characteristics of workplaces with financial participation: evidence from the workplace industrial...

Industrial Relations Journal 28:2ISSN 0019-8692

Characteristics of workplaceswith financial participation:

evidence from the WorkplaceIndustrial Relations Survey

Andrew Pendleton

This article assesses the theory and evidence for the adoption and useof financial participation. It reports finding of a comparison of thecharacteristics of workplaces with profit sharing, employee shareschemes and those with no schemes at all, using data from WIRS3

There has been dramatic growth in the inci- issue comes from research conducted in thedence of financial participation schemes in mid-1980s and may well be dated[7]. Thethe UK over the last fifteen years, aided and importance of identifying these character-abetted by supportive government policy. istics resides in the possibility that they canThe Workplace Industrial Relations Survey provide insights into why some firms adoptconducted in 1990 found that over half of all financial participation.establishments in the trading sector of the The subject of this article is the organis-economy had some form of broadly-based ational, industrial relations and labour man-financial participation such as profit sharing agement characteristics of manufacturingor employee share ownership[1]. Since then workplaces with financial participation, andthe incidence of financial participation draws on data collected by the Workplaceschemes has grown even further and by 1995 Industrial Relations Survey (WIRS3) in 1990.over 10 per cent of the employed labour force The particular appeal of such a focus residesparticipated in PRP schemes alone[2]. Most in the juxtaposition of manufacturing work-of the research in this area has focused on places as a stereotype (not necessarily well-outcomes such as the impact on labour turn- founded) of ‘old’ industrial relations andover[3], labour productivity[4], and financial participation as a typical form ofemployee attitudes[5]. With a small number ‘new’ human resource management. Thatof exceptions, there has been relatively little said, our concern is not to infer the existenceresearch recently into the characteristics of of Human Resource Management or its vari-firms with or adopting financial partici- ants (eg. High Commitment Management)pation[6]. Much of our knowledge on this from the presence of financial participation as

these issues have been addressed else-where[8]. Instead, our purpose is to consider❒ Andrew Pendleton is Lecturer in Industrial

Relations at Bradford University Management Centre. the use of financial participation in relation to

Blackwell Publishers Ltd. 1997, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main St., Malden, MA 02148, USA.

Workplaces with financial participation 103

various arguments developed by economists to profitability. In the UK cash-based sharingand Profit-Related Pay (introduced in 1987)and industrial relations researchers to explain

the attractions of this kind of scheme. are the main forms of cash sharing, whilstSave-As-You-Earn (SAYE) share optionIn the article we compare the character-

istics of workplaces with various types of schemes (introduced in 1980), executiveoption schemes (introduced in 1984) and gen-financial participation against those of work-

places with no scheme at all. Since there are eral option schemes (introduced in 1995) arethe main share-based schemes. All exceptimportant differences between types of

scheme—cash-based schemes are much more cash schemes attract tax benefits. This simpledistinction between cash and share schemesimmediate in provision of benefits and more

closely linked to firm performance than share is, however, often not so clear-cut in practice.In many countries, there are share-basedschemes—we could anticipate that the

characteristics of workplaces will differ schemes where transfer of shares toemployees is financed by current profits, eg.between types of scheme, possibly reflecting

different types of adoption decision. This approved profit sharing (or ADST) schemesin the UK, capital accumulation schemes inapproach contrasts with much of the litera-

ture to date, which either considers all forms Germany and deferred pension plan schemesin the US[14]. We exclude these schemesof financial participation together[9] or con-

centrates on the differences between Inland from our analysis because they are not wide-spread in UK manufacturing[15]. We alsoRevenue-approved share-based schemes[10].

In the analysis presented here we examine restrict our interest to broadly-based schemesopen to all or most employees.the characteristics of workplaces with cash

schemes only, those with share schemes only, Since cash-based and share-based financialparticipation schemes differ in a number ofand those with a combination of the two

types of scheme, using data derived from important dimensions, the reasons forscheme presence may well differ betweenWIRS3. The article proceeds by considering

the characteristics that might be expected to type of scheme. A cash-based scheme mightbe used to improve short-term employeebe observed in firms/workplaces with these

various types of scheme. We then present motivation whereas less direct share-basedschemes may be targeted on developingdescriptive statistics of these characteristics,

dis-aggregated by type of scheme, before longer-term commitment to the firm[16].Variations in the use of these schemes mayattempting to evaluate the relative impor-

tance of these variables in explaining why be systematically related to organisational,institutional and contextual differencessome workplaces have financial partici-

pation. Our main finding is that there is little between firms. By investigating these charac-teristics we may be able to gain insights intosupport for most of the arguments from econ-

omic theory to explain the use of financial the reasons for the introduction of financialparticipation, on the assumption that theseparticipation. In fact industrial relations

characteristics exhibit a stronger relationship characteristics provide the context and theimpetus for the managerial decision. How-with the presence of these schemes.ever, managerial objectives are conceptuallydistinct from company characteristics, andmost firm-level data provide little or no infor-Financial participation: forms,mation on managerial interpretations andtheory and evidenceevaluations of this context. Even so, if thereare systematic associations between certainIt is clear from research in the United

States[11], Europe[12] and the UK[13] that characteristics and the presence of financialparticipation we may, subject to simple teststhere are a number of types of financial par-

ticipation. The main division is between cash- of intuitive plausibility, reasonably infer thatthere is some real connection, albeit indirect,based profit sharing, where rewards are paid

from profits more or less immediately, and between the two. A further consideration isthat most studies lack a longitudinal dimen-share-based schemes, where the rewards are

primarily gained from a long-term increase in sion (ie. data are rarely collected before theintroduction of financial participation).share value. The difference between the two

resides in the time-frame of the performance- Hence it is difficult to say whether observedcharacteristics are a cause or effect of finan-remuneration link, the financial immediacy

of the benefit, and the directness of the link cial participation in most cases. However,

104 Industrial Relations Journal Blackwell Publishers Ltd. 1997.

since many features are likely to persist for To determine whether they play a role in thedecision to introduce sharing, some studiessome time after the introduction of these

schemes (eg. union density seems unlikely to have investigated characteristics of the pro-duction process and workforce that mightchange dramatically in the short term in most

firms) the absence of longitudinal infor- indicate difficulties of supervision. Forinstance, workplaces with team-based tech-mation does not necessarily present an insur-

mountable obstacle to interpretative analy- nologies, where the measurement of individ-ual effort is difficult and where intra-groupsis[17].

