· 4 min read · Features

Strategic Benefits: Business shun the bonus arrangement in favour of share schemes

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Employees ranging from top financial executives to supermarket checkout staff are reaping the benefits of share schemes as they grow in popularity. And the bonus arrangement looks under threat, as executive share schemes increase, particularly in the financial sector, where they are seen as more palatable than huge cash payouts. This is not surprising, considering prime minister David Cameron has said his government would like to see wider share ownership and business secretary Vince Cable MP has famously attacked “the culture of rewards for failure”.

In May, the Financial Services Authority (FSA) published guidance, which seeks to better align pay in the financial services industry with risk. Cable promised a consultation on tougher regulations, linking pay of executives in FTSE 100 companies with the success of the business. A share scheme - where the better the profits of the company, the more share bonus payments staff enjoy - seems a solution here.

Employers shouldn't need legislation to persuade them to launch share schemes - a wealth of research has shown the benefits. Phil Hall, a director at share ownership promoter IFS ProShare, says: "Research has shown employee share ownership plays an important role in higher productivity and financial performance, greater innovation, lower turn-over, improved engagement and better workplace relations."

In July, staff at retail chain Sports Direct found they were set to enjoy an average share bonus of £44,000 (twice average salary) - but would have to wait until 2013 for the bulk of it.

In its 2011 annual report, the company announced profits of £200 million. The total bonus pot is £88 million, divided between 2,200 full-time employees. Sports Direct incentivised employees by enabling them to share in its success through the 2009 Ebitda-based bonus share scheme, which is designed to motivate colleagues, help improve retention and align interests of employees and shareholders. The share scheme is also aligned with the group's business plan.

But can share schemes work for high-earners, or are they only useful in incentivising lower-level staff? Hall thinks the former is true. "From the employee's perspective, they are a tax-efficient savings mechanism that encourages medium- and long-term saving among those on low and middle incomes, as well as among higher earners," he says.

According to the latest IFS ProShare annual survey, 79 FTSE 100 companies offer HMRC-approved employee share plans. In total, IFS ProShare estimates there are 10,000 UK firms offering an HMRC-approved share plan. Many others offer unapproved share plans, without tax benefits. Around two million employees are part of 'all-employee' share plans.

Asda's 'Sharesave' plan allows employees to save between £5 and £250 every month. At the end of the saving period, they get a tax-free bonus and can choose to use the savings and bonus to buy Walmart shares at a 20% discount. Sarah Dickins, people operations and policy director, Asda, says: "We have seen a direct link between Sharesave membership and low colleague turnover. The scheme actively encourages colleagues to engage in the success of the business, as the pay-out from Sharesave is directly linked to share growth and, ultimately, company performance. Share plans are a great retention tool for all levels of colleague, engaging them in the medium- and long-term performance of the company."

At HSBC, there is a share plan open to all employees, in which nearly 90,000 participate, and a group performance share plan for the executive team, which rewards value creation, returns on capital and profits generated for share- holders. It was established this year and is praised by Standard Life Investments' head of corporate governance, Guy Jubb: "It demonstrates HSBC has taken to heart the lessons from the banking crisis and provides a platform to reward and incentivise prudential and profitable growth."

These executive share schemes are becoming increasingly popular - some commentators suggest share schemes will replace the bonus. IFS ProShare's Hall says: "We have seen organisations beginning to switch to offering executive share plans in place of purely cash bonuses. This is especially the case in the financial services industry, where the meltdown means many companies are being prompted to do so by the FSA."

Banks bailed out by the taxpayer were told no cash bonuses should be paid to board members, but shares would be allowed. Goldman Sachs decided the management committee would receive only shares, to be held for a minimum of five years. This went alongside recapture provisions, to ensure employees were accountable for the impact of their decisions.

At BT, part of executives' bonuses is paid as deferred shares, which must be held for at least three years. The executive must remain employed by BT in order to receive the deferred shares, and they are also now subject to claw-back provisions. A BT spokesman says: "Because senior executives are required to build up a significant shareholding, they are directly exposed to the same gains or losses as all other shareholders."

Sue Wilson, reward director at PwC, says companies are becoming more aware of the impact of different forms of incentives and rewards. "They are trying to look carefully at why high earners are getting bonuses and asking, 'is it driving the right behaviour?', and if not, then what would be better?" she says. "They are introducing deferred bonuses, which you are forced to take in shares, so you swim or sink with the shareholders."

David Coleman, head of employee benefits support services at share registrar Equiniti, says share schemes are enormously successful at motivating employees at all levels. However, he says it is unlikely bonuses will be completely replaced by shares any time soon. "The immediacy and lack of any real regulation of cash bonuses makes them not only a useful tool, but probably an expected part of the remuneration package," he says. "Certainly the backlash against bankers' bonuses and 'fat cats' might have dampened the ardour of some companies for cash bonuses, but it also translated across towards discretionary share plans to an extent.

"That, coupled with the restrictions among listed companies on how much of share capital can be tied up in such plans, means I suspect that cash bonuses will be around for a while yet."

What types of schemes are out there?

Save as you earn, or 'Sharesave'

Employees save between £5 and £250 per month. After three, five or seven years, employees can choose to keep their shares, or take back the money

Share incentive plan

Employees buy shares, receive free shares, or buy shares matched by free shares, and save up to £125 a month from pre-tax salary

Company share option plans

Shares cannot be discounted, a minimum of three years must pass between the grant and exercise of the options and there is a limit of £30,000

Enterprise management incentives

For companies with 249 full-time equivalent employees or less and maximum gross assets of £30 million or less

Executive/discretionary plans

Likely to be taxable, less restricted by legislation, so can offer much greater levels of reward