technology influenced consumer choices
Understanding Financial Participation across Market Economies
Elaine Farndale1,2 , J. Ryan Lamare3, Maja Vidovi�c4 and Amar S. Chauhan5
1Associate Professor, School of Labor and Employment Relations, Pennsylvania State University, University Park, PA, USA
2Department of Human Resource Studies, Tilburg University, Tilburg, The Netherlands
3Associate Professor, School of Labor and Employment Relations, University of Illinois at Urbana-Champaign, Champaign, IL, USA
4Instructor, Rochester Institute of Technology Croatia, Zagreb, Croatia
5Ph.D. Candidate, Political Science at Washington University, St. Louis, MO, USA
Abstract: Organizations implement a range of financial participation plans to help create a stron- ger linkage between corporate and individual goals. Although seemingly an organizational-level choice as to what plans are adopted, we argue that institutional constraints at the market econ- omy level of analysis that directly affect worker-firm relationships play a significant role in this choice. Based on organization-level data from nineteen countries, comparisons of the level of profit-sharing and equity-ownership plan use are explained through varieties of capitalism theo- rizing. The findings indicate the usefulness of this level of analysis in explaining corporate prac- tice in financial participation.
Keywords: financial participation; varieties of capitalism; institutions; profit sharing; equity ownership
Financial participation is typically viewed as an instrument that motivates employees to work towards the same goals as those of the organization’s shareholders, thus alleviating the moral hazard agency problem of firms (Dalton et al. 2007). It has also been looked upon as a form of communication between shareholders and workers (Guery 2013), and can therefore be viewed as an effort to introduce legitimacy about capital (Croucher et al. 2010). In this study, we focus on two forms of financial participation that integrate employer and employee (long-
Address correspondence to Elaine Farndale, Associate Professor, School of Labor and Employment Relations, Pennsylvania State University, University Park, PA, 16802, USA. E-mail: firstname.lastname@example.org
International Studies of Management & Organization, 49: 402–421, 2019 # 2019 Taylor & Francis Group, LLC ISSN: 0020-8825 print/1558-0911 online DOI: 10.1080/00208825.2019.1646489http://crossmark.crossref.org/dialog/?doi=10.1080/00208825.2019.1646489&domain=pdf&date_stamp=2019-09-26http://orcid.org/0000-0001-5871-5840http://www.tandfonline.com
and short-term) interests—equity-ownership and profit-sharing. Such plans are widely used by organizations worldwide, and therefore, rather than adopting an individual organizational-level of analysis, we explore here the broader institutional factors that may lead firms to adopt such practices.
Equity-ownership refers to the size of the share in the firm’s equity over which the employee has rights, and is implemented through stock option and employee share plans. Such plans are indirectly related to the present value or future profitability of the firm (Poutsma 2001), and imply a long-term relationship with the firm (Braam and Poutsma 2015). Profit-sharing, in contrast, refers to structured plans that give employees a reward that is variable based directly on a firm’s result or profitability, which involves allocating a speci- fied percentage of annual profits that is usually dependent on an employee’s position in the firm or length of service. Such financial participation plans focus on a shorter-term relation- ship between employee-employer (Braam and Poutsma 2015). Equity ownership plans incur greater risk for employees due to the uncertain nature of the performance of the firm on the stock markets, whereas profit sharing incurs less risk as there is a more direct relationship with the employee’s contribution to the firm (although not unaffected by variables beyond the control of the employee, e.g., rising material costs, fluctuating consumer demand, increas- ing numbers of profit-sharing participants) (Estrin et al., 1987, 1997).
Financial participation plans are implemented in firms on either a broad-based or restricted basis. Broad-based financial participation plans covering a wide range of employ- ees can facilitate direct participation of workers in the firm (Croucher et al. 2010; Cin, Han, and Smith 2002), yet many profit-sharing and equity-ownership plans are restricted to man- agement-level participation. There are, therefore, choices that firms make in determining whether or not to offer equity-ownership and profit-sharing plans, and to which employees these plans will be offered. However, we argue that such rational choices are constrained by institutional factors that vary across market economies.
Based in varieties of capitalism theorizing (Hall and Soskice 2001), countries can be cate- gorized into different market economies according to patterns of institutional arrangements. Two ideal types of market economy—Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs)—are most commonly distinguished. While LMEs have a greater focus on corporate autonomy, shareholder wealth, and liberal employment frameworks, CMEs have greater regulation and a focus on a broader group of stakeholders with interests in the firm. In each market economy, business systems theory (Whitley 1999), supported by neo-institutional theory (DiMaggio and Powell 1983), suggest that firms need to achieve legitimacy and they do so by aligning their strategies according to the context (Poutsma, Blasi, and Kruse 2012). As Farndale, Brewster, and Poutsma (2008) demonstrate, significant differences exist in Human Resource Management (HRM) practices, including financial par- ticipation, both between firms in LMEs and CMEs, as well as between countries within each type of market economy group.
This LME/CME dichotomy is perhaps, however, too narrow to incorporate the diversity of business systems at a national level. Amable (2003) introduced a more nuanced classifica- tion of market economies that includes Continental European (CE), State-Influenced Mediterranean (SIM), Scandinavian Social Democrat (SSD), Asian, and LMEs, based on
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 403
combinations of institutional factors. Our study contributes to this comparative capitalisms literature by applying Amable’s (2003) institutional dimensions per market economy to explore how the different combinations of institutions are associated with the adoption of financial participation plans. Our primary goal is to explore the extent to which the financial participation plans adopted within the firm relate to the market economy institutional con- straints on the firm’s behavior.
