EMPLOYEE SHARE PLANS - THEN AND NOW

ESOP CENTRE AWARDS 2022

I have had the honour of judging the ESOP Centre Employee Share Plan Annual Awards for a long time. I warmly congratulate the 2022 Share Plan award winners to be announced at the ESOP Centre UK Symposium conference in London later today.

The ESOP Centre has asked me to pen a few words reflecting upon the changes in employee share ownership that I have seen over the years.

So, here goes....

SHARE PLANS EARLY DAYS

Employee share ownership was kick started in the UK by two tax favoured plans in quick succession, the 1978 Profit Sharing Share Scheme and the 1980 SAYE Share Scheme.

The tax breaks were a big thing, and both these plans were very tax generous. It also flagged government approval of the concept of employee share ownership which both left, and right leaning parties concluded was a "good thing".

The left believed employee ownership of shares was the beginning of increased worker rights, and the start of the ownership of the means of production that Karl Marx had long before predicted. Indeed, Clause IV of the Labour Party constitution set out their commitment to public ownership of industry, until Tony Blair removed it, some 20 years ago.

To get some flavour of those times, the sentiment is reflected here too…

"Accordingly, every possibility of the exploitation of man by man is ruled out in socialist enterprises."

(Political Economy Academy Textbook: USSR).

The political right wing, on the other hand, believed that employee share ownership was a way to educate the working classes about the benefits and mechanics of capitalism, and to woo the mainstream away from the dangerous propaganda of the hard left.

So, everyone agreed employee share ownership was a good thing; but for very different reasons.

For companies the initial challenge was to decide to adopt a plan or not. And if so which one. The plan design was laid out by tax law - so that was not a discussion.

Once a plan was adopted, the main company tasks were communication and plan administration. Rolling out the plan on an international basis followed some years later.

Much of the communication centred on the tax favoured nature of the plan with, an overlay of basic financial education such as "What is a Share"? Some communications needed to remind employees that the workers don't control the company through the plan.

Some companies flagged that the CEO and board would not participate. The thinking was that this left more shares for the general workforce. Many employees saw this as a sign the employee share plan was of low value and aimed at the little people. A real turn off.

Many companies started the administration with in-house tools, but this was a big job, and SAYE also needs an independent saving carrier, which adds to the needed bookkeeping. Outsourcing was increasingly seen.

Having a plan at all was cutting edge, even bold. But broad-based employee share plans took off rapidly and became mainstream within only a few years.

SHARE PLANS NOW

Now employee share plans are seen in almost all major companies in most developed countries.

Academic proof of the impact of share plans is available, but it is complex and a bit mixed. The better evidence that share plans work is that big sophisticated companies spend millions on them every year and very few cut back the spend or stop altogether.

From this we know the plan spend is seen as worthwhile, but what is missing still is an assessment of optimal spend. Is there a business case to increase the spend, by say, 50% or more? Hard cost benefit numbers are not available but thought experiment discussions would be useful but are rarely seen. Plan design too should be revisited, the difference between contributory plans and non-contributory plans are huge. Plan designs that roll out unchanged for years and years may well be missing a trick.

Share plan success needs to be judged on a multi-dimensional basis, a simple look at the take up rate is no longer enough.

Communication of employee share plans is now highly professional. Often smartly branded, with multi-channel communications and tools online, like calculators - and share accounts that can be accessed by a mobile App. Advertising quality communication that is appealing and impactful.

The role of the CEO in supporting the plan is now recognised as vital. Although companies recognise this importance, there is a need to promote the CEO support as an ongoing strand of the communications set.

Professional administration brings customer level reliability, accuracy, tax and other compliance, and ease of use. Technology has transformed both communication and administration, and as we enter the world of AI, we can expect employees to ask Bard and ChatGPT if their employee share plan is a good idea. In fact, on a generic basis, I did just that yesterday, the Bard response is below.

Companies are now fully focussed on financial education as part of the financial wellbeing offering for employees. This must stop short of financial advice obviously, but the integrated efforts of the administration and communication teams mean this aspect is now light years better than even ten years ago.

The role of share plans in financial security over a working life is an aspect that might need more focus. As pension provision from companies diminishes, other forms of equity based, tax efficient, long-term investment need to take up the slack. Employee share plans operated on a long-term basis can produce large capital sums. This capital will need diversification at some point in the cycle.

The total shares owned by employees can be significant. Cap Gemini is 8% employee owned, about equal to the next biggest shareholder. These shares are worth some E2.4 billion. A company aim to allow a multiyear build-up of equity in the hands of employees, paired with a step change in participatory management might well be a good model for the future.

Employee share plans should not be seen as a useful fringe benefit. Correctly set into the corporate culture, and aligned with corporate purpose, employee share plans can create a genuine partnership between capital and skills to form a nexus of company value creation.

Is employee share ownership a good idea?

And Bard replied:

Employee share ownership is a good idea for a number of reasons. It can:

• Increase employee  engagement and motivation. When employees feel like they have a stake in the company, they are more likely to be invested in its success.

• Improve employee retention.  Employees who feel like they are part of a team are more likely to stay with the company.

• Attract and retain top  talent. Employees who feel like they have a chance to share in the company's success are more likely to be attracted to working for the company.

• Encourage innovation and  productivity. Employees who feel like they have a say in how the company is run are more likely to come up with new ideas and be productive.

However, there are also some potential drawbacks to employee share ownership. For example, it can be difficult to manage and maintain employee ownership schemes. Additionally, employee ownership can lead to conflicts of interest if employees are also involved in making decisions about the company's operations.

Overall, employee share ownership is a good idea for many companies. It can provide a number of benefits, such as increased employee engagement, improved employee retention, and increased employee productivity. However, there are also some potential drawbacks that should be considered before implementing an employee share ownership scheme.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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