The effect of adoption of employee share ownership plans on financial performance of firms listed at the Nairobi Securities Exchange

Abstract

Employee Share Ownership Plans (ESOP) has its origins in the United States of America (Hallock et al, 2003). Firms adopt ESOP to encourage workers to share in the capital of the firm through stock ownership, thus increasing employee organizational commitment. The use of ESOPs in Kenya has been on the rise leading to its recognition in Kenya under Section 5 of the Income Tax Act and as investment vehicles under the Capital Markets Act. Studies conducted elsewhere in the world indicated that the effect of ESOP adoption had mixed results on the financial performance of firms. The objective of the study was to establish the effect of ESOP adoption on the financial performance of firms in Kenya. Few studies have been conducted in this area in Kenya. The study used secondary data of firms listed at the NSE from various industries and sectors. Specifically the study used the annual reports and financial statements of listed firms at the NSE. The pre and post ESOP adoption ROA was calculated. The pre adoption ROA was then projected over a five year period. The resulting projected ROA was compared with the post adoption ROA using paired t test at 0.05 level of significance. The findings of the study showed mixed results on the effect of adoption of ESOP on the financial performance of the firms. Some firms revealed positive effect on performance on adoption of ESOPs while others indicated no effect. The study recommends that firms should consider adopting ESOPs since it provides an avenue for employee‟s interest to be aligned with those of the company and therefore is useful in the effort to attract and retain top talent.