We start with a review of extant literature in which we theorize anticipated relationships between institutional factors and financial participation plan use. Based on these relation- ships, we hypothesize the relative extent of use of profit-sharing and equity-ownership plans across the different market economies. These hypotheses are tested using the extensive Cranet HRM policies and practices survey data from 2009/10 including 4,253 organization responses from nineteen countries. The detailed findings contribute to the broad varieties of capitalism literature, emphasizing the relevance of this level of analysis for exploring man- agement practice in firms. They also indicate the usefulness of taking an institutional approach to theorizing the adoption of financial participation plans across different market economy contexts, based on the isomorphic effects within market economies (Jackson and Deeg 2008). Building on these findings, ideas for future research in this field are discussed.
The rationale behind employee financial participation concerns how employees can have active participation in economic aspects of society. In 1958, American lawyer and investment banker, Louis Kelso, proposed a solution to creating employee financial participation oppor- tunities, whereby owners would not be deprived of their property, but non-owners could be incorporated as shareowners (Lowitzsch 2009). Since then, two primary types of financial participation plans for employees have emerged (Poutsma 2001). First, Participation through profit-sharing, structured plans that give employees a reward that is variable based on a firm’s results or profitability. Second, Participation through equity-ownership a form of financial participation that is not directly linked with profits but indirectly related to the pre- sent value of future profitability. These plans can take the form of equity shares or employee stock options. Usually companies issue these shares from a prescribed quota reserved specif- ically for employees at a discounted price.
Profit-sharing and equity-ownership plans vary in the risks they carry and how they deliver returns to employees. If an increase in employee productivity results in higher profits, the transfer of benefits to the employees will depend upon whether the company can afford to pay a higher contribution in the profit-sharing plan the following year. Conversely, under equity-ownership, the rise in profits is generally transferred to the employee automatically through a related increase in the firm’s stock value, but this increase is only realized when employees sell their equity and when stock markets remain stable. Empirical studies have demonstrated positive links between financial participation and employee productivity (e.g., Kruse and Blasi 1997; McCarthy and Palcic 2012).
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Much of the extant financial participation research has focused on studying market econ- omy institutional effects either unilaterally or classifying two broad types of capitalism: LMEs and CMEs (Croucher et al. 2010). Such studies have demonstrated that the use of employee financial participation plans varies less in LME contexts than in CME contexts, as well as there being differences in the use of these plans between foreign-owned multinational enterprises (MNEs), domestic-owned MNEs, and domestic organizations (Farndale, Brewster, and Poutsma 2008). Although useful, this LME/CME dichotomy does not suffi- ciently reveal the potential differences in institutional drivers within each of these market economies. It is therefore important to develop more nuanced approaches to exploring the use of financial participation plans related to market economy contexts.
Every country has its own set of political-economic institutions that collectively creates the market (or non-market) mechanisms of the country (Ostrom 1986; H€opner 2005). The vari- eties of capitalism approach, pioneered by Hall and Soskice (2001) and extended further by Amable (2003), is a framework for describing comparative political economies on the basis of strategic interactions between the different institutional players in the economy. Hall and Soskice (2001) classified the developed economies into LMEs and CMEs, the primary differ- ence being whether the economy is guided by market-based mechanisms, such as the LME free market economy of the United States, or a CME non-market coordination mechanism in which different institutions in their markets affect the equilibrium choices (Hall and Soskice 2001; Amable 2003).
There are, however, many markets, such as Italy or Sweden, that are situated in between these two paradigms (Amable 2003). Therefore, to analyze how a firm’s financial participa- tion behavior might be affected by its market environment, it is more appropriate to parse the varieties of capitalism into relevant institutional and structural combinations for each charac- teristic of the economy. Such is the classification of Amable (2003), creating five groupings of economies on the basis of five broad institutional dimensions: product markets, financial markets, Labor markets, social protection, and education systems. We focus here on the first three of these institutions, as these market forces are expected to have the greatest influence on the prevalence of financial participation plans in firms due to their direct effect on worker-firm relationships, as we now describe.
Product markets are the markets in which firms sell their products or services, and vary in the extent to which they can be classified as competitive free-markets, versus regulated mar- kets over which governments exert control (Amable, Ledezma, and Robin 2016). Related to financial participation, product market competition has been found to enhance performance- related pay, stock options (Cu~nat and Guadalupe 2004), and incentive-based compensation plans (Beiner, Schmid, and Wanzenried 2011; Funk and Wanzenried 2003): “With greater competition due to increased product substitutability or a larger market, firms provide stron- ger incentives to their managers to reduce costs, even though profits become more volatile” (Raith 2003, 1432). Shedding more light on this relationship, Beiner, Schmid, and
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 405
Wanzenried (2011) found a convex relationship between product market competition and managerial incentive pay: if competition intensity is low, managerial incentive pay will decrease, but under sufficiently high intensity product markets, managerial incentive pay will increase. We therefore propose that competitive markets are likely to show high use of equity-ownership and profit-sharing plans, and that increasing levels of regulation and control will decrease the likelihood of their use.
