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David Woods, 17 Jan 2012
The Government is to reform the tax system to encourage employee share ownership.
Speaking yesterday to business leaders at the Centre Forum think tank in Mansion House, the deputy Prime Minister Nick Clegg (pictured), said he would create a "John Lewis economy" by increasing employee share ownership schemes and making it easier for employers to take part.
The idea behind the plan is that companies owned by employees, tend to perform better meaning share schemes encourage business growth.
Clegg said: "What many people don't realise about employee ownership is that it is a hugely under-used tool in unlocking growth.
"I don't value employee ownership because I believe it is somehow 'nicer', a more pleasant alternative to the rest of the corporate world. Those are lazy stereotypes.
"Firms that have engaged employees, who own a chunk of their company, are just as dynamic, just as savvy, as their competitors. In fact, they often perform better."
ifs ProShare, the industry body for the employee share ownership industry in the UK, says 44% of eligible employees already participating in a Save As You Earn scheme (SAYE), according to its latest annual survey,
John Collison, head of ifs ProShare hopes the Government announcement will mean more employees will see the benefits of this tax efficient, low risk method of saving.
Collison said: "We have been in frequent contact with the Government as they have been considering making such schemes easier for employers to implement and therefore available to more employees.
"Share plans often strengthen employee - employer relationships and give all employees the ability to share in the success of the company they work for. Companies benefit from a more engaged workforce when employees know their efforts are directly contributing to the value of the company and the value of their share holding. "
Catherine Wilson, employment partner at law firm, Thomas Eggar, said: "The perceived advantages of employee share ownership have been well documented and include greater employee motivation and loyalty. This in turn should improve employee retention and productivity as well as hopefully discouraging employment claims.
"If this new 'right' is introduced, employers will need to have a formal agreement in place to adequately deal with the allocation and disposal of shares. In the case of an unlisted company then any scheme would need to include the creation of an internal market for the shares to be sold. The costs associated with both the creation and administration of such a scheme could be quite considerable. Employers will also need to define who is entitled to qualify for share ownership, for example, what is an appropriate minimum service requirement and how the scheme should treat women on maternity leave, staff taking career breaks and those absent on long term sickness. Consideration will also need to be given as to the often vexed definition of good and bad leavers.
"Other legal implications are unclear at this stage. It is not clear whether employers will be permitted to require their employees to accept a lower salary in return for getting shares, thus requiring a change to the terms and conditions of employment contracts.
"Smaller employers may also fear a dilution of share ownership and the resultant lack of control over key business decisions. Historically, certain schemes attract considerable tax advantages if they are approved by HMRC but again it is not clear whether these tax benefits will apply to the new style schemes. Even employment law claims relating to dismissals may become slightly more complex as this additional benefit will need to be taken into account when calculating loss.
"Perhaps most importantly, some care will be required to manage employee expectations not least because of the unpleasant truth that shares may go down as well as up."
Paul Randall, partner at law firm Ashurst, added:"Share plans for all employees are long overdue for a boost. They were immensely popular in the 1980s and 1990s. Under the last Government they were made over-complicated and unattractive. All the research indicates that employee share ownership is good for employees, good for companies and so good for the economy as a whole."
2 comments on this article |
Peter A Hunter 17 Jan 2012
The John Lewis Model implies that by giving the employees a share in the company it will change the way that employees feel about what they do. Their logic seems impeccable, except that what actually changes the way employees feel about what they do is not a share certificate, it is the way they are treated by their managers. By encouraging the adoption of the John Lewis Model for Employee Ownership we risk creating a trend for changing the paper ownership of organisations without changing the working environment for the employees. Unless we can change that environment as well we cannot realise the full potential of the workforce. The employees working environment is created for them by their managers. It is the behaviour of those managers that prevents the workforce from engaging. To achieve the changes in performance that we aspire to in UK Business’s we have to change the way that employees feel about what they do, we have to allow them to engage. This is not a difficult thing to do but the Share Ownership model on its own does not do it. We have to change our employees working environment in order to change the way they feel about what they do. When that happens they can choose to engage. Peter A Hunter www.BreakingtheMould.Co.UK
Corey Rosen 17 Jan 2012
While Nick Clegg’s speech on the importance of employee ownership is encouraging, allowing employees to demand shares in their company is simply not going to achieve what he wants. I am the founder of the National Center for Employee Ownership in the U.S. (www.nceo.org). We and many academics have long studied what makes employee ownership work. Plans must cover most or all employees (not just those who can afford to buy shares), companies must practice open-book management, and companies need to provide structured opportunities for employee input into decisions affecting their jobs. These companies, the research shows, grow about 6% or more per year than would have been expected absent these plans. In the U.S. the main mechanism for employee ownership is the employee stock ownership plan (ESOP), which provides tax incentives to employers to contribute shares to an employee trust that holds the shares for most or all employees, with shares allocated relative to pay (up to a maximum of $245,000 per year) and distributed only after people leave. This allows the trust to acquire large stakes in the companies, often 100% in closely held companies where ESOPs are most often used to buy shares of departing owners of successful firms. ESOPs have the greatest impact of the various employee ownership plans on performance and provide employees with retirement assets two to three times that of what they would have had otherwise. Another popular approach is broad-based option and similar equity plans. These companies also perform better, but not as dramatically as ESOPs, probably because the employees do not accumulate large percentages of their companies through these plans and the companies tend to be less committed to the kind of John Lewis ownership culture so much praised in the U.K. (and very common in ESOP companies). By contrast, plans that allow employees various tax incentives to buy shares, or offer them at a discount, have relatively low rates of participation (in the 30% range), are skewed towards higher income employees, and have no discernible effect on performance. These companies are no more likely to open book or have high involvement management systems than other companies. Having some employees own some stock is simply not enough to make management want to change. An ESOP with a large percentage of stock usually is. Some of these plans also induce more risk for many employees than they should carry because unlike options and ESOPs, it is their own money they are investing. John Lewis is majority employee owned and will stay that way. Its culture is aligned with its ownership. To expect that corporate performance or corporate governance will change based on a minority of employees buying a minority of the shares is, sadly, delusional, even if well intentioned. The U.S. has more experience with this area than any other country. Employee ownership is a major part of our economy (there are 13 million participants in ESOPs and 9 million in broad-based option plans). It would be wise for the U.K. to look at what we have learned here before moving forward. Corey Rosen National Center for Employee Ownership
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