employee share ownership and investment concentration: which employee shareholders fail to...

Employee share ownership and investment

concentration: which employee shareholders fail

to diversify?

Andrew Pendleton, York Management School, University of YorkHuman Resource Management Journal, Vol 20, no 2, 2010, pages 157–174

Using data from a survey of employees in three UK companies, the article examines concentration ofsavings in employer shares. It is found that a substantial minority of employees hold most of theirsavings in employer shares despite the risks. The article examines the distribution and determinants ofportfolio concentration. It is found that portfolio concentration is more likely to be found among men,those on higher incomes, and those who are in early middle-age. Regression analysis indicates thatorganisational commitment and the duration of participation in the share ownership plan also affects theprobability of having a concentrated portfolio. There is no clear evidence that those with substantialconcentrations of employer shares take active steps to monitor their investments more closely than thosewith smaller shareholdings.Contact: Andrew Pendleton, York Management School, University of York, York YO10 5DD,UK. Email: [email protected]_128 157..174

INTRODUCTION

Over the last thirty years, UK governments have encouraged employees to acquireshares in their employer. Several tax-advantageous share ownership plans have beenintroduced, most recently in the Finance Act 2000. The primary justification has been

promotion of an identity of interests between employees and their employer, so as to improvecorporate performance. But could there be a downside to this policy? Critics of employee shareownership schemes argue that they can encourage employees to hold more employer sharesthan is prudent. Concentrated ownership of shares in any single company violates standardinvestment principles relating to diversification and spreading of risk, especially whereinvestors are risk averse and have limited resources. By holding their eggs in one basket,employees are likely to achieve lower financial returns than those obtained from a spread ofinvestments (Meulbroek, 2005). By concentrating their investment in employer shares inparticular, workers conjoin financial risk to employment risk. Occasionally, the consequencescan be disastrous: many Enron employees lost most of the value of their pensions becauseEnron shares formed a substantial component of their pension investment portfolios (Munnelland Sunden, 2004). They also lost their jobs.

Although the problem of excessive investments in company shares has been widelydiscussed in the US, very little is known about this issue in the UK. There is no systematicevidence on the scale of the problem, or indeed whether it is a problem at all. Nor is it knownwhich employees are likely to concentrate their savings in employer shares, or the factorsassociated with such concentration. This article contributes to our knowledge of this issue byexamining employees’ ownership of employer shares. Using survey data from employees inthree large UK companies with Save As You Earn (SAYE or ‘Sharesave’) employee shareownership plans, we identify the characteristics of those with substantial proportions of their

doi: 10.1111/j.1748-8583.2010.00128.x

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 20 NO 2, 2010 157

© 2010 Blackwell Publishing Ltd.

Please cite this article in press as: Pendleton, A. (2010) ‘Employee share ownership and investment concentration: which employee shareholdersfail to diversify?’. Human Resource Management Journal 20: 2, 157–174.

savings in company shares. We also examine determinants of concentrated ownership. Oneparticular factor investigated in the article is employee commitment. Share plans are oftenadvocated because of their potential to heighten organisational commitment but the other sideof the coin is that high levels of commitment to the company may encourage employees to holdmore employer stock than is desirable. We therefore explore whether those employeesdisplaying higher commitment have a higher probability of holding large proportions ofemployer shares. Finally, we investigate whether those with concentrated portfolios monitortheir employer stock more intensely. This issue is important because concentrated holdings ofemployer shares might be justified if employee owners closely monitor these investments.

The findings suggest that concerns about risky employee behaviour are well founded. Aquarter of employee shareholders report that they hold half or more of their savings incompany shares. Concentrated ownership is observed throughout these workforces but thereare some differences by sex and age: men, and those aged under 35, are more likely to haveconcentrations of employer shares. High income is especially strongly associated with theprobability of concentrating in employer shares. Organisational commitment is also associatedwith high concentrations of employer shares, suggesting that the relationship between shareownership and commitment identified in policy rationale for employee share ownership canhave a double-edged character. Finally, there is no clear evidence that employees withconcentrated ownership of employer stock monitor their investments more closely and they areno more likely to read company information than those with smaller holdings.

To the best of our knowledge, this is the first article to investigate portfolio concentration inUK employee share ownership plans. The results are broadly consistent with those generatedby the American literature on pension portfolios. They have disturbing implications for policyand practice: some participants in employee share ownership plans hold potentially riskyconcentrations of employer shares. At the end of the article, we argue that greater attention tofinancial literacy and education is necessary so that employees acquire the motivation andcapabilities to manage their investments more sensibly.

The article proceeds by reviewing the issues relating to concentration of employer shares inemployees’ portfolios, drawing on the small, mainly American, literature on this topic. Variouspredictors of portfolio concentration are identified and discussed. We then outline the datasources and describe the measures used in the analysis, prior to presenting results. Finally, theimplications of the results for research, policy and management practice are considered.

BACKGROUND

Employee share ownership plans, supported by tax concessions, are designed to encourageemployees to acquire company stock. These plans have been strongly supported by UKgovernments for many years on the grounds that share ownership will create an identity ofinterests between companies and their employees, leading to enhanced company performance(HM Treasury, 1998). There are currently two main all-employee share plans in the UK: SAYEand the Share Incentive Plan (SIP). SAYE is a share purchase plan based on a combination ofshare options and a savings plan, while the SIP can function as a share purchase or a free sharedistribution plan (or both). Although these plans are distinct from pension savings in the UK,they can nevertheless enable employees to build up sizeable investments in employer sharesover the medium and long term.

This article focuses on employee shareholdings acquired through participation in SAYE.Participating employees take out an option to acquire company shares in three or five years’time. Meanwhile, they subscribe to a SAYE savings plan, with regular payments of up to £250

Employee share ownership and investment concentration

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 20 NO 2, 2010158


per month (£3,000 per annum). At the end of the savings period, they can take the lump sumfrom the savings plan in cash, exercise and hold their SAYE shares, or exercise and sell usingcashless exercise. Those acquiring shares are liable to capital gains tax (CGT) when shares aresold, though the annual CGT allowance means that most employees will pay no tax in mostcircumstances. Employers can offer a tax-free 20 per cent discount on the prevailing marketprice at award. Since its inception in 1980, SAYE has been a popular plan: in 2005–2006 nearly1,000 companies had a live SAYE plan and new option grants were made to 560,000 employees(HM Revenue and Customs, 2008). Most members of the FTSE100 operate a SAYE plan.