Financial markets are the markets for the exchange of funds, classified either as market (investor)-based or bank-based (Levine 2002). Financial participation plans have been found to be affected by the dominant financial market structure. For example, a greater proportion of institutional investors (market-based) increases the degree of variable pay for managers while reducing the basic level of compensation (Hartzell and Starks 2003). Stock options also have the “highest sensitivity to a firms’ capital structure” (Ortiz-Molina 2007, 21). In LMEs, the financial markets result in short-term pressures from institutional investors for results (Poutsma et al. 2012). We therefore argue that more market-based investment struc- tures (rather than institutionalized financing through banking institutions) will be associated with higher levels of use of equity-ownership and profit-sharing plans. In contrast, where financial markets are less developed, this type of risk is less desirable, resulting in lower use of share ownership and stock options (Jones, Kalmi, and M€akinen 2006). Long-term financ- ing relationships between firms and banks also indicate low use of stock options (Uchida 2006). As an alternative form of variable pay, we anticipate that profit-sharing plans will also be more prevalent in more investor-focused financial markets.
Labor markets are distinguished by the extent to which employee rights are protected, and workers are represented within firms. High levels of protection and representation are referred to as coordinated labor markets, while liberal labor markets are less regulated to encourage greater competition (Hall and Soskice 2001). With regard to financial participa- tion, high indirect participation has been directly correlated with greater use of profit-sharing (Poutsma, Hendrickx, and Huijgen 2003). Highly regulated labor markets also increase enforced governance and reduce agency cost, thereby allowing companies to spend less on incentive-based pay (Dicks 2012), and wanting to take less risk, avoiding equity ownership plans (Jones, Kalmi, and M€akinen 2006). Low levels of indirect employee representation, in contrast, are associated with greater use of stock options and share ownership (Poutsma, Kalmi, and Pendleton 2006). Our proposition is therefore that, in more competitive, liberal labor markets with low levels of employee representation, there is greater use of equity- ownership but less use of profit-sharing plans, compared with more regulated labor markets with high levels of employee representation.
Although we do not focus on social protection and education systems in great detail here, as these institutions are expected to have less of a direct effect specifically on financial par- ticipation schemes than the three institutions described above, we briefly outline their role in distinguishing market economies. Social protection or national welfare systems evolve from country-specific politics in terms of the extent to which the government allocates social expenditure as a percentage of the gross domestic product (GDP) (Amable 2003). Those countries in which there is a lack of social welfare for workers tend to belong to societies with a greater focus on a free-market economy. With regard to education systems, these can
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differ based on the extent to which they are differentiated (such as in the United States) or standardized (such as in Germany) (Amable 2003). This determines the extent to which “job- ready” talent is available to employers in any given country.
Critically, Amable (2003) highlights the importance of considering the interaction between these different market institutions, rather than observing any one of them in isolation. Each insti- tution has a different effect on firm-level variables depending on the context formed by its com- bination with the other institutions (Ostrom 1986; H€opner 2005). For example, the structure of education in a country, and hence the related need for organizations to offer training, should be considered along with a firm’s relationship with banks, because there may be interaction effects on levels of investment in training: Popov’s (2014) survey of 8,265 firms found that availability of bank credit affects a firm’s investment in on-the-job training, with a 15 percent drop in the probability of training being provided by a firm that is credit constrained.
Amable (2003) further explains how one institution can affect the working of another. For instance, a company’s relationship with its creditors can promote long-term investment, thereby providing the opportunity to stimulate stable labor relations. Furthermore, studying a firm’s response strategy in light of a single institution, while holding others constant, may not help in understanding clearly the effect of that institution on the firm’s actions. For example, it has previously been assumed that centralized bargaining would lead to higher wages, but research has demonstrated an inverted U-shaped relationship whereby totally market-based or totally coordinated structures will both put constraints on wages (Calmfors et al. 1988).
As a result of combining these institutional dimensions in different country groupings, Amable (2003) identified five different market economies. We explore each of these market economies and their institutions in turn to uncover the usefulness of the varieties of capital- ism level of analysis in explaining corporate practice in financial participation.
LINKING FINANCIAL PARTICIPATION PLANS WITH MARKET ECONOMIES
Taking each market economy in turn, we develop arguments based on institutional reasoning regarding the prevalence of profit-sharing and equity-ownership financial participation plans. We conclude this section stating two hypotheses designed to test the overall use of these two forms of financial participation across different market economies, i.e. identifying the market economies in which we expect each form to be most or least prevalent. Table 1 summarizes this argumentation, matching the three institutional dimensions to the five market economies, and indicating anticipated levels of use of profit-sharing and equity-ownership plans.
This market economy includes Germany, France, Austria, Belgium, Norway, The Netherlands, and Switzerland (Amable 2003). Product markets are regulated to an average extent according to the Organisation for Economic Co-operation and Development (OECD) norms, except for in the Netherlands where they are somewhat more competitive (OECD
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 407
2015). Financial markets are dominated by banks that have major stakes in corporations with long-term credit-based relationships with firms. Yet at the same time, stock markets are highly developed, also creating market-based demands (Amable 2003). Although the labor markets are competitive with skilled and organized workforces (Poutsma, Hendrickx, and Huijgen 2003), there is substantial coordination and protection provided in the workplace through a high degree of indirect employee representation and protection. Employees have leverage through strong trade union influence in bargaining, which is usually organized at the industry level with some room for flexibility at the company level (Amable 2003; Hall and Soskice 2001). Industrial relations are based on cooperation rather than conflict, with an emphasis on a stakeholder approach to corporate governance (Almond, Edwards, and Clark 2003).