Turning to the theory and evidence so far, cooperation is vital, might be perceived assuitable contexts for the introduction of fin-economic theory (and the current UK govern-

ment [18] views financial participation as an ancial participation. There is little evidence,however, to support these contentions.incentive to employees to work harder which

is otherwise weak in fixed-waged contracts. Research in the US, France and the UK[28]has not found significant relationshipsIf this is so, we might expect firms adopting

sharing to be worse than average performers between either occupational or technologyvariables and the existence of financial par-in terms of profitability or productivity, with

sharing adopted to improve performance. ticipation. Nor is there any evidence so far toindicate clear and significant differencesHowever, evidence from the UK[19], France

[20], Germany[21], Italy[22] and the US[23] between cash and share-scheme firms inthese respects.finds that firms adopting financial partici-

pation tend to be better than average per- It is widely believed that monitoring prob-lems intensify with organisational size[29] soformers and, though not theoretically incon-

sistent with use of sharing as an the expectation should be that financial par-ticipation is positively associated with size.incentivatisation strategy, it suggests at least

that sharing is not widely adopted as a turn- The reality, however, is more complex. Thereis substantial evidence of a negative relation-around strategy by firms in difficulties. We

might infer from this that firms adopt sharing ship between establishment size and presenceof financial participation[30] suggesting thatprimarily to encourage commitment or

reward good performance rather than to monitoring difficulties are not a primary fac-tor behind the introduction of schemes at theincentivise. Certainly Smith’s study of man-

agement objectives, which finds that improv- workplace. Instead, the possibility of a free-rider effect may be a more powerful influenceing commitment is a more important reason

than encouraging harder work, is supportive on the incidence of sharing schemes. Hencelarger workplaces may be less likely to useof this interpretation[24]. However, the same

may not be true of cash-based sharing. Robin- financial participation. However, when thefocus is shifted to the firm the associationson finds that cash-scheme firms tend to be

older and in sectors that are contracting in between size and sharing scheme is usuallypositive, at least for most kinds ofsize: he suggests that sharing may be a way

of improving employee performance to scheme[31]. In principle monitoring prob-lems could explain this association. Theoreti-counteract the problems of decline[25]. A

large-scale study of interessement in France cally, the larger and more multi-tiered thefirm, the more difficult it is for those at thefinds that small firms adopting cash-based

financial participation have significantly top of organisation hierarchies to monitor theperformance of those at the bottom. Yet forlower labour productivity in the years

immediately before the introduction of the this very reason large firms tend to developformal controls and performance measures toscheme than firms not adopting sharing[26].

Another, more diffuse, form of incentivi- guide employee behaviour, so the overallquality of monitoring may well be better thansation is encouragement for employees to

cooperate with each other and with manage- in small firms. The oft-found associationbetween size and financial participation mayment[27]. Since remuneration is linked to col-

lective performance employees are provided be due, then, to other factors. Large firms aremore likely to have share capital than smallwith an incentive to assist others, by sharing

information more readily, and also to moni- firms and more likely to have the adminis-trative expertise and capability to introducetor the work performance of their colleagues

(‘horizontal monitoring’). These factors may and administer financial participationschemes[32]. These factors may be much lessbe especially important where vertical moni-

toring (ie. supervision) is difficult to operate. important, however, in relation to simple

Workplaces with financial participation 105 Blackwell Publishers Ltd. 1997.

cash-based schemes so that a size effect may ures of product market context and haverarely included the panel financial databe much less evident. The UK evidence to

date does indeed provide little indication of necessary to identify variations in perform-ance over time. Theoretically we mighta company size effect in these cases[33].

Financial participation can also be used to expect to find variability in performance andmarket uncertainty more strongly associatedraise productivity in less direct ways. It can

be used to boost wages above market levels with cash schemes because the effects ofthese may be thought to be more immediatein an attempt to retain the most productive

labour, thereby reducing turnover/ recruit- than share-based schemes, and because itseems likely that the set-up costs will bement costs and facilitating training. However,

it is difficult to test for ‘efficiency wages’ of lower. Indeed a recent Australian study,using data from the Australian Workplacethis sort without detailed data on wage rates

and bonuses. Alternatively, investigation of Industrial Relations Survey (AWIRS), finds astrong positive correlation between high lev-managerial objectives for the use of sharing

could be illuminating but most studies using els of competition and presence of a cash pro-fit sharing scheme[38]. Meanwhile a Germanthis approach have not explicitly focused

upon ‘efficiency wages’[34]. In the absence of study of primarily share-based schemes hasfound that firms with financial participationthis sort of evidence, data on absenteeism

and turnover could be relevant (on the are more secure in their product markets[39].Both the economics and industrial relationsassumption that above-average wages could

be used to ameliorate them). However, those traditions anticipate that financial partici-pation will be associated with the structurestudies investigating the relationship

between absenteeism or labour turnover and and processes of employee representationand participation in the firm. In fact, recentpresence of financial participation using

cross-sectional data have generally perceived literature on HRM has displayed consider-able interest in ‘bundles’ of participationschemes as a determinant rather than an out-

come: Wilson, Cable and Peel found that both (including financial participation) initiat-ives[40]. The rationale for ‘bundling’ is thatcash and share schemes have a negative

effect on quit rates, though share schemes the interaction of various forms of partici-pation leads to greater performance benefitshave the stronger effect[35]. In analyses of

