Employee Participation in Financial Returns

Another mechanism for limiting worker moral hazard would be to involve the worker in the firm s financial returns. Employee participation in financial returns is measured by the number of programs through which the worker shares in the financial outcomes of the firm. To the extent that involvement with the firm s financial returns affects workers expected income, they will tend to be more cautious if they can increase 

Moral hazard may also be a problem with the firm e5q)erience rating of the firm s insurance premiums (where a firm s future premiums depend on the current claims, so that higher-than-expected claims raise premiums) may induce firms to deny more claims than they would in the absence of experience rating, in order to reduce their insurance costs and increase their profitability. Sharing those profits with the employees through financial participation rights lowers the incentive for firms to engage in such moral hazard behavior as well. 

Involving workers in the firm s financial returns also increases workers willingness to provide information concerning effective changes in HRM policy and practice. To the extent that this increases the returns to safety investments, or lowers the costs of safety investments, accidents will fall. The demand for safety outcomes may also increase if participation in financial returns increases workers wealth and thus lowers their willingness to bear workplace risk. 

However, an increase in financial returns may increase accidents as well. If bearing more risk increases the expected profitability of the firm more than the perceived costs (i.e., working without a possibly cumbersome safety guard, or working long hours without rest), then the employee may actually have less incentive to take care, and injuries and injury claims may rise. 

Finally, participation in financial returns may be ineffective in lowering workplace safety costs because of the free rider problem if each worker perceives that his contribution to firm safety is negligible and if safety maintenance is costly, he will let others take care while he does not. But to the extent that others feel this way, no one takes care, and the effects of employee participation on safety outcomes will be muted. Employees will ride for free by benefiting from the system without contributing to it. For example, workers with lower back pain might not file a claim if they thought they would bear the full costs of the claim. But if they were to realize that they would gain the full benefits but share (indirectly) in only a fraction of the costs, they would file. So if the extent of ownership is too small to overcome the free rider problem, moral 

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Unlike the Rooney (1992) and Grunberg, Moore, and Greenberg (1996) studies. Park (1997) distinguishes between decision-making participation and financial-returns participation in his study of Minnesota workers compensation claims. Unexpectedly, Park found that employee participation in financial returns increased the injury rate, as did the interaction between financial returns and decision making. That is, as employee participation in the firm s financial returns rose, so did the injury rate, and the injury rate rose even more in firms with employee participation both in the firm s financial returns and in the firm s deci-... 

This study goes beyond much of the earlier research and— following the approach of Hunt and Habeck (1993) and Hunt et al. (1993)—seeks to estimate the role of HRM practices in the determination of workers compensation costs in a multivariate framework. It uses a workplace safety model that incorporates a wider variety of HRM practices than has been previously employed. In particular, it analyzes the impact of the three important dimensions of HRM practices on safety employee participation in decision making, employee participation in financial returns, and the firm s management safety culture. In addition, this is the first study to consider file effect of each of these factors on claim frequency and claim severity, and to ask whether any observed change is file result of changes in technical efficiency or moral hazard (principal-agent) incentives. 

The safety effect of employee participation in financial returns is theoretically ambiguous and—except for employee-owned firms— there is little prior research on participation in financial returns. The financial return estimates derived from employee ownership are fraught with problems of interpretation, as discussed above. We focus on variation in the degree of involvement in financial returns, aside from employee ownership. If firm profitability increases by taking more employment risks, then accidents and workers compensation costs could rise. We don t expect, however, liiatthat will happen we expect that more financial participation by employees will lower workers compensation costs through either of the channels outlined in Chapter 1 technical efficiency will increase as workers have an increased incentive to raise output, or moral hazard (principal-agent) outcomes will improve as workers have an increased incentive to lower eosts. 

Aggregate data Table 3.2 revisited. While the most credible information on claim duration comes from the analysis of individual claim durations in Tables 3.3 and 3. 4, the middle and right columns in Table 3.2 provide some alternative estimates on how HRM policies affect claim duration. The middle column of Table 3. 2 corresponds most closely to the expected cost analysis given in Table 3. 6, below, but is not always consistent with those results increases in Employee Participation in Decision Making, Employee Participation in Financial Returns, and Management Safety Culture reduce expected losses, as they do in... 

As an example, if a firm were to go from using two to using three financial returns programs (Employee Participation in Financial Returns went from 2 to 3), then claim frequency would fall by 23 percent and claim duration would fall by 13 percent. Lost work-time benefit eosts... 

The analysis of this chapter provides little evidence that HRM practices operate solely, or mostly, through a reduction in claims-reporting moral hazard. The only HRM practice that appears to significantly reduce the likelihood of a claim denial is Employee Participation in Financial Returns, which, although consistently exhibiting the expected... 

Increases in any of our three main HRM practices— epdm. Employee Participation in Decision Making epfr. Employee Participation in Financial Returns and mgtcult, the level of management involvement in the safety processes of the firm—all lead to substantial reductions in workers compensation costs per employee. In Table 3.6, we measured per-employee safety gains both as a unit change in each of these indices and as a change to the Tjest practice levels. 

Regression analysis takes into account the influence of other factors included in the model. Definitive interpretation of prior research is hobbled in two ways 1) one or more of the key HRM practices is omitted from examination (no prior study ineludes employee participation in both decision making and financial returns as well as measures of management safety culture), and 2) the variables are often examined in a univariate, rather than a multivariate, framewoik. 

The same cost-benefit concerns apply to EPPR-type programs clearly there are (perhaps unanticipated) safety benefits from having employees participate in the financial returns to the firm. But again, these would need to be weighed across the costs. Since 401 (k), profit-sharing, and other such programs are probably instituted for reasons unrelated to workplace safety, our findings should tend to confirm their use as a cost-effective HRM practice. 

While Eaton and Nocerino (2000) find the existence of safety committees associated with higher injury claim rates, they also find that greater worker involvement in safety committees leads to better safety outcomes. This is consistent with our expectations concerning employee decision making, including both the number of dimensions (decision making, financial returns, and safety process) that woikers participate in and the degree of that participation. 

EPFR Number of employee participation programs in the firm s financial returns... 

Park, Yong-Seung. 1997. Occupational Safety Effects of Employee Participation Plans in Decision-Making and Financial Returns. PhD diss., Carlson School of Management, University of Minnesota. 

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