Based on these institutional characteristics, we anticipate greater use of profit-sharing plans than equity-ownership plans due to average levels of product market regulation, the mix of bank-based and market-based financing, and a dominance of indirect representation and wage bargaining structures. Legislation and tax incentives to promote profit-sharing are also dominant in one country in this market economy: France (Estrin et al. 1997). As the financial market relationship between firms and banks is generally more long-term rather than demanding quick returns, firms will be less in favor of taking risks such as those associ- ated with share ownership and stock options. Equity-ownership use is nevertheless antici- pated to be at a medium (average) level relative to the other market economies, as there are highly developed stock markets.
This market economy includes Spain, Portugal, Greece, and Italy (Amable 2003). These countries are characterized by increasingly high regulation of product markets, with Greece having one of the highest levels of administrative market regulation (OECD 2015). The
TABLE 1 Core Institutional Characteristics of Five Market Economies Linked to the Use of Financial
Scandinavian Social Democrat Asian
Liberal Market Economy
Product markets Medium regulation High regulation
Medium to low regulation
Very high regulation Competitive
Financial markets Bank/market-based Bank-based Bank-based Bank-based Market-based Labor markets Coordinated (some
(emphasis on role of government)
Coordinated (emphasis on role of trade unions)
Coordinated (emphasis on long-term welfare of employees)
Hypothesized use of equity- ownership plans
Medium 3rd Most prevalent
Low Least prevalent
Medium-low 4th Most prevalent
Medium-high 2nd Most prevalent
High Most prevalent
Hypothesized use of profit- sharing plans
Medium-high Joint most prevalent
Low Least prevalent
Medium Joint 2nd most prevalent
Medium-high Joint most prevalent
Medium Joint 2nd most prevalent
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economies’ financial markets depend minimally on market-based mechanisms, and have low percentages of institutional investors compared to banks, pension funds, and insurance com- panies (Amable 2003). The OECD ranked these economies as having the strictest regulation of employment protection within the European Union (OECD 2009), with strong government influence on employment regulations (Schmidt 2007). The relationship between management and worker representation is typically conflict-based (Romo 2005).
In this market economy, we expect to see the lowest levels of market-based plans in the financial participation portfolio. As product markets are increasingly regulated and financial markets remain underdeveloped as a result of state intervention, financial participation plans are anticipated to be less related to market-based risk, resulting in low use of equity-ownership plans. Although there is high indirect participation (normally directly correlated with profit- sharing), there has been substantive evidence for a decrease in performance-based pay incen- tives under high government regulation (Perry and Zenner 2001). We therefore expect the lowest levels of both profit-sharing and equity-ownership plans in this market economy rela- tive to the other market economies.
Scandinavian Social Democrat
Sweden, Denmark, and Finland are the countries that form this market economy (Amable, 2003). A notable feature of these market economies is the close to average but lower degree of regulation of product markets compared to the CE and SIM models (Amable 2003). Financial markets are dominated by companies having access to patient capital through banks, meaning that credit availability is not always tied to profits (Hall and Soskice 2001). These three econo- mies follow a social democratic structure in the labor market, evidenced by high trade union membership levels and highly centralized collective bargaining coverage (ETUI 2015). The result is highly coordinated labor markets, in which trade unions play a significant role.
Based on the medium-to-low regulation of product markets, bank-based financing, and high indirect participation and coordination of the labor market, we expect to see medium (average) levels of financial participation based on both profit-sharing and equity-ownership plans, relative to the other market economies. Specifically, due to the lower regulation of product markets than in CE, we might expect higher use of equity-ownership in SSD, yet the financial markets are more purely bank-focused than in CE, indicating less use of equity- ownership. Combined with the greater level of labor market coordination than CE, overall, we expect lower levels overall in SSD of equity-ownership than in CE.
Japan and South Korea combine to form this Asian market economy (Amable 2003). Product markets are distinct from CE, SIM, or SSD economies, in that they are very strongly regu- lated (Amable 2003). Economic policy is adopted to balance state intervention and free mar- ket demands, with the state being more inclined to protect successful domestic firms from foreign competition (Cerny 2005). South Korea is cited as a marked example of economic success that implemented this model, which notably failed in India (Chibber 2003). The
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 409
financial market’s relationship with the firm is credit-based and has a long-term objective, with firms predominantly being financed through banking institutions (Uchida 2006). These countries have highly coordinated labor markets where a top priority is protection of employ- ment (Amable 2003). A further distinction of this model, especially in Japan, is an inbuilt lack of social security and indirect dependence on companies (Cho 1996), whereby care for the long-term welfare of employees is an important institutional feature.
These institutional factors (very highly regulated product markets, bank-based financial markets, and highly coordinated labor markets) lead us to believe that the regulated product markets will somewhat constrain the use of stock options. Given also the long-term financing relationship between firms and banks, this would also indicate low use of stock options. Since the Asian financial crisis in the late 1990s, however, dynamics are said to have changed, with firms increasingly inclined to use stock options to align with North American “best practice” in financial participation (Ahmadijan 2001). We therefore anticipate a medium (average) to high use of equity-ownership plans relative to the other market econo- mies. Given the highly regulated labor market context and systems of indirect worker partici- pation, we also expect to see medium (average) to high use of profit-sharing plans.