WIRS3 data, Fernie and Metcalf found that than that secured from each type of schemein isolation[41]. In addition, firms who areSAYE, but not cash, schemes have a signifi-

cantly negative effect on turnover, whilst already attuned to involving employees insome degree of decision-making may beEdwards found that neither are significantly

related to quits[36]. more sympathetic to providing employeeswith a greater share of the profits, whilstAnother perspective views financial par-

ticipation as a mechanism for transferring those already possessing a participatorystructure may well find it administrativelyrisk from the firm to the employee. Theoreti-

cally we may expect firms to want to share easier to implement financial participationschemes than firms without participation[42].risk where performance is highly variable or

where market pressures are especially Given these observations it is perhaps notsurprising that several studies in the UK andintense or unpredictable. Estrin and Wilson,

for instance, find the presence of profit shar- elsewhere[43] find significant positiverelationships between the presence of finan-ing associated with variability in profitability

and market share[37]. On the other hand, cial participation and other forms ofemployee participation. So far, however, thefirms with highly variable performance or

market context may be less likely to adopt literature has not considered to any greatextent whether the strength of these relation-financial participation because of the set-up

costs and because of the possibility that vari- ships differs between cash and share-basedschemes. We could hypothesise that, sinceable remuneration may be subject to ‘sticki-

ness’ in practice. If this is the case, then, shar- cash-based schemes may be more likely thanshare schemes to be adopted for direct incen-ing firms may display more stable

environmental and performance character- tivisation rather than enhancing long termcommitment, any association between cashistics than non-sharing firms. There is little

conclusive evidence on these issues because schemes and other forms of participation willbe weaker than in the case of share schemes.most industrial relations surveys have until

recently contained under-developed meas- The relationship between financial partici-


pation and specifically union-based represen- profit share may be paid as a regular additionto wages and salaries).tation is less straightforward to predict. On

To summarise so far, the evidence providesthe one hand, we might expect unions to berelatively little support for the argumentshostile to financial participation since unionsbased mainly on economic theories whilstusually aspire to maximise base wages[44].there is rather more evidence of relationshipsThe apparent capacity of profit sharing tobetween employee participation, broadlyincrease identification with the firm anddefined, and the existence of financial per-encourage entrepreneurial attitudes may alsoformance. Most of this evidence, however,be anathema to unions, especially as somerelates either to cash schemes or shareadvocates of financial participation (eg. theschemes or conflates the two. By comparingUK Government) appear to anticipate a cor-the findings from these studies it is possibleresponding diminution in union membershipto discern possible differences in the corre-and influence. On the other hand, unionslates of the various types of scheme. Work-may believe it desirable to secure a greaterplaces with cash schemes appear to differ inshare of the firms ‘rents’ for employees bytheir characteristics, at least in some respects,whatever means as long as this does not sub-from workplaces with share schemes. Ideallystitute for conventional wages. As with otherthese comparisons should be made more sys-forms of participation, the presence of unionstematically so that firmer generalisations canmay provide the institutional mechanisms tobe made about these differences. For this rea-implement financial participation. Equally ason we compare the characteristics of work-positive correlation between unionplaces with cash schemes and those withpresence/density and financial participationshare schemes using a single data sourcemay reflect a lagged response to management(WIRS3) in the remainder of the paper.strategies to weaken strong unions (eg. as the

‘cycle of control’ thesis suggests[45]). Unfor-Financial participation:tunately it is difficult to test this essentially

dynamic hypothesis using cross-sectional evidence from WIRS3data, and managerial objectives have to Conducted in 1990, WIRS3 is the most com-remain a matter of conjecture in many studies prehensive and representative recent surveyusing this type of data source. of industrial relations practices in the UK. WeSo far the evidence from studies of com- use data drawn from 591 workplaces inpany characteristics is contradictory. Ameri- manufacturing to identify and compare thecan and Australian evidence indicates that characteristics of workplaces with nofinancial participation is more prevalent in schemes at all, those with cash schemes only,non-union firms or where density is those with a SAYE but no cash scheme, andlower[46]. Equally other studies have found those with both a cash and a SAYE scheme.the opposite: Kruse (using a longitudinal From the initial sample of 591 workplaces, wesurvey) found that union presence is one of derive 232 with no scheme of any sort, 106the best predictors of the adoption of profit with cash sharing only, 125 with sharesharing[47]. In the UK the evidence for the schemes only and 78 with both. Fifty work-most part suggests a positive but weak places with either an ADST or unapprovedrelationship between union presence and share scheme are excluded from the analysis.financial participation[48]. Once again, how- In the following pages we report the featuresever, cash and share-based schemes are not of workplaces with these various forms ofclearly distinguished in the literature. It can financial participation, organised in relationbe hypothesised that the relationship with to the theoretical arguments outlined above.union presence will differ by type of scheme It should be borne in mind when interpretingbut it is difficult to predict what these differ- these findings that, since WIRS3 providesences might be. Financial participation and cross-sectional information, any inferencesunion density might be more closely associa- about causality have to be treated with ated in share-scheme firms but this may be a great deal of caution. Strictly speaking WIRSfunction of size. On the other hand a stronger allows only the testing of the associationrelationship may be found in cash-scheme between workplaces features and the presencefirms because cash profit sharing may be of financial participation schemes. However,more likely to be associated with collective since many features (eg. size) are unlikely to

change much in the short term in most casesbargaining than share schemes (because the


and are unlikely to be a function of the intro- their size characteristics from non-schemeworkplaces. Most share scheme workplacesduction of financial participation we could

reasonably infer that such features may well belong to companies with more than 5,000employees. By contrast, a large majority ofbe antecedents of the decision to adopt fin-

ancial participation schemes. A further con- cash-scheme and no-scheme workplacesbelong to firms with less than this number ofsideration is that the decision to introduce

financial participation (especially share-based employees. Most workplaces, of all fourtypes, belong to multi-establishmentschemes) may well be a company-level

decision, and that use of workplace data enterprises though this is more clearly so inthe case of share-scheme workplaces. Asassumes that corporate behaviour will be

influenced by the characteristics of the would be anticipated, nearly all share schemeworkplaces are UK owned. Taken togetherobserved workplaces[49]. In the following

analysis, then, all that can be shown with cer- these results suggest that the free-rider effectis not an important disincentive to the oper-tainty is the characteristics of workplaces

with financial participation. Extrapolation of ation of share ownership schemes. In turnthis may be a reflection of the use of thesethe determinations of the adoption of sharing

from these findings is inevitably conjectural. schemes for uses other than direct incentivi-sation (eg. to encourage a more generalisedsense of commitment).i) Workplace and company characteristics

It seemed worthwhile to investigate thedistribution of personnel/industrial relationsEarlier studies have found a strong associ-

ation between firm size and adoption of staff by type of scheme. As Table 1 shows,specialist managers are clearly more likely toemployee share schemes but no clear

relationship between size and cash-based be found in workplaces with share schemesor both share and cash schemes than thoseprofit sharing. What does WIRS3 show for

manufacturing workplaces? Table 1 presents with cash schemes only or no schemes at all.The meaning of this finding is not, however,the results.