Nevertheless, there has been some concern that, through a combination of repeatedparticipation in SAYE offerings and a failure to diversify, employees may build up largeconcentrations of employer stock. Although this danger has long been recognised by critics ofemployee share ownership, neither the scale of concentrated investment in company shareownership nor its predictors are currently known. Although the major government surveys ofindividual’s financial assets, such as the Family Resource Survey, record the types of savingsand investment vehicles used by individuals and households, they do not address thecomposition of savings portfolios.1

Although there has been no UK evidence to date, there is a substantial literature onsubscriptions to employer stock within American 401(k) pension plans. Typically, these definedcontribution pension plans allow employees to invest in a variety of assets, such as shares andfixed income securities. It is common for employer stock to be included as an investmentoption, often as a default choice, and some employers also match employee contributions withcompany stock. The 401(k) plans differ from other pension plans in that there are norestrictions on the level of employer stock held within the fund (Munnell and Sunden, 2004),and these plans are the fastest growing and most widespread form of employee ownership inthe US.

For some time there has been concern about the level of company shares in employees’pension portfolios. Critics identify several problems with substantial holdings of companyshares by employees. First, they are likely to generate poorer investment returns than will beobtained from investments in a market index of shares (Meulbroek, 2005). Second, a single stockwill typically have higher volatility than a wide portfolio of investments, meaning thatinvestors are exposed to greater risk (Douglas et al., 2004). In the worse case, shares can losemuch of their value more or less overnight. Although most employees are generally thoughtto be risk averse, employees may not recognise the riskiness of their actions. As ‘amateur’investors, most employee shareholders will lack the ability, information or wealth to foresee orinsure against steep declines in the value of their shareholdings. Third, the concentration ofhuman and financial capital intensifies the risk borne by employees. While holding riskyinvestments may be justified if the volatility of each does not strongly co-vary with the others(‘hedging’), the problem with employee share ownership is that the short-term returns fromhuman capital and employer shares will likely move in tandem because both are linked tocompany performance. In principle, employment may give these investors superior ‘insider’information, which could either justify the acquisition of company stock or enable them todiversify out of it in a timely manner. However, it is unlikely that most ‘rank and file’employees will have information, or the capacity to interpret it, that is superior to that disclosedto stock markets (Kasznik, 2003).

American research shows that concentrated ownership of company stock is widespread.Mitchell and Utkus (2003) estimated that nearly a quarter of 401(k) participants with theopportunity to invest in company stock have more than 60 per cent of their plan assets inemployer stock. Similarly, Benartzi and Thaler (2001) found that over 40 per cent of the assets

Andrew Pendleton



of 67 funds are invested in company stock. Over 60 per cent of the assets in the Enron 401(k)plan were invested in Enron stock, so that many employees lost much of their pensions as wellas their jobs when Enron collapsed (Munnell and Sunden, 2004). Since the Enron and Worldcomdebacles, the scale of concentration in employer shares has abated somewhat, partly due tolegislative initiatives (the Pension Protection Act 2006 requires companies to issue regular riskstatements to employees and to provide diversification options in all 401(k) plans (Blasi andKruse, 2006: 31). Meanwhile, although there is little European evidence, the indications are thatemployees will invest substantially in employer stock if given the opportunity to do so: inFrance, approximately 40 per cent of employee contributions to company savings plans areinvested in employer stock. Recent innovations in employee savings plans (e.g. Plan d’EpargneRetraite Collectif (PERCO) plans in France) have therefore placed limits or precludedinvestments by employees in company shares (see Aubert, 2006). In the UK, evidence is mainlyanecdotal but is nevertheless sobering: many employees working for the banks that collapsedin 2008/9, such as Northern Rock, lost their life savings (Whitebloom and Wormack, 2009).

Nevertheless, large holdings might be justified in a number of circumstances. First, ifemployees have insider information, they could find it worthwhile to take the risk ofconcentrating their savings in company shares. One recent study of employee stock optionexercises argues that ‘rank and file’ employees, as well as senior executives, possess superiorinformation because large volumes of option exercises immediately preceded falls in sharevalue (Huddart and Lang, 2003). However, this argument rests on the questionable assumptionthat most employees undertake ‘cashless exercises’, i.e. they exercise and sell sharessimultaneously. If employees exercise and hold stock, falling share price has the oppositeimplication. It is also not clear what kind of superior information employees might possess thatwould enable them to ‘beat the market’, given the extensive disclosure requirements andscrutiny faced by listed companies (Kasznik, 2003). Other studies find no correlation betweenemployee behaviour and future share value (Huberman and Sengmueller, 2004), and there isevidence from behavioural economics that employee decisions are based on past, not future,share price performance (Benartzi, 2001). Overall, it seems unlikely that employee shareholderswill have superior information to the market. Instead, there is a danger that employees will beprone to perceptual biases arising from their sense of familiarity with their employingcompany: they may believe that the prospects for the company are better than they are.American evidence from the mid-1990s indicates that employees perceive company stock as lessrisky than diversified funds (cited in Aubert, 2006).

An alternative justification for holding large concentrations of employer shares is based ingovernance theory, suggesting that the risks are offset by employee control of the company. Thisjustification can generally be discounted because typical employee share plans in large, listedcompanies do not provide meaningful control rights. The combined employee share of totalequity is usually relatively small and neither management nor employees perceive or expectcontrol (Pendleton, 1997). In the absence of either insider information or control, employeeswith large proportions of their savings in company shares should at least monitor theirinvestments closely (VanDerhei, 2002). Whether they actually do so is another matter, as willbe explored later in the article.

Finally, concentrated investment in employer shares might be justified because employeeshare plans usually protect against some downside risk. The SAYE plan can provide a discountof up to 20 per cent on market value at grant and most employers offer this. In mostcircumstances, share ownership will not be financially harmful to the employee given risingmarkets and the typical volatility of company stock. However, employees may be badlyexposed if their company suffers a steep fall in share price or if there is a generalised fall in




the market, as happened in the recent financial crash. Other than where companies gobankrupt, this is not catastrophic if employees can be patient investors and can ride outdepressed share prices. However, anecdotal evidence suggests that many SAYE participantsinvest in company shares to save for particular events or activities (such as family weddings).Given wealth constraints, most employees will be time-constrained in their investmentbehaviour. They may therefore have to sell their shares at inopportune times.