Liberal Market Economies
This final market economy includes the Anglo-Saxon countries of the USA, UK, Australia and Canada (Amable 2003). LMEs are characterized by competitive product markets with very limited levels of regulation (Amable 2003; OECD 2015). Financial markets are well developed, and the importance of institutional investors is realized. Firms seek to maximize shareholder value in the wake of a threat of takeover if they do not follow that objective (Grant 2010). Relationships between investors and firms are built on short-term profits (Hall and Soskice 2001), encouraging the use of incentive plans to motivate employee perform- ance. Labor market policies are very liberal, allowing firm autonomy (Farndale, Brewster, and Poutsma 2008). This results in a competitive labor market that is less influenced by third-parties and more open to free-market forces. Indirect employee representation is less common than in other models of capitalism (Almond, Edwards, and Clark 2003).
Based on these institutional factors, we expect the highest use of stock options and share own- ership, encouraged by low levels of indirect employee representation and labor market regula- tion. Given that product markets are competitive, there are highly developed financial markets with investor-firm relationships leveraged on short-term profits, and there is the highest emphasis on maximizing shareholder value, equity-ownership plans are expected to be used more com- monly than in any of the other market economies discussed here. With the indirect participation rate being lower, however, we expect to see a medium (average) use of profit-sharing plans.
As summarized in Table 1, although it is expected that both equity-ownership and profit- sharing financial participation plans will be used in all five market economies, based on the preceding theorizing, we offer the following two hypotheses:
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H1: Financial participation plans based on equity-ownership will be most prevalent in LMEs, followed first by Asian, then by CE, and then by SSD market economies, and least prevalent in SIM market economies.
H2: Financial participation plans based on profit-sharing will be most prevalent in both CE and Asian market economies, followed first by SSD and LMEs, and least prevalent in SIM market economies.
The hypotheses are tested using 2009/10 Cranet data from nineteen countries representing the five market economy models (n¼ 4,253) (see Table 2). The Cranet survey aims to draw repre- sentative national samples across multiple countries. Data are collected from full population surveys in many countries and from representative random samples in the larger countries. The questionnaire is designed by an international team in English and then translated and back- translated (Brislin 1976) into the language or languages of each country. The survey is targeted at senior-level managers responsible for HRM. These managers are selected as key informants as they are likely to be well-versed in the firm’s financial participation plans. In the survey, HR managers were asked to respond to “yes/no” questions as to whether they used employee share schemes and/or stock options (equity-based plans), and profit- sharing plans, separately for four employee levels—management, technical/professional, clerical, and manual.
TABLE 2 Respondents
Market economy Number of respondents Respondents per country
Continental European 1,333 Austria ¼ 203 Belgium ¼ 240 France ¼ 157 Germany ¼ 420 Netherlands ¼ 116 Norway ¼ 98 Switzerland ¼ 99
State-Influenced Mediterranean 371 Greece ¼ 214 Italy ¼ 157
Scandinavian Social Democrat 780 Denmark ¼ 362 Finland ¼ 136 Sweden ¼ 282
Asian Model 389 Japan ¼ 389 Liberal Market Economy 1,380 UK ¼ 218
USA ¼ 1,052 Australia ¼ 110
Data was not available from Spain and Portugal (SIM), South Korea (Asian), and Canada (LME).
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 411
Several control variables are applied to accommodate for different organizational determi- nants in addition to the effect of market economy based on extant literature. First, firms are likely to use financial participation schemes when they are expected to have a positive impact on their profit-seeking activities. For example, Kalmi, Pendleton, and Poutsma’s (2005) study of 209 listed firms from the UK, Netherlands, Germany, and Finland found that equity-based ownership is positively related to productivity, while profit-sharing does not have a similar effect or any complementary relationship with other forms of participation. This is contradict- ory to the normally-held belief that financial participation works best with other forms of par- ticipation. They attribute the reason for this to the fact that firms in their study were publicly listed, whereby a sense of ownership is less important and any financial participation schemes are seen as “supplementary” rewards. We measure this control by including two variables: a dummy variable for whether the firm is publicly listed (62.5% of firms did not report being publicly listed); and dummy variables for whether the firm was reporting its profit over the previous three years as being high, modest, enough to break even, insufficient to cover costs, or leading to large losses (12.1% of firms fell into the top two categories, and 33.8% into the bottom two).
Second, the extent to which a firm has formal mechanisms of employee representation may determine its use of financial participation plans. Our reasoning lies in the difference between stakeholder and shareholder models of corporate governance, whereby the former is known for its greater employee representation. While shareholder firms aim to maximize equity value, stakeholder firms have broader objectives that consider added value to all par- ties who have a stake in the organization (Jones et al. 2012; Tirole 2001). Research shows that the recent trend towards the shareholder approach in countries such as Finland has con- tributed to increased use of participation schemes (Jones et al. 2012; Poutsma and De Nijs 2003). However, it is also argued that because stakeholder firms have less pressure to maxi- mize short-term profit, they can therefore share rewards with their workers (Blair 1995; Levine 1995). In order to measure the extent of stakeholder (rather than shareholder) influ- ence, we include two proxy variables typically evident in stakeholder model firms: the level of influence of trade unions (scaled 1–5, where 1¼ no union influence at all, and 5¼ a very great extent of union influence); and the presence of work councils (66.6% of firms reported having a works council).
