Why Do Firms Adopt Profit‐Sharing and Employee Ownership Plans?

Abstract Profit‐sharing and employee ownership in companies have attracted considerable interest, yet there has been little research on factors predicting the adoption and maintenance of these plans. This study uses new data from a survey of 500 US public companies, and panel data on corporate financial variables, to examine factors predicting the presence and adoption of profit‐ sharing and employee stock ownership plans (ESOPs) in the 1975–91 period. Several findings support productivity‐related motivations for such plans (including higher R&D levels among old profit‐sharing firms, and recent adoption of job enrichment programmes among new profit‐sharing firms), while others support flexibility‐related motivations (including higher variance in profits prior to the adoption of profit‐sharing plans and ESOPs). Unionized firms were less likely to have either type of plan in 1975, but equally likely to adopt them subsequently (often in concessionary contracts). Comparisons of cross‐sectional and panel results illustrate advantages of panel data in disentangling the causes and effects of profit‐sharing and ESOPs.