Anecdotal evidence suggests that some UK employees do indeed concentrate substantialproportions of their medium-term (non-pension) savings in company shares. But as yet therehas been no systematic evidence on the phenomenon. The first objective of the articletherefore is to report findings on the distribution of holdings of company shares. The secondis to evaluate the relative importance of various factors in determining the probability ofconcentrating savings in company shares. We examine the role of age, tenure, income,gender, duration of participation and employee commitment. Finally, we report findings onthe extent to which those holding large concentrations of company shares monitor theirinvestments.

In the next section we consider the factors that might be associated with concentratedownership of company shares

PREDICTORS OF PORTFOLIO CONCENTRATION

Age

US evidence from 401(k) plans indicates that portfolio concentration in employer stock riseswith age though not strongly so (Holden and VanDerhei, 2001). There is a tendency tocontribute more to employer stock plans with age (see Pendleton, 2009) and this may lead toincreasing proportions of employer stock in savings if countervailing action is not taken.However, there is also some American evidence that stock trading is more prevalent amongolder employees (Clark and Mitchell, 2005) so portfolio concentration may decline among oldergroups. Overall, it is not obvious whether age will have positive or negative associations withconcentration, and it may be that the relationship is not linear.

Tenure

Increasing duration of employment may lead to an increasing sense of ‘familiarity’ with thecompany, which in turn may be associated with a greater tendency to concentrate in employershares. US research suggests that preferences for the familiar will lead employees to invest incompany stock rather than other assets (Huberman, 2001). Tenure will likely be associated withthe number of opportunities to participate in share scheme offers (many companies haveannual SAYE invitations) so that, all things being equal, the stock of employer shares may buildup over time.

Income

Income is a powerful determinant of propensity to save in general (Bertaut and Starr-McCluer,2000), and to contribute to employer share purchase plans in particular (Degeorge et al., 2004;Pendleton, 2009). High earners might exhibit a greater tendency to diversify because if incomeproxies for education and ability, a higher level of financial knowledge will be found amonghigher earners. However, evidence from 401(k) plans indicates that divestment of companystock is not strongly influenced by income, while recent research on financial educationsuggests that high-income employees make the same mistakes as lower income counterparts(Bernheim et al., 2006).

Andrew Pendleton



Gender

Women have a higher propensity to save and to accumulate savings (Huberman et al., 2003).US evidence indicates that women are less likely to invest in equities than men (Sunden andSurette, 1998), possibly because of higher risk aversion (Agnew et al., 2003) or a lower tendencyto be overconfident (Barber and Odean, 2001). This implies that women’s savings are morelikely to be spread over a wider range of instruments than employer stock. Thus, it is predictedthat women will have a lower probability of concentrating their savings in employer shares.

Duration

It is predicted that the length of time employees have participated in SAYE plans will impacton portfolio concentration. The longer employees have been members, the more opportunitythey have to build up stocks of company shares. It is likely that duration will have similareffects to tenure, for obvious reasons.

Commitment

Those with greater organisational commitment may hold higher concentrations of employerstock (Mitchell and Utkus, 2003; Cohen, 2004) possibly as an expression of commitment and/oran overly favourable perception of the value of employer stock (Cohen, 2004). US evidence onthis issue is not clear-cut. Cohen finds a commitment effect but Benartzi (2001) does not.

RESEARCH METHODS

Since employee characteristics, attitudes and behaviour are of primary interest, data arecollected from employees. An employee survey was conducted in three large UK companieswith long-standing Save As You Earn arrangements. Plan longevity was important to providethe opportunity for (some) employees to build-up holdings of employer stock (given limits onthe amount of stock that can be acquired via any one plan offering). The companies wereselected to represent manufacturing, retailing, and hospitality. The survey was organised by theshare ownership lobbying body Proshare (now ifsProshare), and administered in conjunctionwith two share plan administrators: Abbey National and Halifax Employee Share Services.2

Data entry was performed by Objective Research.Although the survey was organised by those with a clear interest in employee share plans,

the circumstances of the research meant that an independent survey was highly desirable forall concerned. In the lead-up to the survey, there was considerable speculation that the thenChancellor of the Exchequer, Gordon Brown, intended to abolish the SAYE scheme on thegrounds that it was ineffective in promoting long-term employees share ownership. As actualpatterns of ownership were largely unknown, both industry and government took the view thatan independent survey could generate relevant information. The author was therefore asked toassist with the design of the survey. None of the sponsoring organisations are responsible forthe analysis and interpretation of results presented here.

Questionnaires were distributed via the administrators to 10,500 employees in thesecompanies (combined UK employment of 50,420 at the time). A stratified random samplingprocedure was adopted, with managers asked to distribute questionnaires randomly withineach of the major occupational groups in their companies. A total of 2,488 useablequestionnaires were returned, a response rate of 24 per cent. Of these, 53 per cent hadparticipated in a SAYE plan to maturity, and hence, had the opportunity to acquire companyshares. The analysis in the article is based on this subgroup of employees (n = 1312): those who




had participated in the plan but had not yet had a SAYE maturity, and hence had not yet beenable to acquire shares, are excluded.3 A total of 87 per cent of those who had been in a SAYEplan to maturity owned shares in the company at the time of the survey.

VARIABLES

The key variable is employees’ reports of the proportion of their savings and investments(excluding pensions and housing) held in employer stock. This is a subjective measure ofportfolio concentration, and invites employees to choose five categories of concentration: 0,1–25, 26–50, 51–75, and 76–100 per cent. Use of subjective and categorical responses is not idealbut more precise questioning would have depressed response rates and invited inaccurateresponses because most employees are unlikely to be able to provide precise answers.4 Themeasure explicitly excludes pensions and housing on the grounds that the former is perceivedto be separate from savings by most people in the UK while housing is perceived as aninvestment by some but not others (and, of course, not all respondents will own theirresidence). In the regression analysis, this measure is converted into a binary measure where1 equals portfolio concentration of 26 per cent and above (this approximates to the mid-pointof the distribution).

