· 8 min read · Features

Employee benefits: Share ownership schemes - Should you CoCo?

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Government wants more co-ownership - whereby staff own a minor, but significant, stake in their companies. But is such high level of share ownership a good thing? Peter Crush investigates.

The UK's 3.5 million shareholders will be more aware than most just how volatile the stock market has been of late. Larger companies have had the most to lose, and in July Vodafone spectacularly hit the news when it was forced to buy back £1 billion worth of its own shares after a profit warning caused a 14% fall that led the board to feel the company was undervalued.

For most employees such share price machinations will be of little concern. Even those who take part in some form of employee share scheme tend to ride out any short-term stock price aberrations. With many employers matching any employee purchase of shares, a company's share price has to drop by more than half before they are what investors call 'under water' (worth less than the price they bought them for). As for share price falls having an impact on employee performance, although everyone in Vodafone is offered shares, share ownership arguably has limited impact because only a minuscule fraction of employees actually own direct shares in the company they work for.

This year though marks the 21st anniversary of the introduction of an often-ignored share scheme in Britain, one where, in theory, employees tend to become far more interested in their company's financial performance. It is called the Employee Share Ownership Plan (or ESOP) - which the traditional SIPs (Share Incentive Plans) and SAYE (Save as You Earn) can feed into. ESOPs allow staff to participate in their businesses on a significant scale (and tax-efficiently), by establishing an employee benefit trust that buys shares in the company on behalf of staff and distributes it to them. This is usually via one or more schemes such as share options, profit-sharing or restricted shares.

The aim of ESOPs is to hand over ever greater control to employees - typical ESOP plans in large companies can enable staff to own 4%-5% of the total equity, with some going as high as 20%. But this year, the Government called for this to go even further. In May, the All Party Parliamentary Group (APPG) on Employee Ownership issued its first report, and it encourages even greater levels of share ownership adoption - what it calls 'Co-owned Companies (CoCos)'. Here, typically more than 25% of the company is owned by staff - a substantial - but still a minority-stake in the business.

According to Sarah McCartney-Fry, MP, there is "growing interest in the role of the sector where businesses are substantially or majority owned by its employees". She adds: "Co-owned firms appear adept at managing innovation and change and are underpinned by very high levels of productive employee engagement." Currently only 2% of businesses - which nevertheless turn over £25 billion - are more than 25% co-owned. But is such high ownership a model HR directors should pursue?

Some share provision experts say they would be wary of this. JP Morgan Invest director Jonathan Watts-Lay says share ownership is rising but is worried it could be for the wrong reasons: "HRDs need to look at how staff are choosing to spend their money," he says. "We're actually seeing a reduction in people paying into pension plans because they are buying stock options instead. They're not necessarily doing this to feel more involved in the company, but because they feel they can get almost guaranteed gains that employer share schemes offer."

Blowing their money

Watts-Lay is worried about this trend because there is nothing to stop staff cashing in their shares after their five-year term, blowing the money and having nothing for their retirement. "As soon as you educate people about shares, there is a penny-dropping moment and uptake can hit up to 60%. Although this is good in one way, the flip-side of this is that employees risk having all their eggs in one basket and not having a broad enough portfolio of investments. We're seeing people who work in the old nationalised industries who have been buying shares for the past 20 years and who have a massive amount invested in company stock. These people are under threat of having all their wealth hit if the share price takes a tumble, especially if they do not have money siphoned away elsewhere."

For those saving into SAYE share schemes, there is currently a limit on the number of shares they can actually buy - £250 worth per month. Ifs ProShare, however, is currently lobbying the Government to have this raised to £400 per month, and warns against over-cautiousness in encouraging staff to own more shares. "The limit has been in place since 1991," says director Phil Hall. "Inflation has eroded what this is worth now. We'd only be raising the bar to the equivalent of what £250 was back then. But even if it was higher, we do not feel it would be a problem. Staff saving their maximum limit can still - when the share period matures - earn 3% interest and get their original money back, so share prices have to go really badly wrong for them to lose out. We need to be careful of putting people off the notion that more share ownership is a bad thing."

Of the 2.3 million on SAYE, some 20% save the maximum, implying there is demand to hold as many shares as possible. Employees who do profit through share schemes can plough this money back into a pension and get double tax relief (it works out to a £125 worth of pension fund at a cost to the employee of £33), but this requires financial education to be provided.

But because the UK shares market does seem so bankable, many suggest higher share ownership is still unlikely to cause the real shift in employee productivity the Government seems to hope for.

Asda, the UK's third-largest supermarket, has had more than 200,000 employees taking shares since 1994. Earlier this year it paid out more than £37.5 million to 17,000 colleagues who saw their shares maturing. According to its own communications material, the sharesave scheme is intended to "give Asda colleagues a stake in the company and the chance to share in the success of the business" - just what the APPG envisages. Those who did save the maximum per month pocketed £12,700 - £3,700 more than their original £9,000 investment. But while there are currently around 50,000 colleagues saving into the scheme, Asda's HR spokesman admits that the average stake in the company per employee is only £50 per month, an amount that will not, arguably, see their commitment to improve the profitability of the company change demonstrably. He also says "the majority of colleagues sell their shares at the first opportunity". Some of the uses staff have put their windfall to include a 'boob reduction', buying a piece of field to become self-sufficient or upgrading their 500cc Kawasaki bike to a 750cc one.