Third, a firm’s age and size have been found to be significant predictors of financial par- ticipation plan use (Lavelle et al. 2012). For example, new firms need to expend more effort in aligning the long-term interests of employees with their own than established firms. They are also expected to have equity-based plans rather than profit-sharing, as early year profits are less likely (Lavelle et al. 2012; Pendleton et al. 2001). The link between firm size and financial participation is less predictable but nevertheless evident, dependent to some extent on the anticipated benefits of using financial participation to counter the effects of power inequalities as firms increase in size (Lavelle et al. 2012). Firm age and the number of employees are therefore included in the analysis.
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Finally, the level of capital intensity of a firm has been found to be related to plan use, whereby high intensity is associated with the highest need for firms to align the interests of man- agers and workers with corporate objectives (Lavelle et al. 2012). We use a proxy measure of capital intensity based on whether the firm is in the manufacturing sector (indicating high capital intensity) rather than the services sector (64.9% of firms reported being in manufacturing).
In summary, these firm characteristics (public listing, profitability, trade union influence, works council presence, firm age, number of employees, capital intensity) are included in the analyses as control variables to consider other potential explanations for variance in financial participation plan use.
To analyze financial participation plan use, we calculate the plan incidence for each employee type within a firm. This helps explore the effects of market economy and types of employees using a logit regression model incorporating company fixed-effects as each unit of observation is repeated for each type of employee. In other words, for each firm the dependent variable is whether the scheme, which is being regressed on the explanatory varia- bles, is offered (coded as 1) or not (coded as 0). For each scheme, it is recorded whether or not the scheme is offered to each of the four employees levels: management, professional/ technical, clerical, and manual.
Table 3 presents the percentage of firms reporting the use of financial participation plans by employee level. It shows that all plans are used across employee levels, although with decreasing frequency as the level decreases (as expected). It is noteworthy that there is a particularly noticeable decrease in use from managers to the lower levels for stock options.
The independent variable in the analysis is market economy, designated as CE, SSD, SIM, Asian, or LME. We fit the following model to our data, where Yi is a binary measure of each of the three financial participation plans (share schemes, stock options, and profit- sharing):
Yi ¼ b0 þ b1Market Economy þ b2Employee Type þ b3Controls þ b4Firm Fixed Effects þ ei:
TABLE 3 Percentage of Firms using Financial Participation Plans by Employee Level
Management Professional/Technical Clerical Manual
Employee share scheme 21.9 14.9 13.8 10.9 Stock options 18.3 7.8 5.2 3.0 Profit sharing scheme 28.8 23.5 20.1 14.4
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 413
TABLE 4 Logit Regression Coefficients for Financial Participation Plan Use
Dependent variable Employee share scheme Stock options Profit sharing
Scandinavian Social Democrat �0.08 �1.34� �3.64��� (0.72) (0.65) (0.56)
State-Influenced Mediterranean �0.82 1.81�� �6.18��� (0.72) (0.56) (0.62)
Liberal Market Economy 1.24� 2.41��� �1.74�� (0.68) (0.59) (0.54)
Asian 7.54��� �0.41 �5.92��� (0.29) (0.60) (0.65)
Professional/Technical �3.14��� �3.30��� �1.13��� (0.29) (0.27) (0.15)
Clerical �3.48��� �4.81��� �1.87��� (0.31) (0.36) (0.17)
Manual �4.95��� �6.11��� �3.68��� (0.40) (0.46) (0.22)
Number of employees 0.00 �0.00 0.00� (0.00) (0.00) (0.00)
Union influence (small) 0.31 �0.89�� 0.49 (0.57) (0.92) (0.50)
Union influence (moderate) 0.06 �0.17 1.15� (0.62) (0.78) (0.52)
Union influence (great) �0.62 �1.03� 0.91 (0.85) (0.60) (0.63)
Union influence (very great) �2.67 0.22 �0.07 (1.64) (0.43) (1.37)
Works council presence 1.46�� 1.02� �0.23 (0.5) (0.46) (0.43)
Public listing 5.01��� 4.82��� 0.24 (0.47) (0.50) (0.35)
Capital intensity (manufacturing) �0.44 0.19 �1.20��� (0.42) (0.38) (0.35)
Firm age �0.00 0.00 0.00 (0.00) (0.00) (0.00)
Profit (modest profit) �1.04 1.99� 1.13 (1.53) (0.86) (.90)
Profit (breakeven) 2.02 0.00 0.91 (1.32) (0.70) (0.77)
Profit (costs not covered) �3.04�� �0.283 �0.25 (1.03) (0.54) (0.57)
Profit (large losses) 1.85�� �0.19 �0.11 (0.66) (0.38) (0.38)
AIC 2,897.8 2,572.0 4,168.2 BIC 3,046.1 2,720.3 4,316.5 Log Likelihood �1,426.9 �1,264.0 �2,062.1 No. of observations 6,253 6,225 6,263 No. of groups: Firm 1,596 1,598 1,601 Variance: Firm (Intercept) 30.97 22.5 27.43 Residual 1.00 1.00 1.00
Standard error in parentheses. ���p< 0.001, ��p< 0.01, �p< 0.05.