Other variables are as follows:

Age

Age is recorded using a five-category ordinal question, and initially converted into fourdummies. Only three are used in the regression analysis because the youngest category (16–24)has only a handful of cases: it is therefore merged with the next age group (25–34) to form thereference category.

Income

The survey records income with an eight-category question: these categories are collapsed intofour (three dummies).

Sex

A single one, zero variable is used, with males = 1.

Tenure

This is a continuous measure of the duration of employment.

Organisational commitment

Employees were asked five of the positively worded five-point items from the BritishOrganizational Commitment scale (Cook and Wall, 1980). These included questions such as ‘Ifeel I am part of this company’ and ‘I am proud to tell people the company I work for’.Although two factors could be observed in exploratory factor analysis, all questions loadedpredominantly onto one factor so these items were combined into a single commitment scale,ranging from 1 (low commitment to 5 (high commitment) (alpha = 0.8063).

Duration

In the survey, employees were asked a five category question about the length of time they hadbeen participating in SAYE. This is converted into a dummy for the analysis. Duration is codedto one when participation has been more than seven years duration (66 per cent of employeesare in this category).

Andrew Pendleton



RESULTS

Results are presented in three stages. First, there are a set of descriptive statistics showing thedistribution of portfolio concentration by company, sex, age, and gender. Second, a series ofprobit regressions are conducted showing the relationship between portfolio concentration andthe predictor variables. Third, some further descriptive statistics are presented, indicating thelikelihood of monitoring of employer stock.

The distribution of portfolio concentration: descriptive statistics

Table 1 presents information on the proportion of employee shareholders in each portfoliocategory, and the results are striking. Nearly a quarter (24 per cent) of respondents hold over50 per cent of their savings and investments in company shares. This distribution of portfolioconcentration is similar to that observed in US 401(k) plans, suggesting that wherever companystock is made available, a substantial minority of employees will tend to acquire relatively largeamounts of it.

Table 1 also shows the distribution of portfolio concentration by sex. Consistent withpredictions, men are significantly more likely to hold concentrations of employer shares thanwomen, with 29 per cent of men holding 50 per cent or more of their savings in employershares compared with 20 per cent of women (chi-square statistic significant at better than 99 percent). Women are more likely not to hold any employer shares at all: 18 per cent do not ownany shares compared with 7 per cent of men. These findings are consistent with US evidenceon this question and the predictions advanced earlier (Sunden and Surette, 1998).

Table 2 presents information on the proportion of each age group in each portfolio category,and the chi-square statistic (significant at better than 99 per cent) indicates significantdifferences in share ownership behaviour between age groups. This table indicates that thelikelihood of owning shares at all tends to decline from middle age. The proportions with halfor more of savings in company shares also decline with age (from 30 per cent in the 25–34 agegroup to 16 per cent in the oldest group). This contradicts evidence from the US cited earlierwhich finds that concentration tends to rise with age.5 We cannot readily explain the patternof ownership concentration on the basis of the data alone but possible explanations are thatfinancial awareness increases with age and the increasing propensity to save that is typically

TABLE 1 The distribution of portfolio concentration by sex. Percentage in each portfolio category

Company shares as a proportion of savings (per cent) All Female Male

0 13 18 71–25 44 47 4026–50 20 15 2451–75 13 109 1676–100 12 10 13N 1312 691 621

Chi-square = 63.89, p = 0.000, Cramer’s V = 0.22.Base: all employees who have had a SAYE plan maturity.




associated with age (until shortly before retirement) leads workers to seek out a wider rangeof savings opportunities. The UK Wealth and Assets Survey in 2006/7 shows that individualsuse a wider range of savings and investment vehicles as they grow older (Office of NationalStatistics, 2008).6

Table 3 shows the proportion of each income group in each portfolio category. Here theresults are striking: the likelihood of higher concentration clearly and significantly rises withincome (chi-square statistic better than 99 per cent). Just under a quarter of those in the lowestincome group own no shares at all: they have either taken the savings money or exercised andsold their shares when the SAYE plan matured (we are not able to distinguish between thesetwo possibilities in the data). A total of 16 per cent have 50 per cent or more of their savingstied up in company shares. This proportion rises steadily with income with 33 per cent of thehighest income group having half or more of their savings in employer shares. This is clearlycontrary to the prediction that those on higher incomes will more likely diversify. Instead, thehigher absolute levels of savings typically associated with higher income are helddisproportionately in employer stock.

TABLE 2 The structure of portfolio concentration by age of employee. Percentage of each age group ineach portfolio concentration category

Company shares as a proportion of savings (per cent) 16–24 25–34 35–44 45–54 55+

0 9 11 10 15 191–25 55 39 44 43 5226–50 9 21 19 23 1351–75 18 16 14 9 1076–100 9 14 12 11 6N 11 282 441 388 187


TABLE 3 The structure of portfolio concentration by income of employee. Percentage of each incomegroup in each portfolio concentration category

Company shares as a proportion of savings (per cent) £1–9.9k £10–19.9k £20–29.9k £30k+

0 24 14 7 41–25 46 46 44 3626–50 14 18 21 2751–75 9 11 15 1876–100 7 11 13 15N 326 410 314 250


Andrew Pendleton



Determinants of portfolio concentration

The results so far provide a clear pattern of ownership concentration. Those most likely to haveconcentrated asset portfolios are men, those on high incomes, and those at the lower (but notthe bottom) end of the age distribution. In the following analysis we examine the relativeimportance of various individual characteristics found likely to be associated with highconcentrations of employee share ownership in previous literature, using regression analysis.To do this, we use probit to assess their effects on the probability of employees having morethan 25 per cent of their savings in company shares. Probit is used in preference to othertechniques such as ordered probit (the initial dependent variable has several, orderedcategories) or quasi-linear approaches such as interval regression because the distribution isskewed to the left. Hence, a binary dependent variable seems most appropriate.7 A two-stageHeckman probit is also used to take into account the fact that not all eligible employees ownshares in the company. In this model, the dependent variable is coded to missing for thoseowning no shares, with the first stage of the model evaluating the determinants of the decisionwhether to invest in shares or not.