As can be seen from Table 1, the results obvious. Indeed some critics have arguedthat correlations between the presence of per-from WIRS are similar to those of earlier

studies, in respect of both size of workplace sonnel managers and other features of work-place industrial relations are not meaningfuland size of firm (by employment). Work-

places with share schemes (either alone or in in themselves[50]. In this case plausible con-nections can be found between the presenceconjunction with cash schemes) are clearly

larger than those without any schemes whilst of a specialist manager and financial partici-pation, but whether the linkage resides in thethose with cash schemes only differ little in

Table 1: Size and ownership of workplaces with financial participation(compared to workplaces without financial participation)

No scheme Cash only SAYE only SAYE + cashAverage workplace size(employees) 439 538 892* 819*Proportion belonging to firms withover 5000 employees (%) 14 15 80### 70###Proportion belonging to multi-sitefirms (%) 69 76 98### 100###Proportion who are UK owned (%) 68 73 96### 93###Proportion where specialistpersonnel/industrial relationsmanagers (%) 41 41 66### 56#n 232 106 125 78

Notes: * = t-value significant at 0.05%; # = chi-square statistic significant at 0.05%; ### = chi-square statistic significant at 0.001%


provision of administrative resources and indicate that better performing firms areeither more likely to introduce or retainexpertise, greater commitment to HRM-type

practices, or encouragement for HRM from schemes. The strongest claim that can bemade in the circumstances is that there is aabove the workplace is impossible to deter-

mine. We hoped that some light might be positive but weak association between pres-ence of financial participation schemes andshed on this by examining the incidence of

industrial relations/personnel representation better than average performance but themeaning of this association is unclear.on the Board of Directors or other senior

management body (not shown in the table)but the differences between types of work- iii) Workforce and production characteristicsplace are negligible.

ii) Performance Economists suggest that financial partici-pation may be used as a form of incentivi-sation when other more direct forms of incen-For many advocates of financial partici-

pation, the most powerful advantage of these tivisation are not easily used and wheremonitoring of individual performanceschemes is that they provide an incentive for

employees to improve their work perform- presents difficulties[52]. Several proxies areoften used to test for this such as the pro-ance, which in turn (it is assumed) will lead

to improved firm performance. Implicit in portion of non-manual workers and the pro-portion of supervisors in the workforce, andmany of these discussions is the assumption

that these firms will be relatively poor per- we follow this approach here.As can be seen in Table 3, there is only oneformers and that financial participation will

be adopted to bring them into line with better significant difference between workplacesregarding workforce characteristics. Work-performing firms. Use of WIRS to test this

proposition is especially fraught since per- places with share schemes have a higher pro-portion of white collar workers. We alsoformance measures may be more amenable

to short-term changes than other workplace attempt to measure the technological sophis-tication of workplaces by first identifying thecharacteristics and hence the direction of

causality is especially indeterminate. Most incidence of various forms of micro-electronic technology for manufacturingobservers have viewed financial participation

as the antecedent of performance[51] and operations and then by creating a Guttman-type scale measuring the extent to whichthere is some evidence from the panel

component of WIRS to support this interpret- automated technology is in use. The moreautomatic and self-adjusting the technology,ation. The findings presented below, there-

fore, must be interpreted with a considerable the higher the score. There is little evidence,however, of substantial differences betweendegree of caution.*

As can be seen in Table 2, workplaces with workplaces, though those with both types ofscheme make significantly more use of auto-any form of financial participation claim that

their labour productivity performance has mated technology than the others. Finally weattempted to measure the extent to whichimproved compared with three years ago,

though the differences with non-scheme various aspects of the labour force and pro-duction process are monitored by creating aworkplaces are not significant. Turning to

other performance measures, workplaces scale reflecting the extent of the range ofinformation collected and used by manage-with cash schemes perform significantly bet-

ter (at the 0.05% level) than non-scheme ment. The higher the score the wider therange of issues on which information is col-workplaces. Workplaces with other types of

financial participation for the most part per- lected. A negative association between moni-toring and use of sharing schemes could indi-form better than workplaces without

schemes, but not significantly so. These find- cate that financial participation serves as asubstitute when routine monitoring is weaklyings may be evidence of the beneficial impact

of financial participation: equally they may developed. As it happens, Table 3 shows verylittle difference between types of workplace,and it is not worth considering further the* There are a large number of missing values on theimplications of these scores. Overall, the evi-performance and product market questions in WIRSdence is not inconsistent with the propositionso additional caution is necessary in interpreting fin-

dings in these areas. that financial participation is used to ease


Table 2: Performance of workplaces with financial participationcompared to workplaces without financial participation

No scheme Cash only SAYE SAYE + cashChange in labour productivity since3 years ago 2.08 1.95 1.93 1.85Labour productivity relative tosimilar workplaces 2.73 2.45* 2.78 2.50Financial performance relative toother workplaces 2.67 2.33* 2.47 2.42

Note: all items measured on a 1–5 scale where 1 equates to very good performance and 5 withvery poor performance* = t-value significant at 0.05%

Table 3: Workforce and production characteristics in workplaces with financial participationcompared to workplaces without financial participation

SAYE andNo scheme Cash only SAYE cash

Average proportion of blue collarworkers (%) 68 67 59*** 61*Average proportion of skilledworkers in the blue-collar workforce(%) 33 28 31 26Average proportion of femaleworkers (%) 30 29 30 29Average proportion of supervisors(%) 4 5 5 5Proportion of workplaces usingmicro-electronic technology foroperations (%) 80 83 84 90#Technological sophistication (averagescore on scale 1–6) 4.8 4.8 5.0 5.0Monitoring information(average score on scale 1–11) 7.2 7.1 7.7 7.4

Note: * = t-value significant at 0.05%; *** = t-value significant at 0.001%.# = chi-square statistic significant at 0.05%

monitoring but neither does it provide very place. Table 4 presents the findings fromWIRS.strong support for it.

