The impact of large-scale employee share ownership plans on labour productivity: the case of Eircom

Abstract

Large-scale employee share ownership plans (ESOPs) have been a distinctive characteristic of Irish public enterprise reform, with shareholdings of 14.9% being allocated to employees as part of firm restructuring and privatisation programmes. This paper presents a case study analysis of a large-scale ESOP in Eircom, Ireland's former national telecommunications operator. We identify changes in labour productivity (LP) during 8 years before and after the establishment of the company's ESOP and use a framework based on Pierce, Rubenfeld and Morgan (1991, The Academy of Management Review, 16, 121–144) and Pierce, Kostova and Dirks (2001, Academy of Management Review, 26, 298–310) to explore the role played by the ESOP. The ESOP was found to play a key role in enabling firm-level reform through concession bargaining and changes in employee relations, and thereby indirectly affecting LP. However, despite the substantial shareholding and influence of the ESOP, we find that it has failed to create a sense of psychological ownership among employees, and thereby further impact on productivity.

Keywords:

• broad-based stock options
• employee share ownership
• employee share ownership plans (ESOPs)
• labour productivity
• privatisation
• public sector reform

Notes

1. The Comsource consortium consisted of the then national telecommunications operator of the Netherlands, PTT Telecom (later KPN NV), and the Swedish national telecommunications operator, Telia AB.

2. Taken from ESOP in Brief, Available: www.esop.eircom.ie/pdf/booklets/esopinbrief.pdf

3. The ESOP acquired the 9.9% shareholding through a €127 million contribution from Eircom and a €114 million loan, which was secured on the ESOP's shareholding and repaid using revenue from a profit-sharing scheme and dividends.

4. A consortium of private equity investors including Providence Equity Partners, Soros Private Equity Partners, Goldman Sachs and headed by Irish businessman Anthony O'Reilly.

5. A consortium headed by Irish businessman Denis O'Brien.

6. Eircom incurred a net loss of €531 million for the financial year ending in March 2004 as a result of the special dividend paid out (Eircom Annual Report 2004).

7. Output measures based on deflated revenues are a better proxy for output since revenues reflect other aspects of output such as volume of call traffic, the type of call made and any other value-added services that physical measures of output such as number of telephone lines do not take account of.

8. The average number of full-time employees per year was obtained from annual reports. The figures for hours worked per week were taken from the Central Statistics Office (CSO). Data were not available for the telecommunications industry itself so figures for industrial hours worked were used as a proxy.

9. Minister for Public Enterprise, Mary O'Rourke, Dáil Éireann debate on ‘Employee Shareholding Schemes’, 12 May 1999.