Several models are estimated. The first basic model includes demographic variables (age, sex,income) with company dummies. Note that the reference group for age combines the youngestwith the next oldest group because the youngest group is so small. The second model adds themeasures for the duration of participation in the SAYE plan, with the expectation that lengthyparticipation provides more opportunity for employees to build up concentrations of employerstock. The third model adds the measure for employee commitment. Duration is initiallypresented in a separate model from commitment because duration of participation might beexpected to be associated with commitment given the findings elsewhere in the literature thatshow share plan participation is associated with higher commitment. Thus, some collinearitymight be anticipated. However, the correlation between the two variables is low at 0.0370 (seeAppendix 1) and the marginal effects of duration are unchanged when commitment is added(Table 4). The fourth model repeats the third model using the Heckman probit approach.

In Model 1, the predictions made earlier are largely confirmed. Being male significantlyincreases the probability of portfolio concentration by 9 per cent. The probability ofconcentration steadily declines with age, with each result significant at 95 per cent or better.There is a big jump between the 45–54 age group and the 55+ age group – this might beattributed to the known preference for liquidity among those approaching retirement. Theincome effect operates in the opposite direction. The magnitude and significance of ownershipconcentration rises with income, and becomes marked and significant (at better than 99 percent) at the upper end. Relative to those on the lowest salaries, being a high earner (£30,000 ormore) increases the probability of concentration by 20 per cent. This income effect has thestrongest positive impact on concentration while being in the immediate pre-retirement agegroup has the strongest negative effect. Model 1 shows a significant tenure effect: each year ofservice increases the probability of ownership concentration by just under 1 per cent. This couldbe evidence of a ‘familiarity’ effect. The company dummies (not shown) are insignificantindicating that company specific effects do not have a significant impact on the probability ofportfolio concentration once other employee-level factors are taken into consideration. Thereare no problems of collinearity with the model: correlations between all variables included donot exceed 0.4 and most are substantially below this.8

Model 2 adds the measure for the duration of participation in SAYE plans. It is stronglysignificant and substantial in its effects, with the marginal probability of having more than 25 percent of savings in employer shares being 17 per cent. These results are consistent with an




interpretation that suggests that employee holdings of company stock build up over time due torepeated participation in SAYE offerings. But employees fail to divest or diversify, possibly dueto inertia. Inclusion of this measure unsurprisingly weakens the tenure effect because durationis obviously tenure related: the correlation between these two variables is the highest among thevariables at 0.40 (see Appendix 1). Nevertheless, the overall pattern of effects remains similar.

Model 3 adds the measure for organisational commitment. The result is in line withpredictions: higher levels of organisational commitment are associated with a higher probabilityof holding higher proportions of employer stock. As might be expected, higher incomeemployees tend to display higher commitment so inclusion of the commitment measurereduces the effect of the highest income variable somewhat. All other variables, however,remain broadly unchanged in their effects, indicating that commitment has independent effectson ownership concentration. These results suggest that the relationship between shareownership and organisational commitment has potentially adverse as well as beneficial effects:share ownership may be associated with higher commitment, as much of the literature finds,but this higher commitment is also associated with concentrated positions in employer shares.

TABLE 4 Determinants of portfolio concentration. Probit marginal effects (z values)

Model 1 Model 2 Model 3 Model 4

Sex 0.096 0.099 0.108 0.107(2.65)** (2.71)** (2.95)** (2.93)**

Tenure 0.007 0.004 0.004 0.004(3.14)*** (1.76) (1.86) (1.88)

Age 35–44 -0.090 -0.106 -0.110 -0.111(-2.33)* (-2.69)** (-2.79)** (-2.86)**

Age 45–54 -0.123 -0.140 -0.145 -0.146(-2.66)** (-3.01.)** (-3.11)** (-3.23)**

Age 55+ -0.245 -0.261 -0.268 -0.267(-4.68)*** (-5.01)*** (-5.12)*** (-6.01)***

Salary 10–19k 0.056 0.035 0.040 0.037(1.37) (0.83) (0.95) (0.89)

Salary 20–29k 0.074 0.043 0.035 0.033(1.48) (0.84) (0.69) (0.65)

Salary 30k+ 0.199 0.169 0.148 0.148(3.74)*** (3.12)*** (2.71)** (2.69)**

Duration 0.168 0.164 0.162(5.20)*** (5.05)*** (5.12)***

Commitment 0.063 0.061(2.82)** (2.79)**

Company dummies Yes Yes Yes YesLR chi2 95.87*** 123.17*** 131.21*** 123.57***

(Wald)N 1312 1312 1312 1143

(uncensored)

Notes: The table shows marginal effects of each independent variable on the probability of the dependent variabletaking the value 1, when all other variables are held at their mean.* = significant at 0.05; ** = significant at 0.01: *** = significant at 0.001.

Andrew Pendleton



Model 4 repeats Model 3 but also controls for the selection into ownership using theHeckman probit method. Only the second stage results (i.e. those relating to the level ofinvestment, once the decision to invest has already been made) are reported because they aredirectly comparable to those presented in the other models. As is clear, the results are verysimilar indeed, albeit a shade more conservative, to those presented in Model 3. This is notsurprising because most (87 per cent) of eligible employees select into ownership. The firststage results (i.e. those relating to the decision to invest at all) are not reported here (availableon request) but show that income is the strongest influence. It is followed by the duration ofparticipation in SAYE plans, and being aged 55 or over (negative). All other effects areinsignificant. The upshot of these results is that they show that on top of having a higherprobability of investing in company shares, those on the highest incomes have a higherprobability of holding large concentrations of these shares in their savings portfolios. Byimplication they also indicate that younger adults (16–35) do not have a higher probability ofowing shares than other age groups apart from those over 55 but they do tend to have higherconcentrations of these shares.

The propensity to monitor

The results presented so far indicate that sizeable proportions of employee shareholders holdsubstantial proportions of employer stock in their savings and investment portfolios. Althoughthis contravenes the general principle that wealth-constrained, risk averse investors shouldhold diversified portfolios, these concentrations of employer shares might be justified if theseemployee shareholders take active steps to monitor their investment. To assess whether this isthe case, a couple of questions were asked in the survey about employee monitoring. Theresults for these are reported in Tables 5a and 5b. These tables cross-tabulate each level ofportfolio concentration, including zero holdings of employee shares, among those who havehad a SAYE plan maturity against the chosen monitoring measure.

