Effect of Employee Share Ownership Plans on Financial Performance of Firms Listed in the Nairobi Securities Exchange

Abstract

Employee share ownership is commonly recognized as an adequate method for spurring firm performance by facilitating employees to participate in the creation and sharing of wealth they create in an organization. The reason is that Employee Stock Ownership Plans (ESOPs) realign employee’s goals with corporate goals and help companies to attract talent, retain staff, motivate employees and enable them to share the long-term growth of the company. Previous empirical studies provide contradictory conclusion with some positing that ESOPs enhance company performance and others arguing that just like stock options, ESOPs had a net unfavorable effect on performance of a company in the long run. The study investigates the effect of ownership of shares by employees on financial performance of listed firms in the NSE. This study was conducted through the use of a descriptive design. 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 8 companies listed in the NSE having employee stock ownership. Study used secondary data in the analysis covering a period of 11 years from 2005 to 2015 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 2005-2015 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 listed firms in the NSE in Kenya. A recommendation for study is that 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 viable alternatives to divestures and spin offs.