Effect Of Employee Stock Ownership Plans On Financial Performance Of Companies Listed In The Nairobi Securities Exchange

Abstract

Employee stock ownership is widely recognized as an effective means of improving corporate performance by enabling employees to participate in the creation and sharing of wealth they create in an organisation. The rationale is that Employee Stock Ownership Plans (ESOPs) align individual goals with corporate goals and help companies to retain staff, attract talent, motivate employees and enable them to share the long-term growth of the company. Previous empirical studies provide contradictory conclusion with some indicating that ESOPs enhance company performance and others arguing that just like stock options, ESOPs have a net negative effect on performance of a company in the long run. The purpose of the study is to investigate the effect of employee stock ownership plans on financial performance of companies listed in the Nairobi Securities Exchange. This study was conducted through the use of a descriptive design. The population of study comprised of all companies listed in the NSE operating in Kenya during the study period. The study used purposeful sampling to pick 9 companies listed in the NSE having employee stock ownership. The secondary data in this analysis covered a period of 10 years from 2003 to 2012 which was exposed to sensitivity analysis using OLS regression. The results obtained from the models were presented in tables The study found that the regression equations for the period 2003-2012 related financial performance of the companies to their ESOPS, company size and inflation. The study concludes that ESOPS have a strong positive and significant influence on the financial performance among companies listed in the NSE in Kenya. The study recommends that the companies’ management should put in place and implement corporate policies in encouraging employees to take up the ESOPs among the companies listed in the NSE. This is by having a high-involvement and open culture necessary for ESOPs to thrive. The study also recommends that a public policy formulation encouraging investors and entrepreneurs to promote broad based ESOPs in their investments and enterprises. The policy also should facilitate employee buyouts scheme and business succession, a successful alternatives to selling the company to an external buyer.