ESOPs and Profit-Sharing Plans: Do They Link Employee Pay to Company Performance?

In recent years, there has been increased interest in the impact of pay systems on company performance. However, clear results on the impact of these pay plans have not been achieved. We argue here that stronger results have been elusive because compensation systems which supposedly create a pay/performance linkage often do so only weakly, if at all. In most of the companies that we studied, we find that these nominally performance-contingent pay systems provide less of a financial incentive to the achievement of company-wide performance goals than does basic salary and wage compensation. It is therefore not surprising that empirical studies would find these plans to be mixed in their effectiveness.