The results of these tests suggest that those with concentrated portfolios of employer sharesdo not compensate by monitoring their employer’s performance more closely. In Table 5a, resultsare reported for the frequency that employee shareholders monitor the company’s stock price. Ascan be seen, there is difference in the frequency of monitoring between the various groups ofshareholders: those whose savings portfolios are nearly entirely composed of employer shares(the 76–100 per cent group) monitor company share price at more or less the same frequency as

TABLE 5a Extent of monitoring by employees. Frequency that employees in each ownership categorycheck company share price

Company shares as a proportionof savings (per cent)

Everyday

At leastonce a week

At leastonce a month

At leasttwice a year

Less thantwice a year

0 30 35 18 10 91–25 28 28 20 15 926–50 32 31 21 6 1051–75 29 37 18 10 676–100 25 38 18 10 10

Chi square = 23.36, p = 0.104, Cramer’s V = 0.0658.Base: all employees who have had a SAYE plan maturity.




those with no employer shares at all. The chi-square and Cramer statistics, which are notsignificant at 95 per cent, confirm that the differences between the employee groups are small.9

However, when we turn to the frequency with which company information is read byemployee shareholders, there appears to be a greater association between the variousshareholder groups and the frequency of monitoring. The chi-square statistic is significant at 95per cent though Cramer’s V indicates that the association is fairly small. However, much of thedifference between groups is between those with no employer shares and all those with shares.If the analysis is restricted to shareholders, the differences between share ownershipconcentration groups are insignificant (chi-square reduces to 3.52, p = 0.318). Within the groupof employee shareholders, there is a small tendency for the frequency of monitoring to rise withportfolio concentration but this increase is dissipated in the most concentrated group.

Overall, these results indicate that portfolio concentration is not mitigated by closermonitoring. These results are further confirmed by regression analysis where propensity tomonitor is regressed against the demographic variables used earlier (not shown here but resultsavailable on request). All levels of portfolio concentration are insignificantly related tomonitoring. This regression analysis also indicates that those on higher incomes, who might beexpected to be more financially literate, are no more likely to actively monitor theirinvestments. This may be seen as disturbing: some employees are prepared to put their savingsat risk without taking steps to actively monitor that risk.

CONCLUSIONS AND IMPLICATIONS FOR POLICY AND PRACTICE

The research reported here is the first attempt as far we know to investigate the extent ofconcentration in company shares among employees participating in UK employee shareownership plans. The findings indicate that portfolio concentration can be widespread amongstemployees in companies with share plans. A quarter of these employees report that half ormore of their savings and investments are held in company shares. Regression analysisindicates that high income is a substantial influence on the probability of owning a concentratedportfolio. The duration of participation is also a substantial influence: the longer employeeshave participated in the SAYE plan, the greater the probability of portfolio concentration.Organisational commitment also affects the probability of holding a concentrated portfolio. Theresults also show that those who have the highest concentrations of company shares only

TABLE 5b Extent of monitoring by employees: use of company information. ‘Frequency that employeesin each ownership category read information about the company supplied by the company’

Company shares as a proportionof savings (per cent)

Always Most ofthe time

Some ofthe time

Never

0 36 29 29 51–25 48 27 20 526–100 51 30 17 251–75 57 26 15 376–100 52 19 26 3

Chi- square = 28.523, p = 0.005, Cramer’s V = 0.09.Base: all employees who have had a SAYE plan maturity.

Andrew Pendleton



partially mitigate their risk exposure by closer monitoring. They do not monitor share pricemore regularly than other shareholders or even those without shares, and they do not readcompany information than other employee shareholders.

There is also worrying evidence that those who already hold concentrated positions may beabout to add to them: 65 per cent of those in the concentrated group have more than three SAYEcontracts in operation, compared with 47 per cent in the other group. They are also savingconsiderably more in SAYE each year (an annual average of £1,562 compared with £1,098).

The results suggest that the groups most at risk of concentrating in employer stock aremales, those in the 25–34 age category, those on high incomes, and those with several years ofparticipation in the company share plans. These groups may be more capable of assuming thislevel of risk as their other financial commitments may be lower than other groups ofemployees. Alternatively, some of these groups may find it difficult to actively manage theirsavings and investments due to other commitments. Unfortunately, we cannot evaluate thesepossibilities due to data availability issues. It is also possible that some employee ‘grow out of’this tendency to concentrate savings in one savings vehicle. Our results show that the likelihoodof portfolio concentration declines in older age groups. Similarly, results from the UK Wealthand Assets Survey indicate that the number of types of investment held by individuals growswith age (Office of National Statistics, 2008).

These findings suggest that there is a potential downside to employee share ownershipplans, and they will strike a chord with those critics of employee share ownership who warnagainst ‘putting all the eggs in one basket’. This raises the issue as to what extent employeeshare ownership should be actively promoted by governments and companies. Given thepotentially adverse effects reported in the paper, share ownership plans should either be lessactively promoted or else be counterbalanced with more information on the need for employeesto actively monitor their investments and take appropriate and timely remedial action. Eachalternative is considered briefly, highlighting their implications for policy and practice. Ourargument is that greater communication and education are necessary.

The policy rationale for employee share ownership emphasises its potential for alignment ofinterests between companies and employees, and the balance of evidence indicates that shareplans have favourable impacts on employee attitudes and company performance. It is difficultto argue, therefore, against the use of share ownership plans per se. Within companies, there hasbeen a great deal of emphasis in recent years on enhancing the frequency and clarity ofcommunications to employees about share plans, with these communications often deliveredby the external share plan administrator/savings carrier. Technical improvements in the last tenyears have also given employees greater access to information about their share plan savingsaccounts and shareholdings. There is a danger, though, that the more effective thecommunications, the more employees will be prone to participate in the plan or to holdemployer shares, irrespective of the risks. Indeed, communication plans are often stronglymotivated by a concern to secure high levels of participation. Even though they always carry‘health warnings’, it is possible that share plan communications function as ‘implicit investmentadvice’ (Liang and Weisbenner, 2002), especially where there is high trust between employeeand company. A widespread complaint from employee shareholders in the banks that collapsedin autumn 2008 was that there had been a breach of trust by their employer.10