The evidence presented in Table 4 suggeststhat firms with some form of financial partici-iv) Participation, information sharing and indus-

trial relations pation tend to share information more thanthose without. These differences are least on‘core’ industrial relations issues such as termsPrevious research has shown that financial

participation tends to go hand in hand with and conditions of employment, and healthand safety, where only share-scheme work-other forms of employee participation[53].

However, previous research has not always places display some significant differenceswith no-scheme workplaces. The differencesdistinguished between cash and share-based

sharing, and it is possible that differences are more marked on financial issues, such asinvestment and financial results. Here alsomay be observed between types of work-


Table 4: Incidence of consultative/information sharing in workplaces with financial participationcompared to workplaces without financial participation (percentage of workplaces)

No scheme Cash only SAYE SAYE + cashConsultation issuesTerms and conditions 71 71 83# 70Health and safety 82 84 84 84Staffing plans 44 47 55 56Changes in work methods 77 79 90# 79Information suppliedInvestment 58 64 72# 79#Financial state of establishment 66 76# 83# 85#Financial state of organisation 58 62 85# 91#InstitutionsPresence of three or moreinformation sharing mechanisms 47 58# 66# 73#Presence of joint consultativecommittee 33 40 53# 59#

Notes: # = chi-square statistic significant at 0.05 or better

workplaces with share schemes (either singly most recent pay settlement is more likely tohave been determined by collective bar-or in combination with cash schemes) are sig-

nificantly more likely to share information gaining. Coupled with the findings on jointconsultation, the evidence indicates that thethan non-scheme (and, partially, cash

sharing) workplaces. All types of sharing participation systems in workplaces withshare schemes are substantially based onworkplaces are significantly more likely to

have several mechanisms for sharing infor- union representation. By contrast, the evi-dence on workplaces with cash schemes onlymation (eg. team briefing) than non-scheme

workplaces, but only share-scheme work- suggests that, whilst they are more prone tosharing information than workplaces withoutplaces are more likely to have a joint con-

sultative committee. The direction of caus- schemes, this might take place outside union-based institutions in many cases.ality is clearly of interest here but

unfortunately indeterminate given the natureof the data. It is impossible to say whether v) Efficiency wagesworkplaces who place a premium on sharinginformation are more likely to introduce One of the most interesting issues concerning

financial participation is that of its effects onfinancial participation or whether financialparticipation leads to greater information pay levels[54]. One school of thought believes

remuneration tied to profitability should sub-sharing.Even so, workplaces with share-based fin- stitute for fixed pay levels. Alternatively fin-

ancial participation could form part of a strat-ancial participation schemes are clearly moreparticipative than workplaces without finan- egy to boost remuneration above market

levels to reward and retain highly productivecial participation. Some (eg. some tradeunion activists for example) fear that this will labour. There are limits to how far these alter-

native hypotheses can be tested with WIRS3be at the expense of traditional forms ofcollective employee representation. The because of the lack of financial information

and the cross-sectional nature of the data.evidence presented in Table 5, however,suggests they have little to fear, though the Nevertheless details of relative median pay

levels allow us to make some simple com-same may not be true for cash-scheme work-places. parisons. Table 6 provides the details.

The figures in Table 6 show the average ofWorkplaces with share schemes are clearlymore ‘unionate’ than non-scheme work- the median pay level (including all bonus

payments) reported for each skill category ofplaces: union density is significantly higher,a collective agreement concerning pay deter- manual employees at each workplace by type

of scheme. In WIRS these median pay levelsmination is more likely to be present, and the


Table 5: Industrial relations characteristics of workplaces with financial participationcompared to workplaces without financial participation (percentage of workplaces)

No scheme Cash only SAYE SAYE + cashPresence of a collective agreement 57 51 76# 81#Presence of collective bargainingover pay 63 55 75# 79#Union density (mean %) 43 41 59* 61*

Notes: # = chi-square significant at 0.05; * -t-value significant at 0.05

Table 6: Median pay levels and labour turnover in workplaces with financial participationcompared with workplaces without financial participation

(Mean scores of median pay levels)

No scheme Cash only SAYE SAYE + cashUnskilled manual 5.2 5.0 5.2 6.2***Semi-skilled manual 6.3 6.7 6.3 7.0**Skilled manual 7.9 8.4 7.9 8.5*Labour turnover (%) 14.25 10.62 10.16* 8.7***

Notes: * = t-value significant at 0.05; ** = t-value significant at 0.01; *** = t-value significant at0.001

are grouped into eleven categories, and the frequently adopted to retain labour, as wellas Fernie and Metcalf’s WIRS-based resultsfigures in the Table refer to these categories.

The higher the figure shown, the higher the for trading sector workplaces[55].median pay level averaged across all relevantworkplaces. It is not clear from WIRS vi) Riskwhether profit bonuses are included in thosereported for cash profit sharing since much Economic theory suggests that financial par-

ticipation will be more widespread, ceteriswill depend on the frequencies at whichbonuses are paid. For this reason the details paribus, in contexts where risk is high, and

where the firm may want to transfer risk toreported in Table 6 have to be treated withcaution. Even so the generally higher levels employees. WIRS3 is notable for its inclusion

of several questions on product market com-of median pay reported for workplaces withcash schemes and those with both cash and petition, including numbers of competitors,

intensity of competition and nature of pro-share schemes suggest that cash profit shar-ing is not substituting for base pay, at least duct demand (stable/unstable etc.). There are

no questions, however, on variability of per-not in comparison to pay levels elsewhere.These findings could be consistent then with formance, so the measures of risk used here

refer entirely to product market issues.an efficiency wages approach, and wouldappear to be inconsistent with the substi- As Table 7 shows, workplaces with any

form of financial participation have signifi-tution strategy. The figures for labour turn-over, which show significant differences cantly lower levels of competition (defined

by the number of competitors), though thisbetween workplaces with a share scheme andthose without any schemes, are even more might be primarily a function of size. By con-

trast there is little difference in the geographi-difficult to interpret since quits are more sub-ject to short-term fluctuations than most of cal extent of markets between the types of

workplace: the vast majority of workplaces inthe other variables reported in this paper.The lower levels of turnover in share scheme all categories trade in national or inter-

national markets. Finally, workplaces withworkplaces may be as much an outcome offinancial participation as an antecedent of its financial participation record higher levels of

stability overall in their product markets thanintroduction. This would be consistent withPoole’s observation that share schemes are do workplaces without profit sharing


