Does shared capitalism work in the United Kingdom?

Richard Freeman, Alex Bryson 03 September 2008



Of course it does. Isn’t John Lewis the best store in the world?

Of course it doesn’t. Except for John Lewis, the best store in the world.

Shared capitalism, by which we mean firms that pay all or almost all employees in part on the basis of performance of their enterprise or workplace, has traditionally been viewed as a niche part of an economy; John Lewis in the United Kingdom, Mondragon in Spain, and at one point United Airlines in the United States. In its 1991 PEPPER (Promotion of Employee Participation in Profits and Enterprise Results) Report and in ensuing reports, the European Union endorsed ownership and profit sharing.

Our analysis shows that in the United Kingdom and United States, and to a growing extent in other advanced countries, shared capitalist modes of pay and work arrangements have increased way beyond niche economic status. Today, more employees have a bigger financial stake in their firms than ever before. Forty-four percent of US workers have part of their pay linked to company performance, either through ownership, stock options, profit sharing, or gain sharing. In Britain, one-fifth of private sector workplaces have share ownership schemes covering one-third of employees (Bryson and Freeman, 2008).

Some of the growth in share ownership in Britain over the last quarter century (and in Employee Stock Ownership Plans in the United States) is attributable to government tax privileges given to firms that pay workers with ownership stakes. But some of the growth is also part of a movement towards incentivising workers through collective forms of pay (Bryson, Pendleton and Whitfield, 2008). Despite the United Airlines bankruptcy, overall employee ownership in the US has not fallen. In the United Kingdom, an increasing number of firms, some with very different ownership models, have joined the Employee Ownership Association, which represents the growing co-owned sector.

Is this any good for the economy?

The narrowest theory of worker behaviour says it can’t be any good. Workers will free ride on the back of others instead of trying harder because of the financial incentive. Under UK tax law, employees have to hold onto shares for three years before they benefit from the tax breaks. Shares can go down as well as up. And worker effort and activity is only one factor influencing the company’s performance. Aside from CEO and top executives, few employees have sizeable holdings that give them both a large financial stake and influence on decisions.

But share ownership and other forms of shared capitalism are large and growing. Shared capitalist enterprises are meeting the market test. So do they really lead to better performance?

Isolating the effects of share ownership on performance through econometrics is tricky. Estimating production functions or profit functions from administrative or survey data is subject to all sorts of problems. Firms do not choose the schemes randomly. Nor do they choose other inputs randomly. Share capitalist companies may be those that have identified benefits in sharing the rewards of company performance with their employees, but other firms have chosen to be “lean and mean” because that pays off for them. Many believe that the firms adopting share schemes have more sophisticated managements than firms that do not, and that it is that management leadership that really matters, not the scheme.

Evidence from the United Kingdom

Two new studies for Britain find, as best as one can with this type of data, that yes, indeed, shared capitalism works for UK firms beyond the fabled John Lewis. They also find substantial differences in the effectiveness of various schemes and that effectiveness differs in combination with other practices.

The first study, commissioned by HM Treasury, is the largest study of share ownership ever to have been undertaken in Britain. Linking administrative data taken from HM Revenue and Customs records to company performance data, the authors find “on average, across the whole sample, the effect of tax-advantaged share schemes is significant and increases productivity by 2.5% in the long run”. They also find that “there are further benefits to be gained from operating several types of schemes” (Oxera, 2007a, 2007b). And they found that schemes chosen by firms without tax advantages tended to pay off more than those with tax breaks.

Our work (Bryson and Freeman (2008)), based on nationally representative workplace data from the 2004 Workplace Employment Relations Survey, finds positive effects of share ownership on workplace productivity variously defined, with the effects being much more pronounced when shared capitalism schemes are deployed in combination. Among the single schemes, share ownership has the clearest positive association with productivity, but its impact is largest when firms combine it with other forms of shared capitalist pay. This may explain why British firms are increasingly choosing multiple collective pay systems (Bryson, Pendleton and Whitfield, 2008).

The findings on shared capitalism in the United Kingdom mirror , to a considerable extent, results from the United States in the 2000s. Researchers at NBER went beyond the production function methodology to survey tens of thousands of workers in firms concerned about what makes shared capitalism work more or less effectively under a research project on ”Shared Capitalism” (Blasi, Freeman, Kruse, 2008). The research, to be published as an NBER volume in 2009, shows that shared capitalism improves outcomes for companies and their workers. For example, owning company stock strongly predicts both an innovation culture and willingness to engage in innovative activity. They also find that shared capitalism and high performance work policies have stronger effects in predicting an innovation culture when they are combined in a setting that encourages worker co-monitoring.

We have learned a lot about shared capitalism schemes as a result of this recent research but much still remains to be understood. Firms often change the specific schemes they use. The schemes appear to have larger positive effects in some sectors and firms than in others (with almost no evidence of any negative effects). Absent experimental data, it is possible that the analyses have not identified true causal effects on performance. Neither the Treasury-sponsored study nor ours felt sufficiently confident in the magnitudes of the estimated effects to assess whether the tax privileges given shared capitalist arrangements are socially optimal. And neither we nor the NBER researchers feel sufficiently confident that we have identified the right mix of schemes and other policies that guarantees success with shared capitalism. But taken together, the growth of shared capitalist forms of pay and the econometric evidence that it pays off for firms and workers gives a picture that diverges greatly from the old view that this is just a small niche part of capitalism.

Shared capitalism works in the United Kingdom outside of John Lewis. And it works in the United States and in many other economies as well.


Bryson, A. and Freeman, R. B. (2008) ‘How Does Shared Capitalism Affect Economic Performance in the UK?’ NBER Working Paper #14235

Bryson, A., Pendleton, A. and Whitfield, K. (2008) ‘The Changing Use of Contingent Pay at the Modern British Workplace’, NIESR Discussion Paper No. 319

Blasi, J. R. , Doug Kruse, and Richard Freeman (edited 2009, forthcoming NBER) Shared Capitalism at Work: employee ownership, profit and gain sharing, and broad-based stock options

Oxera (2007a) “Tax Advantaged Employee share Schemes: analysis of productivity effects Report 1 Productivity Measured Using Turnover”, HM Revenue and Customs Research Report 33

Oxera (2007b) “Tax Advantaged Employee share Schemes: analysis of productivity effects Report 2: Productivity Measured Using Gross Value Added”, HM Revenue and Customs Research Report 33



Topics:  Labour markets

Tags:  Shared capitalism, performance pay

Herbert Ascherman Chair in Economics, Harvard University

Professor of Quantitative Social Science, Social Research Institute, UCL


CEPR Policy Research