) free from employer Employees can contribute from 10 each month up to a maximum of 125 or 10 per cent of their monthly pre-tax earnings; whichever is the lower amount. This sum is taxexempt and taken from gross salary. ShareCo matches each share purchased up to a value of 125 per month. Shares are held in trust. Company pays admin fees. All shares acquired by the employee are exempt from tax if held for 5 years Shares can be sold earlier but will be subject to tax and, if sold within first 2 years, matching shares are forfeited. Some tax advantages to retaining shares for 3 years but max at 5 years

5 ESPP: gift or Incentive? Discounted rate creates gift exchange Firm hopes workers who accept gift reciprocate with effort But not standard gift exchange Employees make upfront financial contribution Value of gift varies with stock price fluctuation and with effort of entire work group Any employee who buys discounted share can gain irrespective of effort but gain more if group effort rises Unlike wage, employees can refuse it; about 50% do not buy shares under ESPP Also a group incentive pay scheme Compensation depends on company performance (cf profit sharing, all-employee stock options) But only for those who join Non-members remain on fixed wage

6 Comparison with Other Incentives Incentive-based compensation Individual (piece rate): earnings vary with individual effort (output) Group: earnings vary with group effort ESPP: individuals choose to join or not, thus within-firm sorting Members gain from group effort via higher share price But gain from discounts/matching; tax breaks, with gains realised after a period, so akin to deferred compensation Greater impact on plan joiners than with group incentive? Line of sight & 1/n problem similar BUT ESPP involves commitment by joining and money upfront

7 Theory: Shares -> effort Heterogeneous agents: maximizers and reciprocators Will plan member give greater effort? Not if short term free rider maximising 1/n problem facing residual claimant Yes, if gift increases effort via reciprocation Employer signals reciprocity=norm Peer pressures from Plan members Possible spillover to non-members Does size of gift matter? Power of symbolic gifts Deferral Benefits accrue at end of 3 years but max at year 5 Long-term pay off so effects at extensive margin

8 Empirical strategy Multinational firm, business services circa 12k employees Web-based survey of UK employees 2007 and 2010 Multiple behavioural outcomes: long-hours working; working harder than colleagues; absence; co-worker monitoring; quits; job search. Net out other aspects of employment relation to get at ESPP Wage; organizational loyalty Spillovers; co-worker membership in non-member models Worker selection Plan member decision as function of disutility of effort/ability IV to isolate causal impact on effort (LATE) Use of lagged admin data on Plan membership at business unit/office level

9 Model ( 1) Ei 1Plan i 2Wage i 3 Loyal i ' x X i if Equation 1 controls are age, age squared, male, white, degree, married, risk attitude, occupation, supervisor, hours worked, tenure, log annual wage, organizational loyalty. (Co-worker monitoring models also include how closely supervised and how easy to monitor others). Also work unit fixed effects equivalents to identify within unit plan participation effects IV: 2SLS equivalent of equation (1) using lagged membership in work unit as exclusion restriction

10 Results Employees who accept the gift of subsidized shares have superior performance to those rejecting gift Work extra hours; lower absences; working hard; lower quits; lower job search Robust to model specification, including work unit fixed effects No link to co-worker monitoring ESPP divides workers into members and non-members. Expect members to do more co-worker monitoring where more members. Confirmed: PCMEMB +ve sig for M not NM IV suggests treating participation as exogenous understates effects LATE impact on compliers: bigger effect on high ability who are better able to repay the gift (Englmaier and Leider, 2008) Interpretation supported by responses to questions about ESPP effects on motivation, job search etc

11 Coefficients on Members from OLS from Fixed Effect models with work unit dummies OLS Coefficient Fixed Effects Coefficients 1) How hard workers work (relative to how hard other employees work) 0.21 (1.97)** 0.31 (2.57)*** 2) Hours worked relative to standard hours 0.10 (2.65)*** 0.11 (2.59)*** 3) Any absence 4) Days absent (1.66) (1.53) (2.93)*** (2.63)*** (5)Voluntary quits (2.77)*** (2.21)** 6) Job search (4.15)*** (3.60)*** 7) Do-Nothing if see another worker not doing good job (categorical) 0.02 (0.75) 0.01 (0.38) 8) Additive Measure of Intervening if see another worker not doing good job (0.68) (0.29)

12 OLS and IV models OLS IV 1) How hard workers work relative to how hard other employees work Member 0.30 (2.55)*** 0.20 (0.41) 2) Hours worked relative to standard hours Member 0.09 (2.07)** 0.48 (2.51)*** 3) Any absence Member (1.33) (1.21) 4) Days absent Member (2.54)*** (1.12) 5) Voluntary quits Member (2.55)*** (1.58) 6) Job search Member (4.79)** (3.43)**** 7) Do-Nothing in response to seeing another worker not doing good job (categorical) Member 0.01 (0.53) 0.08 (0.80) 8) Additive Measure of Intervening with another worker who is not doing good job Member 0.05 (0.34) 0.57 (0.98)

13 Spillovers from Peer Membership to Members and Non-members Members Non-members 1) How hard workers work relative to how hard other employees work PCMEMB (3.38)*** (2.96)*** 2) Hours worked relative to standard hours PCMEMB (0.60) (0.78) 3) Any absence PCMEMB 0.03 (1.39) (0.67) 4) Days absent PCMEMB 0.10 (1.46) 0.01 (0.15) 5) Voluntary quits PCMEMB (0.75) (1.34) 6) Job search PCMEMB (0.39) (3.34)*** 7) Do-Nothing when another worker not doing good job (categorical) PCMEMB (1.73)* 0.01 (0.35) 8) Additive Measure of Intervening when another worker not doing good job PCMEMB 0.17 (2.19)** 0.03 (0.40)

14 Conclusion Findings resemble gift exchange/efficiency wage studies showing workers reciprocate with additional effort and studies showing workers respond to group incentives But setting is unique since it allows us to compare workers who accept/reject gift in same work unit within same firm rather than across workplaces that give workers different treatment. ESPP offers gift of subsidized shares but also offers group incentive since value of shares will be higher with greater worker effort. But also differs from gift and group incentive because requires up front payment to take advantage of gift. If those who accept Plan have lower disutility of effort than those who reject, ESPP is socially more efficient than gift or incentive systems which treat all workers the same

15 Appendix: Other Evidence Efficiency wages increase effort (lab experiments) Consistent with gifts leading to reciprocity and fair wage hypothesis (Akerlof, Fehr) but: Gift increases amount of labour but not effort per hour (Fehr and Gachter, lab) gift effect disappears over time (Gneezy/List - field) No link (Henning-Schmidt field); needs stake knowledge (lab) Large productivity effects of awards with no pecuniary value due to symbolic value (Kosfeld and Neckerman, field) Recent studies indicate positive associations between exposure to/participation in share plans and worker effort Kruse et al 2010, 2011 ground-breaking suggesting broadly positive effects using insider econometrics and GSS Anomolous absence effect (or like unionization in reducing presenteeism)