Table 7: Product market competition in workplaces with financial participationcompared to workplaces without financial participation

Percentage of workplacesNo scheme Cash only SAYE SAYE + cash

Proportion with many competitors 52 40# 44# 38#Proportion operating innational/foreign markets 89 93 93 87Proportion operating instable/predictable markets 33 61# 42 45

Notes: # = chi-square statistic significant at 0.05%

schemes, though only in those workplaces workplaces do have more information shar-ing mechanisms[56]. However, the numerouswith cash sharing schemes is this difference

significant. This particular finding for cash distinctive features of share scheme work-places may well be a function of size, givenscheme workplaces, taken in conjunction

with the significant positive differences in the well-known associations between sizeand industrial relations characteristics. Weperformance reported earlier, suggests that

workplaces/firms may wish to be per- therefore attempt to control for the effects ofthese variables by using multi-variateforming well in secure markets before they

are willing to make the future commitments methods of analysis.In the analysis that follows, the range ofagainst cash-flow which cash profit sharing

entails. Overall, then, the evidence presented variables is much smaller than that used inthe preceding section. Some variables arehere is not supportive of the risk argument.excluded because no significant relationshipswere observed earlier, and further investi-Further analysis gation did not seem worthwhile. Others areomitted because they have a large number ofAll in all, the evidence presented in the pre-missing values and hence reduce the numbervious sections is not supportive of many ofof observations. Within these confines wethe arguments derived from economic theoryattempted to incorporate at least one variableto explain the adoption of profit sharing, sug-relevant to each of the theoretical argumentsgesting that firm behaviour may be morediscussed earlier (except efficiency wages,complex and may be subject to a wider set ofwhere the WIRS data are of limited utility).influences than is often assumed in theIndustrial relations and participation meas-economics literature. There is little clearures form a large proportion of the variablesevidence to suggest that workplaces havebecause the earlier results suggest that theadopted financial participation for incentivi-most fruitful lines of enquiry lie in this area.sation or monitoring reasons or that theyEach variable is described in Table 8. Four,have financial participation to share producthowever, require additional comment. BAR-market risk with their employees. IndeedGAINW refers to the presence of a recog-there are some indications that the reverse isnition agreement with a white collar unionthe case. What is clear, however, is thatfor the purposes of determining pay, and isemployee representation and participation inincluded since other analyses have found adecisions goes hand in hand with financialstrong association between this variable andparticipation. Distinguishing workplaces bythe presence of innovative pay systems[57].type of scheme uncovers clear differences inPERFORM is derived from an interaction ofthese respects: share scheme workplaces arethe variable measuring relative labour pro-more likely to have a joint consultative com-ductivity three years ago and that measuringmittee, to have other mechanisms for sharingcurrent relative labour productivity, and pro-information, to determine pay by collectivevides a measure of relative productivitybargaining, and to have high levels of unionchange over time. We also include a dummydensity. By contrast, it is less easy to discern(NEWWORK) to indicate whether anydistinctive characteristics of profit sharingchanges have been made to working prac-workplaces as compared with workplaces

with no schemes at all, though cash-scheme tices recently on the grounds that financial


Table 8: Description of the variables Before finally selecting the variables shownin Tables 8 and 9, considerable experimen-tation took place with alternative similarName Descriptionvariables. Those shown above provided theSIZE Natural log of number ofbest fit for the three types of sharing work-employees at the workplaceplace. The predictive strength of this modelHRM Equal to 1 if personnelis reasonable, though noticeably weaker forspecialist at the workplace, 0workplaces with cash schemes only. In fact itotherwiseis difficult to pinpoint clear differencesMULTI Equal to 1 if multi-between those workplaces with cash schemesestablishment firm, 0only and those with no schemes at all, andotherwisethe significance of one of the key variablesMANUAL Proportion of manual(BARGAINW) is vulnerable to minoremployees at the workplacechanges in the model specification. OverallTECHNOL Equal to 1 if workplace usesthe findings provide little support for mostadvanced automatedof the hypotheses discussed earlier in themachinery (ie. repeat cyclearticle, with many of the variables displayingand self-adjusting machines)insignificant relationships with the presenceINFOMECH Scale 0–7 recording numberof the various kinds of scheme. Whilst theof mechanisms for employeenegative coefficients on SIZE for workplacesinvolvement and with cash schemes are consistent with thecommunication (eg. qualitylimits on incentivisation provided by a poss-circles)ible free-rider effect, this finding should notCONSULT Equal to 1 if jointbe over-emphasised since the relationship isconsultative committeenot significant. Meanwhile the positivepresent, 0 otherwiserelationships between organisational size andDENSITY Proportion of workplaceall types of scheme (strongly significant in theemployees in unioncase of share scheme workplaces) may indi-membershipcate that incentivisation is not an importantBARGAINW Equal to 1 if unionreason for using financial participationrecognition agreement for(because any incentive effects would prob-white collar workers, 0ably be outweighed by free-rider effects).otherwiseThis positive size effect may reflect, albeitQUITS Level of labour turnover (%)weakly, the greater administrative resourcesCOMPETE Equal to 1 if many possessed by larger firms to introduce andcompetitors, 0 if few or noadminister such schemes[58]. If this is thecompetitorscase, however, we could expect to find posi-NEWWORK Equal to 1 if new workingtive and significant relationships between thearrangements introducedpresence of human resources managers andover the last three yearsthe existence of schemes, on the assumptionwhich had reducedthat these managers have particular capabili-demarcations or increasedties in this area. Equally the presence offlexibility, 0 otherwisehuman resource managers might indicatePERFORM Change in relative labourcompany/workplace commitment to humanproductivity over three yearsresource management practices (though this(low numbers equal highassumption has been criticised bygrowth and vice-versa)McCarthy[59]). Intriguingly, negative coef-ficients, significant at 10% for workplaceswith both kinds of scheme, are shown onHRM. Alternative specifications wereparticipation may form part of a more gen-

eral strategy to secure flexibility. MULTI is in attempted, with dummies used to record thepresence of a Board member for industrialpart a proxy for organisational size: we are

unable to enter size more directly since only relations/ personnel and the presence of amore senior human resources manager, buta minority of workplaces provided this infor-

mation. To control for sectoral effects, dum- though positive relationships were foundthese were extremely weak.mies were included for each of the main SIC

sub-classes within manufacturing. The findings also provide contradictory


Table 9: Characteristcs of workplaces with financial participationlogistic regressions