It might be argued that share plan communications such as invitations to participate shouldsomehow be ‘toned-down’. This is probably the wrong solution as it is not share planparticipation per se that is problematic. In the case of SAYE there are several key decisions tobe made by employees: one is at invitation (whether to participate), one is at maturity (whetherto exercise and then to sell or hold), and then subsequently what to do with any shares held




by them. The problem of excessive holding of shares arises from decisions made at maturityand actions (inaction) taken subsequently. By contrast, it is difficult to escape the conclusionthat participation in the SAYE plan (i.e. taking out an option and contributing to the savingsplan) is generally favourable for employees because of the tax breaks, lack of downside risk andthe flexibility in the scheme. All but the most liquidity-constrained employees may benefit fromit. Excessive holdings of employer shares (i.e. after the plan period has concluded) might bereduced by greater frequency of communications after maturity, reminding employees aboutthe volatility of share prices and the risks of undiversified portfolios. These communicationsmight take the form of generalised ‘risk statements’ that heighten employee awareness butavoid straying into provision of unregulated financial advice.

Many of those responsible for managing share plans within companies or administeringthem as savings carriers believe much greater financial awareness and knowledge is necessary,and that some way of enhancing financial education is desirable. Earlier research has shownthat employee shareholders have no greater financial knowledge and awareness than non-shareholders (Peel and Pendlebury, 1999) despite the risks they may be taking. Financialeducation may function both to enhance employees’ financial capabilities and to heighten theirmotivation to manage their savings and investments. Employers are generally reluctant toprovide workplace financial education on the grounds that they do not have the expertise andare wary of providing unauthorised financial advice.11 But it is arguable that provision offinancial education should be an employer responsibility as a counterbalance to their offers toemployees to acquire company stock. The answer to this conundrum may be to encourage thirdparty provision of financial education within the workplace, financed by employers. This mightbe provided by SAYE administrators, voluntary organisations, and trade unions, and mighttake the form of a more advanced version of the Financial Services Authority’s currentprogramme of workplace financial education. The implication of our results is that certaingroups of employees may be especially targeted for financial education.

As for further research into this topic, it would be desirable to collect employee data froma greater spread of companies. This would enable exploration of the role of plan design andof company-level factors (eg. do communications about the share plan influence employeeportfolio decisions?). It would also enable researchers to assess the role of share pricemovements on employee behaviour. It would also be desirable to collect richer data fromemployees such as more precise data on the composition of their savings portfolios.Unfortunately, these kinds of data are difficult to collect, partly because of individuals’sensitivities, partly because employees may not be readily aware of the details of their personalfinances. Nevertheless, the issues raised in this research suggest that we should persevere.

ACKNOWLEDGEMENTS

I am grateful to Proshare, Abbey National, Halifax, and Objective Research for organising datacollection and processing. I am grateful too for the Inland Revenue’s assistance in facilitatingmy involvement in the project. None of these organisations bear any responsibility for theresults or interpretations offered in the paper. Participants in a seminar organised at LeedsUniversity Business School provided useful comments on an earlier version of the article. I amalso appreciative of the comments of two anonymous referees.

Notes

1. The new Wealth and Assets survey will address the composition of savings andinvestments.

Andrew Pendleton



2. None of these organisations exists in the same form today. Proshare was acquired by theInstitute of Financial Services and is now known as ifsProshare. The Abbey National ceasedshare plan administration when taken over by Santander. The Halifax merged with Bank ofScotland to become HBOS, and was then taken over by LloydsTSB in 2008. The unitadministering share plans was sold to Capita in autumn 2009.3. Comparison of means indicates that the subsample selected for analysis is not different(at 95 per cent confidence) from the full sample in terms of sex and most income bands buton average the subsample is older, has longer tenure and has more high-income earners.This is unsurprising because inclusion in the subsample will be affected by tenure.4. Benartzi et al. (2007) attempted to gain more precise information on concentration buthad to use categories as a fallback position for around a quarter of respondents.5. Note that the youngest group has small numbers (n = 11). There are far more youngworkers participating in the share ownership plans but, because of their short tenure, mosthave not yet had a SAYE maturity.6. US evidence indicates that individuals allocate investments according to simple ‘rules ofthumb’ such as dividing investments equally (Benartzi and Thaler, 2001). On this basis, use ofa wider range of investments could be expected to reduce concentration in employer shares.7. We also experimented with an ordered probit model retaining all categories of theoriginal dependent variable. This is not reported as the coefficients are not directlycomparable with the marginal effects reported for the probits. However, the coefficients arequalitatively similar to the marginal effects reported.8. A post-estimation test of multi-collinearity indicates that the highest variance inflationfactor is 2.41, well within acceptable bounds.9. It might appear surprising that 30 per cent of those with no employer shares observeshare price on a daily basis: this might be explained by the fact that nearly all of this groupare current SAYE option holders and savings participants.10. I am grateful to Jed Nichols, General Secretary of Accord, for this observation.11. These are the key results from a pilot survey carried out by the author for ifsProsharein 2006.

REFERENCES

Agnew, J., Balduzzi, P. and Sunden, A. (2003). ‘Portfolio choice and trading in a large 401 (k) plan’.American Economic Review, 93: 1, 193–215.

Aubert, N. (2006). ‘Understanding employees’ stock holdings in the French company savings planusing the literature on American 401k plans’. Gestion 2000, 6: 6, 61–77.

Barber, B. and Odean, T. (2001). ‘Boys will be boys: gender, overconfidence, and common stockinvestment’. Quarterly Journal of Economics, 116: 1, 261–292.

Benartzi, S. (2001). ‘Excessive extrapolation and the allocation of 401 (k) accounts to company stock’.Journal of Finance, 56: 5, 1747–1764.

Benartzi, S. and Thaler, R. (2001). ‘Naive diversification strategies in retirement savings plans’.American Economic Review, 91: 1, 79–98.

Benartzi, S., Thaler, R., Utkus, S. and Sunstein, C. (2007). ‘The law and economics of company Stockin 401 (k) Plans’. Journal of Law and Economics, 50: 45–79.

