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

Abstract

Employee stock option plans have received large consideration in the recent past and have become the most contentious part of the compensation package. Despite their adoption by firms, there is no observed empirical link on the impact of ESOPs and firm’s F.P. The agency theory for instance supports that employee share rights can be used as an alternative for monitoring certain situations such as where individual performance reward is complicated to implement. However, a different school of thought argues that once ESOP participants exercise the ESOP, it would lead to an increase in employee compensations and benefits, an additional expense which will reduce the firms’ earnings. The aim of this study was to ascertain the effect of ESOPs on F.P of firms quoted at NSE. The population for the study was all the 9 companies quoted at NSE that has employee share ownership plan. Secondary data was collected over a five 5 year time frame (January 2013 to December 2017) annually. The descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. The results of the study found a negative and relationship between employee share ownership plans and ROA and also revealed that firm size had a negative and insignificant relationship with ROA of firm quoted at NSE. The result further revealed that firm age had a positive and insignificant relationship with ROA but a positive and significant relationship between dividend payout ratio and ROA of firm quoted at NSE. The study concluded that ESOPs, firm size and firm age did not significantly influence financial performance of the quoted firm but dividend payout had a significant influence. The study recommended that when firms are introducing or reviewing their employee share ownership plan, they should bear in mind of the positive effect the plan bears on the performance of the firms. Policy makers should however bear in mind that its effect is not statistically significant and so it should not be undertaken at the expense of other actions that can improve performance.