414 E. FARNDALE ET AL.
In each model, the reference category (for categorical variables) is the CE market economy as this is the largest group, and the management employee level as this repre- sents the group most likely to be included. Table 4 shows the results of the logit regression.
For employee share schemes, supporting our initial descriptive results, employee share schemes are used most for management and least for manual employees (b¼�4.95; se¼ 0.40; p< 0.001). The presence of work councils, publicly listed firms, and firms operat- ing with low profitability are also significantly (p< 0.01) and positively related to the use of employee share schemes. Testing hypothesis 1, we found that SSD (b¼�0.08; se¼ 0.72) and SIM (b¼�0.82; se¼ 0.72) firms do not differ from the CE reference category, but LME (b¼ 1.24; se¼ 0.78; p< 0.05) and Asian (b¼ 7.54; se¼ 0.29; p< 0.001) firms are signifi- cantly more likely to provide these schemes. We also tested for the significance of the coeffi- cient differences across the market economies (rather than the reference group). For this, we used a simultaneous test within a general linear hypothesis. Since this is a multiple hypoth- esis, we therefore avoid the multiple comparison problem by using the Bonferroni correction. The results of this test show that only the Asian market economy has a significantly different coefficient from the other four market economies. This second test largely confirms the ini- tial findings, with the only point of difference being the ranking of LME firms.
For stock options, stock options are least likely to be offered to manual employees (b¼�6.11; se¼ 0.46; p< 0.001) and most likely for management employees. Finally, being publicly listed (p< 0.001) and making modest profits (p< 0.05) are significantly positively associated with stock option use. Testing hypothesis 1 further, stock options are more likely to be used in LME (b¼ 2.41; se¼ 0.59; p< 0.001) and SIM (b¼ 1.81; se¼ 0.56; p< 0.01) market economies relative to the CE reference category, while they are less likely to occur in SSD (b¼�1.34; se¼ 0.65; p< 0.05) firms. There is no significant difference between Asian firms (b¼�0.41; se¼ 0.60) and the CE reference category. When testing for the significance of the coefficient differences across the market economies, the effect of CE firms is not dif- ferent from SSD and Asia firms, nor is the effect of SIM firms different from that of LME firms. Again, the second test largely confirms the first, with only SSD firms being classified differently.
Overall with regard to hypothesis 1, for both employee share schemes and stock options (equity ownership), we anticipated these to be used most in LME, followed by Asian, then CE, and then SSD firms, and least in SIM firms. For share schemes, this is partially sup- ported as LME and Asian firms were found to use this practice most, while CE, SSD, and SIM firms use share schemes least. For stock options, the pattern is slightly different: LME and (unexpectedly) SIM show the most common use, whereas the lowest use is in CE, SSD, and (unexpectedly) Asia firms.
For profit-sharing, again confirming the descriptive findings, these schemes are least com- mon for manual employees (b¼�3.68; se¼ 0.22; p< 0.001) and most common for manage- ment. Finally, high capital intensity firms are significantly (p< 0.001) less likely to use profit-sharing, while firms with moderate union influence are significantly (p< 0.05) more likely to use this practice. Testing hypothesis 2, we find that SIM (b¼�6.18; se¼ 0.62; p< 0.001), Asian (b¼�5.92; se¼ 0.65; p< 0.001), SSD (b¼�3.64; se¼ 0.56; p< 0.001),
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 415
and LME (b¼�1.74; se¼ 0.54; p< 0.01) firms are all significantly different from the CE reference group, with each region being less likely to offer profit sharing than firms from CE. When testing for the significance of the coefficient differences across the market econo- mies, however, the effects of SIM and Asian firms are not statistically different from each other (though they do differ relative to CE firms). Similarly, the effects of LME firms are not significantly different from CE or SSD market economies.
With regard to hypothesis 2, we anticipated profit-sharing would be used most in CE and Asian firms, followed by SSD, and LME firms, and least in SIM firms. There is again partial support, as CE firms do show the highest level of use and SIM firms the lowest level of use. However, Asian firms show a low level of use rather than high as expected.
Financial participation plans represent a set of management practices that firms can largely choose to implement (other than where this is mandated by law, e.g., in France; Estrin et al. 1997), with the expectation that they will help to motivate employees to improve the bottom- line performance of the firm (Dalton et al. 2007). The extent to which such plans are put in place has previously been found to be associated with such characteristics as firm size, age and capital intensity (Lavelle et al. 2012), whether a firm is publicly listed (Kalmi, Pendleton, and Poutsma 2005), and the extent of the firm’s stakeholder rather than share- holder corporate governance model (Jones et al. 2012). The study presented here has expanded upon this organization-level of analysis, exploring the extent to which institutional factors at market economy level can be applied as explanatory variables for financial partici- pation use.
Taking employee share schemes and stock options as examples of long-term equity-based financial participation plans, these are contrasted with the shorter-term profit-sharing plans (Braam and Poutsma 2015). Based on Amable’s (2003) classification of countries into five market economies (CE, SIM, SSD, Asian, and LME), their typical product, financial, and labor market characteristics were used to characterize each market economy, proposing how these factors might influence short and long-term financial participation plan use. As Table 1 summarized, it was proposed that high regulation of product markets and strong control of financial markets were likely to combine to reduce the incidence of both equity-based and profit-sharing plans due to their inherent levels of risk (Jones et al. 2006; Raith 2003). In contrast, strong coordination of labor markets was likely to increase the use of profit-sharing but decrease the incidence of equity-based plans based on patterns of employee representa- tion (Poutsma, Hendrickx, and Huijgen 2003).