Bernheim, D., Berstein, S., Gokhale, J. and Kotlikoff, L. (2006). ‘Saving and life insurance holdings atBoston University – a unique case study’. National Institute Economic Review, 198: 75–96.

Bertaut, C. and Starr-McCluer, M. (2000). Household portfolios in the United States. Working paper,Federal Reserve Board of Governors.

Blasi, J. and Kruse, D. (2006). ‘Policy note: are diversification and employee ownershipincompatible?’. Journal of Employee Ownership Law and Finance, 18: 19–38.




Clark, R. and Mitchell, O. (2005). ‘The changing retirement paradigm’, in R. Clark and O. Mitchell(eds), Reinventing the Retirement Paradigm, Oxford: Oxford University Press, pp. 3–13.

Cohen, L. (2004). Loyalty-based portfolio choice. Paper presented to European Finance Association,Maastricht. Paper number 5062.

Cook, J. and Wall, T. (1980). ‘New work attitude measures of trust, organisational commitment, andpersonal need fulfillment’. Journal of Occupational Psychology, 53: 39–52.

Degeorge, F., Jenter, D., Moel, A. and Tufano, P. (2004). ‘Selling company shares to reluctantemployees: France Telecom’s experience’. Journal of Financial Economics, 71: 169–202.

Douglas, J., Wu, O. and Ziemba, W. (2004). ‘Stock ownership decisions in defined contributionpension plans’. Journal of Portfolio Management, 30: 92–100.

HM Revenue and Customs (2008). Annual Statistics, London: Inland Revenue.HM Treasury (1998). Consultation on Employee Share Ownership, London: HM Treasury.Holden, S. and VanDerhei, J. (2001). 401 (K) Plan Asset Allocation, Account Balances, and Loan Activity

in 2000, Washington DC: Employee Benefit Research Institute. Brief 239.Huberman, G. (2001). ‘Familiarity breeds investment’. Review of Financial Studies, 14: 3, 659–680.Huberman, G. and Sengmueller, P. (2004). ‘Performance and employer stock in 401 (k) plans’. Review

of Finance, 8: 403–443.Huberman, G., Iyengar, S. and Jiang, W. (2003). Defined contribution pension plans: determinants of

participation and contribution rates. Pensions Institute Discussion Papers, Pensions Institute,Birkbeck College.

Huddart, S. and Lang, M. (2003). ‘Information distribution within firms: evidence from stock optionexercises’. Journal of Accounting and Economics, 34: 3–31.

Kasznik, R. (2003). ‘Discussion of “Information distribution with firms: evidence from stock optionexercises” ’. Journal of Accounting and Economics, 34: 33–41.

Liang, N. and Weisbenner, S. (2002). Investor Behavior and the Purchase of Company Stock in 401 (k) Plans– the Importance of Plan Design. Washington, DC: Board of Governors of the Federal ReserveSystem.

Meulbroek, L. (2005). ‘Company stock in pension plans: how costly is it?’. Journal of Law andEconomics, 48: 2, 443–474.

Mitchell, O. and Utkus, S. (2003). ‘The role of company stock in defined contribution plans’, in O.Mitchell and K. Smetters (eds), The Pension Challenge: Risk Transfers and Retirement Income Security,Philadelphia, PA: University of Pennsylvania Press.

Munnell, A. and Sunden, A. (2004). Coming up Short: The Challenge of 401 (K) Plans, Washington, DC:Brookings Institution.

Office of National Statistics (2008). Wealth and Assets Survey: Experimental Statistics 2006–2007, London:Office of National Statistics.

Peel, M. and Pendlebury, M. (1999). Employee Share Ownership and Financial Awareness: Some FurtherEvidence, London: Association of Chartered Certified Accountants.

Pendleton, A. (1997). ‘Shareholders as stakeholders: the role of employee share ownership’, in G.Kelly, D. Kelly and A. Gamble (eds), Stakeholder Capitalism, Basingstoke: Macmillan.

Pendleton, A. (2009). ‘Employee participation in employee share ownership: an evaluation of thefactors associated with participation and contributions in Save As You Earn plans’. British Journalof Management, doi: 10.111/j.1467-8551.2008.00522.x.

Sunden, A. and Surette, B. (1998). ‘Gender differences in the allocation of assets in retirement savingsplans’. American Economic Review, 88: 2, 207–211.

VanDerhei, J. (2002). The Role of Company Stock in 401 (K) Plans, Evidence presented to House ofRepresentatives Education and Workforce Committee Hearing ‘Enron and Beyond: EnhancingWorker Retirement Security’, Washington, DC: Employee Benefit Research Institute.

Whitebloom, S. and Wormack, S. (2009). ‘How bank’s failure cost us our life savings’, Financial Mail,9 March.

Andrew Pendleton



AP

PE

ND

IX1

CO

RR

ELA

TIO

NM

AT

RIX

Var

iab

lety

pe

Mea

nTe

nu

reS

exA

ge35

–44

Age

45–5

4A

ge55

+S

alar

y10

–19k

Sal

ary

20–2

9kS

alar

y30

k+

Du

rati

onC

omm

itm

ent

Tenu

reC

onti

nuou

s16

.39

Sex

0,1

0.47

0.17

Age

35–4

40,

10.

34-0

.11

0.12

Age

45–5

40,

10.

300.

26-0

.13

-0.4

6A

ge55

+0,

10.

140.

25-0

.11

-0.2

9-0

.26

Sala

ry10

–19k

0,1

0.31

-0.0

5-0

.16

0.00

-0.0

1-0

.04

Sala

ry20

–29k

0,1

0.24

0.07

0.36

-0.0

1-0

.11

-0.0

6-0

.38

Sala

ry30

k+0,

10.

190.

130.

350.

18-0

.05

-0.0

8-0

.33

-0.2

7D

urat

ion

0,1

0.66

0.40

0.11

-0.0

30.

130.

11-0

.02

0.07

0.11

Com

mit

men

t1–

5sc

ale

3.77

-0.0

40.

050.

07-0

.05

-0.0

4-0

.12

0.01

0.21

0.04

Port

folio

conc

entr

atio

n0,

10.

440.

080.

190.

03-0

.01

-0.1

2-0

.05

0.06

0.17

0.17

0.10




employee share ownership and investment concentration: which employee shareholders fail to...

Documents