Variable Cash schemes Share schemes Cash and shareSIZE − + −HRM − − −*MULTI + +*** +MANUAL + −* +TECHNOL − −*** −*INFOMECH +* + +**CONSULT + + +DENSITY − + +BARGAINW +* +** +**QUITS − − −COMPETE − − −***NEWWORK + + +**PERFORM − + −Significant sector dummiesChemicals −*Metal construction +*Mechanical engineering −*Electrical engineering −**Textiles −*−2 log likelihood 223.517 216.126 142.185Goodness of fit 208.554 264.893 332.536Model chi-square 40.714 71.114 79.968Significance 0.0089 0.0000 0.0000Correct predictions (%) 73.61 76.99 84.42Observations 216 226 199

Notes: + = positive coefficient; − = negative coefficient* = coefficient significant at 10%; ** = coefficient significant at 5%; *** = coefficient significantat 1%

and mainly weak evidence in relation to participation for incentivisation purposesmay well be more widespread in labourhypotheses about workforce/technological

characteristics and monitoring. Quit rates are intensive firms and workplaces[61].The results are perhaps clearest and mostnegative and insignificant in all cases, as was

found by Edwards[60]. Workplaces with interesting in relation to employee partici-pation and representation, even though theshare schemes only have a significantly

higher proportion of white collar employees coefficients for union density and presence ofa joint consultative committee (JCC) arethan workplaces without schemes, and this

is consistent with the argument that sharing insignificant (though mainly positive) in allcases. The positive and significant relation-might be used to ease monitoring difficulties.

However, contradictory evidence is possibly ships between presence of a cash scheme andINFOMECH indicate that these workplacesprovided by the significantly negative

relationships between the presence of have a wider range of information sharingmechanisms (eg. team briefing, qualityadvanced automated technology (TECHNOL)

and share scheme workplaces, assuming that circles) than non-sharing workplaces and, inconjunction with most of the density and JCCmonitoring of individual workers is more dif-

ficult in more technologically advanced coefficients, is consistent with Poole’s earlierfinding that sharing firms have a ‘consulta-workplaces. Equally, this variable might be

functioning as a proxy (albeit an imperfect tive’ style of industrial relations manage-ment[62]. The most interesting finding, how-one) for capital intensity, with the negative

coefficients indicating high labour intensity. ever, concerns white collar unionrepresentation. Significant positive relation-As Perotin has suggested the use of financial


ships are found between the presence of a sharing mechanisms and white collar unionrecognition agreements and the presence ofunion recognition agreement for white collar

pay determination (BARGAINW) and all financial participation. These results are sup-portive of the notion of ‘bundling’ and sug-types of financial participation. Whether this

reflects novel bargaining strategies by white gest that the relationship between ‘tra-ditional’ forms of employee representationcollar unions, as Millward suggests[63], or

lower resistance amongst non-manual work- and more innovative human resource man-agement practices may be complementaryers to innovative pay strategies is difficult to

determine from WIRS. It is interesting to note rather than zero-sum. These are consistentwith earlier studies of financial participationthat all types of sharing workplace are more

likely to have reduced demarcations or by Poole[65] and echo Edwards’ recent find-ing that union ‘voice’ remains influential inincreased flexibility (NEWWORK) than non-

sharing workplaces, significantly so in the the management of labour[66]. They contrast,however, with McNabb and Whitfield’scase of those with both share and cash

schemes. analysis of the whole WIRS sample where therelationship between union density and fin-Finally, there is little clear evidence to sup-

port those arguments developed by econom- ancial participation is strongly negative[67].One of the key objectives of this article isists in relation to risk and performance. All

types of sharing workplaces have a smaller to compare the features of workplaces withvarious kinds of financial participation withnumber of competitors, significantly so (at

1%) in the case of those with cash and share those that have no financial participationschemes at all. The overall picture is thatschemes, suggesting that workplaces that are

more secure rather than exposed in their pro- workplaces with financial participation tendto differ in similar ways from workplacesduct markets might be more likely to adopt

and retain financial participation[64]. The without schemes but these differences aremore pronounced in the cases of workplacesresults for labour productivity growth are

weaker and more mixed: workplaces with with share schemes and those with both cashand share schemes. There are very few sig-cash schemes have better productivity

growth than non-scheme workplaces whilst nificant differences between cash schemeworkplaces and those without any schemes,share scheme workplaces have lower pro-

ductivity growth, but in no instance are the and as a consequence it is difficult to paint adistinctive portrait of the kind of workplacerelationships significant. In any case this vari-

able, like QUIT, may well reflect an outcome that uses cash profit sharing. In this case it isespecially risky to extrapolate the determi-of financial participation rather than an ante-

cedent so we should be wary of attaching nants of the adoption of sharing from the fea-tures associated with the presence of sharingundue importance to it.schemes. It is slightly easier to construct anexplanation for both the presence and adop-Conclusions tion of financial participation in share schemeworkplaces since, though the conceptual gapOverall our results provide little support for

the theoretical arguments put forward by between features and intentions remains, theobserved relationships are stronger, andeconomists to explain the use of profit shar-

ing and other forms of financial participation, hence more amenable to interpretation.It may well be that greater insights couldwhilst they are broadly consistent with the

findings derived by industrial relations ana- be derived into the adoption and use of fin-ancial participation if a richer range of vari-lysts from other large-scale investigations of

these issues. The evidence provides weak and ables were used. It is interesting to note thatwhilst no significant relationships weremixed support for theories about the associ-

ation between monitoring, performance, found between a profit sharing dummy andHRM practices in Wood’s recent survey,incentivisation and risk, and financial partici-

pation. By contrast, the findings are both significant positive relationships wereuncovered between the ‘strength’ of profitmore consistent and stronger in respect of

variables referring to employee participation sharing, defined as the proportion of payreceived as a profit share, and other featuresand representation. This is most clearly so in

the case of workplaces with both cash and of HRM[68]. This suggests that future large-scale surveys should include a wider rangeshare schemes where there are significant

associations between both use of information of questions so as to pick-out the ‘quality’ of


engineering firms’, British Journal of Industrialprofit sharing and share ownershipRelations, 1990, 28: 2, 197–215.schemes[69]. Greater provision of longitudi-