This institutional reasoning was applied to the five market economies, developing two hypotheses comparing anticipated levels of use of the different financial participation plans. These hypotheses received some support, highlighting how market economies differ signifi- cantly in their use of financial participation plans. For example, while SIM firms were found to show low use of employee share schemes and profit-sharing, LME firms were high in the
416 E. FARNDALE ET AL.
use of equity-based plans but lower in the use of profit-sharing. We consider the implications of these findings further here.
In LME countries, the competitive, market-based product, and financial markets, com- bined with a relatively low level of labor market regulation mean that financial participation might be used to motivate employees to work towards the same goals as those of the firm’s shareholders. In contrast, in SIM, the combination of highly regulated product markets and underdeveloped competitive financial markets, combined with an unwillingness to take risk mean that the context is not conducive for the use of financial participation plans. The only unexpected finding here was the relatively high use of stock options in SIM firms, which does not fit the institutional profile. Despite evidence of a decline in the use of performance- based pay incentives under high government regulation (Perry and Zenner 2001), stock options appear to be of interest to firms in these countries. Future qualitative research could be interesting to undertake in exploring why.
The CE countries hold a middle position between the SIM and LME contexts, with moderate levels of product market regulation, a balance between market-based and bank- dominated financial markets, and labor markets that are largely coordinated but with competi- tive elements. Their use of equity-based financial participation plans was also around the mid-level comparing across the market economies, while the use of profit-sharing was rela- tively high, as expected. Balancing the levels of regulation with free-market forces results in greater use of employee share ownership and profit-sharing plans than in SIM countries, though somewhat less than in the much freer markets of LME. A similar situation was observed in the SSD countries, but with slightly lower use of equity-based and profit-sharing compared to CE countries. Lower levels of product market regulation appear to be balanced against a less free- market approach to finance to result in mid-levels of financial participation plans.
There were, however, other unanticipated results. The discrepancy between anticipated and observed use of financial participation plans was primarily evident for the Asian firms (for stock options and profit-sharing). One reason for this finding may be that the Asian mar- ket economy in the analysis only included firms in Japan as the data were not available for South Korea. South Korea has been identified as a strong example of balancing state inter- vention and free-market demands (Chibber 2003), whereas Japan places greater emphasis on companies to support long-term employee welfare due to its lack of social security (Cho 1996). This greater reliance on the corporate world may mean that the product, financial, and labor markets operate differently from those in South Korea, leading to the observed lower use of profit-sharing and stock options than anticipated. Further research on specific country- level institutional factors that affect worker-firm relationships could help to clarify this finding.
Overall, the findings indicate that product, financial, and labor market factors can be con- sidered as institutional constraints to corporate agency in selecting whether or not to imple- ment financial participation plans. By adopting Amable’s (2003) distinction between five different types of market economy, this level of analysis enabled us to contribute to our understanding of financial participation use. We have demonstrated that such plans are a product of economic, regulatory, and market factors operating in the macro context of firms, influencing management practice. As such, these findings provide further evidence of
FINANCIAL PARTICIPATION ACROSS MARKET ECONOMIES 417
isomorphism within market economies: Different market economies are expected to have dif- ferent patterns of management practice adoption and diffusion based on “systematically inter- dependent configurations” (Jackson and Deeg 2008, 545). Future research can continue to benefit from the relevance market economy level of analysis in investigating financial partici- pation plan use.
This study has explored whether a firm’s financial participation practices are related to the institutional configurations of the market economy in which it operates. Based on institu- tional theorizing, we anticipated a certain ranking in the use of both equity-ownership and profit-sharing financial participation plans. The study’s findings largely support the antici- pated associations between institutional factors and the use of financial participation plans. The differences between market economies in the use of equity-based and profit-sharing plans have been highlighted. Future research can now explore further how these differences manifest themselves in creating systems of employee financial participation.
Despite these interesting findings, the study is, of course, subject to certain limitations, the first of which is that the data only record whether or not the various financial participation plans are offered to employees, rather than exploring the extent to which they are taken up by employees. As noted, a further limitation of this study is that limited data were available, with not all countries being represented in each market economy, with for example, Japan being the sole representative of the Asian model. The addition of further countries in future research would be a valuable contribution to knowledge in this field.
On the basis of this study, it is clear that the market economy level of analysis is an important variable in explaining financial participation plan use across market economies, in addition to extant organizational and country-level studies. For practice, this means that MNEs operating across market economies should consider these institutional constraints (product, financial, and labor markets) when implementing financial participation practices. We look forward to observing how future research might extend the findings presented here both to additional forms of financial participation, and to an even broader range of market economy countries.
Elaine Farndale http://orcid.org/0000-0001-5871-5840
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- FINANCIAL PARTICIPATION
- Market Economies
- LINKING FINANCIAL PARTICIPATION PLANS WITH MARKET ECONOMIES
- Continental Europe
- State-Influenced Mediterranean
- Scandinavian Social Democrat
- Liberal Market Economies
- Control Variables