According to Malcolm Hurston, chairman of the Employee Share Ownership Centre: "The theory is that employees do work smarter, and see the link become input in (their work) and input back (the return on their shares)." However, he also concedes that this is not always the case. "Whether a company is 5% or 35%-owned by employees is not always the most important factor. For employees, the share scheme is still all about whether they can yield life-changing sums of money. Unfortunately, employees can just buy shares, and sit on them, and still receive a pretty much guaranteed profit without them necessarily working any harder for it."

Small business benefit

However, he argues that for smaller businesses (particularly those with fewer than 500 staff) employee co-ownership is still a good option to consider. "Small, fast-growing companies do not always have money to pay staff to incentivise them," he says. "But what they can offer are 'promises'."

In 2000, the Government launched just such a scheme, called EMI - Enterprise Management Incentives - which helps employers retain exceptional individuals they could not otherwise afford by offering them tax-efficient share options. Options of up to a market value of £120,000 can be given, subject to a total share value of £3 million. There is no tax or NI to be paid by employees when the options are exercised. Hurston adds: "This has turned into one of the few well-designed schemes that hasn't been abused, and generally is used for its intended purposes - getting staff, keeping them, and having them involved in the business."

Thousands of small companies are now enjoying having co-owned businesses. Advertising agency St Luke's offered its first free shares to staff in 2004, which take three years to mature. Before this, 42% of the company were not shareholders. To prevent those with more money not buying up more shares than is desirable, a £500 a month limit has been placed on bought SIPs and, according to managing partner Neil Henderson, the arrangement has a hugely positive effect.

Should you CoCo? There is some evidence you should. If you are a small business it could be the answer to engagement. If you are in a large company, the jury is out on whether being 'part' of it develops any change of mindset. Just how many shares staff need to own before they give more discretionary effort is the $64,000 question.

EMPLOYEE OWNERSHIP IN A BIG WAY IN THE US

ESOP co-ownership is a highly successful model in America. Louis Kelso, lawyer and investment banker, arranged the first ESOP transaction in the US in the 1950s. He believed that the capitalist system would function more efficiently if all workers shared in owning capital-producing assets. Companies with ESOPs include Polaroid and Xerox. Today there are at least 11,000 wholly employee-owned (more than 50% ownership) companies in the US covering more than 11 million people. American academics believe the CoCo model does work in terms of greater employee productivity and engagement. Five of the 15 winners of Winning Workplaces' 2007 Top Small Workplaces Award all had significant employee ownership plans, and four of them were majority employee-owned. Winners were judged on areas including teamwork, participation, and other successful people practices. Avis, the world's second largest car rental company, was 100% purchased for US$1.75 billion by its 20,000 employees in 1962. After the employee buyout, Avis changed its motto from "we try harder" to "owners try harder".

CO-OWNED SUCCESS STORIES

- Who is it? Loch Fyne Oysters

What does it do? Supplies shellfish and fresh fish supplies to the UK trade and exports market, and also for home delivery

Established: 1977

Employees: 115

Became employee owned: 1977

What's the model? 30% of its shares have been put into a Share Incentive Plan (SIP), with 20% in the hands of management. The remaining 50% are permanently held in a trust. So far one fifth of the shares in the SIP have been allocated to staff. It is expected that all of these will be handed out within the next 10 years.

How are employees involved? No single employee is allowed more than a 5% stake in the business. There is a quarterly meeting of shareholders, where future plans and the current performance of the company is discussed. Two elected directors hold monthly meetings with all representatives from departments, allowing information flow. All senior and middle managers are involved in designing training where the meaning and goals of employee ownership are defined. The right way to apply them in the company are also agreed.

- Who is it? Scott Bader

What does it do? Produces polyester and alkyd resins, gelcoats and conventional water-based polymers at five manufacturing sites across the world

Established: 1921

Employees: 630

Became employee owned: 1951-63

What's the model? The Bader family entrusted 90% shares of the company to employees by creating the Scott Bader Commonwealth, a registered charity. The remaining 10% were given to the trust in 1963. Employees are expected to be members of the Commonwealth, and currently more than 75% are. Employees have no direct financial stake in the company, but they do enjoy the fruits of their labour through a profit-share arrangement. New employees become members of the Commonwealth after successfully completing their probation period.

How are employees involved? A 16-strong Members' Assembly represents members' interests. The group board includes four elected representatives, two of whom are members of the Assembly. Each year 60% of profits must be ploughed back into the business, and no profit share is paid unless an equal amount is paid into a charitable fund.