4. Fernie, S. and Metcalf, D., ‘Participation, contin-nal information, including time-series per-gent pay, representation and workplace per-formance data, would also be helpful sinceformance: evidence from Great Britain’, Britishit would help to overcome the difficulties in Journal of Industrial Relations, 1995, 33: 379–415;

interpreting causality encountered with Fitzroy, F. and Kraft, K., ‘Co-operation, pro-WIRS and would also facilitate the mounting ductivity and profit sharing’, Quarterly Journalof duration analyses (ie. do some workplaces of Economics, 1987, 102: 1, 23–35.use financial participation for longer than 5. Dunn, S., Richardson, R. and Dewe, P., ‘The

impact of employee share ownership on workerothers?). Finally it would be desirable toattitudes: a longitudinal case study’, Humanacquire more information about the processResource Management Journal, 1991, 1: 1, 1–17.of introducing workplace innovations. As it

6. Poole, M. and Whitfield,K., ‘Theories and evi-stands we can say little about the interestingdence on the growth and distribution of profitassociation between the presence of a pay sharing and employee shareholding schemes’,determination agreement with white collar Human Systems Management, 1994, 13: 3, 209–

unions and the presence of financial partici- 220; McNabb, R. and Whitfield, K., ‘The deter-pation. These issues should perhaps be minants of employee involvement in decision-embraced by research targeted specifically at making at the workplace’, unpublished mimeo,

University of Wales, Cardiff; Smith, G.,financial participation, rather than incorpor-‘Employee share schemes in Britain’, Employ-ated in WIRS (where the breadth of the sur-ment Gazette, April 1993, pp. 149–154; Wood, S.,vey precludes too detailed a focus on any one‘High commitment management and paymentarea of human resource managementsystems’, Journal of Management Studies, 1996,practices). Future survey-based research in33: 1, 53–77. Beaumont, P. and Harris, R., ‘Thethis area could be designed to incorporate a pattern of diffusion of employee share-owner-

more qualitative and processual dimension ship schemes in Britain: some key findings’,so that the analysis between financial partici- International Journal of Human Resource Manage-pation and other features of industrial ment, 1995, Vol 6, No. 2, 391–410.relations can be pursued at a deeper level. 7. Baddon, L., Hunter, L., Hyman, J., Leopold, J.

and Ramsay, H., Peoples’ Capitalism? A CriticalThe answer, then, to the current short-Analysis of Profit-Sharing and Employee Sharecomings of survey-based quantitative investi-Ownership, Routledge, 1989. Poole, M., The Ori-gations is not necessarily to pursue a case-gins of Economic Democracy, Routledge, 1989.study approach instead but to combine the

8. Millward et al, op. cit.best features of each. 9. Bhargava, S. and Jenkinson, T., ‘Explicit versusimplicit profit sharing the determination ofwages: micro-economic evidence from the UK’,

Acknowledgements Labour, 1995, 9: 1, 73–95. McNabb, R. and Whit-field, K., op. cit.This article grew out of the Impact of Profit

10. Poole, M., op. cit. The main exception is Gregg,Sharing Europe (IPSE) research project, P. and Machin, S., ‘Unions and the incidencefinanced by the European Commission. The of performance-linked pay schemes in Britain’,author is grateful to members of the IPSE net- International Journal of Industrial Organization,work, especially Maria Gonzalez, Andrew 1988, 6:1, 91–109.Robinson and Nick Wilson, for their help in 11. Kruse, D., Profit Sharing: Does it Make a Differ-

ence, Upjohn Institute, 1993.developing the ideas expressed in the article.12. Uvalic, M., The PEPPER Report—Promotion ofThe author also thanks the anonymous ref-

Employee Participation in Profits and Enterpriseerees of this journal.Results, Commission of the European Com-munities, 1991.

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of time. As they note, it is unlikely that the nat- organizational logic and flexible productionsystems in the world auto industry’, Industrialure of the independent variables will have sys-

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ment schemes: Australian establishment data’, ownership) explicitly refer to company-levelinfluences. See Beaumont, P. and Harris, R., op.Industrial Relations, 1995, 34: 4, 507–531.

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find this is so for share-based schemes. 52. Weitzman, M. and Kruse, D., op. cit.53. Baddon, L. et al, op. cit.; Poole, M., op cit.32. Poole, M., op. cit.

33. Baddon, L. et al; Robinson, A., op. cit. 54. Bhargava, S. and Jenkinson, T., op. cit.55. Poole, M., op. cit., p. 62; Fernie, S. and Metcalf,34. Studies by Poole, M., op. cit., Baddon, L. et al,

op. cit. and Smith, G., op. cit. include questions D., op. cit., p. 399. These results can be con-trasted with those of Edwards, who found noabout quitting and remuneration but have not

explicitly sought to test efficiency wages mod- significant relationships between quit rates andfinancial participation. See Edwards, P., op. cit.els.

35. Wilson, N. et al, op. cit. It should be noted that there are a number of


data errors in WIRS which can substantially 62. Poole, M., ‘Factors affecting the development ofbias findings for labour turnover. To counter employee financial participation in contempor-this, all workplaces with a quit rate in excess of ary Britain: evidence from a national survey’,150 per cent were excluded from our analysis. British Journal of Industrial Relations, 1988, 26: 1,

56. Wood finds that presence of profit sharing is 21–36.not significantly related to HRM practices in a 63. Millward, N., op. cit.comparison of HRM and non-HRM work- 64. Marchington, M., Goodman, J., Wilkinson, A.places. See Wood, S., ‘High Commitment man- and Ackers, P., New Developments in Employeeagement and payment systems’, Journal of Man- Involvement, Department of Employmentagement Studies, 1996, 33: 1, 53–78. Research Paper, 1992.

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58. Poole, M., op. cit. 67. McNabb, R. and Whitfield, K., op. cit.59. McCarthy, W., op. cit. 68. Wood, S., op. cit.60. Edwards, P., op. cit. 69. Purcell, J., op. cit.61. Perotin, V., op. cit.


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