The stock market may have the jitters, but there are plenty of reasons why employers should encourage employee share ownership, says Sonia Speedy
Encouraging share ownership among a workforce is well recognised as having benefits for employers just as much as the employees for whom it can bring a welcome financial boost.
These advantages include: aligning employee interests with those of shareholders; enhancing staff recruitment and retention; and proffering reward for past performance alongside future incentives. The more employees who own shares in their company, the greater these advantages can be.
There are many ways in which employers can broaden the appeal of share ownership to staff. Mike Landon, a principal at Mercer, says the most common way for companies to encourage wide share ownership among staff is to introduce government-approved plans that offer tax benefits. These include share incentive plans (Sips), sharesave schemes (also known as save-as-you-earn (SAYE)), and company share option plans (Csops). Among smaller companies, enterprise management incentive (EMI) schemes are also popular.
Employers can also increase the attractiveness of these schemes with additional features. A significant plus for sharesave schemes, for example, is that employers can offer a discount of up to 20 percent on the market price of the shares.
Another useful way of improving the take-up of sharesave is to emphasise the scheme’s function as a savings vehicle. Colin Paterson, a partner in employee share and share option scheme specialist The RM2 Partnership, says: “With sharesave in particular, what employees tend to say is, ‘this is a great scheme because I have an opportunity to buy shares on good terms in the company, but it also means I’m putting aside something every month that I wouldn’t have done otherwise’.”
Extra incentives can also be brought into play around a Sip. With this type of plan, employees can buy partnership shares in their employer out of their pre-tax income, and employers can make this benefit go further still by matching the shares staff buy.
Employers can award up to two matching shares for each partnership share bought by staff. “It can make an absolutely massive difference to take-up. Usually you’ll find that if there is such a generous match offered, then virtually all employees will take up the scheme,” says Landon.
Employers can also offer up to £3,000-worth of free shares to employees each year free of tax and national insurance. Awards are typically linked to a firm’s profitability. “Because employees don’t have to pay anything at all for these, again virtually everybody would accept them. It’s a good way of maximising share ownership,” says Landon.
When it comes to encouraging wide share ownership by staff, some employers will look to incentivise key individuals. In such cases, EMI schemes are popular among smaller firms, while many companies look to Csops to motivate and reward senior staff. Deferring part or all of senior employees’ annual bonuses into company shares is another way of encouraging share ownership at this level, as is creating shareholding guidelines or even requirements for the likes of directors.
However, the government’s move to install a flat rate of 18 percent capital gains tax (CGT) has lessened the attractiveness of company share schemes for some senior staff. Phil Hall, head of industry body ifs ProShare, says some employees with EMI options were previously subject to a 10 percent CGT liability if they exercised their option two or more years after the date of grant, and this has now risen to 18 percent.
The UK’s currently precarious economic and investment scene also means employers may need to work harder to explain the relative merits of company share schemes as share prices slide and interest rates on savings in banks and building societies rise.
“Nobody can predict how the market is going to move, but what we can say is that if people are given share options, it’s a one-way ticket. They can’t lose because they’re not obliged to exercise the option. If they are given a sharesave option, they must gain, because they will be getting at the very least some interest on the money,” says the RM2 Partnership’s Paterson.
Whatever state the economy is in, communication is critical for boosting take-up, not just at the outset but throughout the life of the scheme. Using a combination of marketing materials can often achieve the best results, says Phil Ainsley, head of employee share plans at Equiniti. This could include paper-based communications as well as online resources, and fully translating marketing material for overseas staff, or those for whom English is not their first language.
Some employers have also made use of newer, more innovative communication channels, such as: enabling staff to apply for schemes by text message; providing savings calculators to help illustrate the potential benefits of schemes; and tailoring marketing messages to specific groups of employees.
Irrespective of the methods of communication that employers choose, ifs ProShare’s Hall believes it is important for employers to keep things simple and make it as easy as possible for employees to take part. “It is also very important for employees to feel that the share plans on offer are endorsed by senior management,” he says.
Despite changes to CGT and the waves within the global economy, there are still advantages for both parties in encouraging wider employee share ownership
Government-approved tax-efficient employee share plans
- Sharesave or save-as-you-earn Employees can save up to £250 a month from take-home pay into a sharesave contract, with the option to buy shares in their employer at a set price when the scheme matures in three, five or seven years. They can also withdraw their contributions, interest and any bonuses at this time, if they prefer.
- Share incentive plans (Sips) Employees can spend up to 10 percent of their pre-tax income or £1,500 a year on partnership shares in their organisation. Employers can offer matching shares or make awards of free shares.
- Company share option plan (Csop) Employers can offer chosen employees an option to buy shares in the company at the market value on the date the option is granted. This option is then available for 10 years, although it cannot be exercised for the first three years. An employee can hold up to £30,000 worth of shares in a Csop.
- Enterprise management incentive plan (EMI) These are available to companies with gross assets of not more than £30 million. The business can offer specific employees share options of up to £100,000 each, up to a total of £3 million.
Case study: Easyjet’s share schemes take off
Luton-based budget airline Easyjet has achieved wide share ownership among its 7,000 staff.
It runs two UK all-employee plans: a sharesave scheme, which has achieved the equivalent of 45 percent-50 percent participation among eligible employees, and a share incentive plan, which has about 1,600 members. Similar schemes are also in place for staff based outside the UK.
Easyjet staff have been attracted to the schemes by some of the terms on offer. For example, the share price is discounted by the full 20 percent available within the sharesave scheme, while matching shares are offered on a one-to-one basis within its Sip, through which the company has also gifted free shares to staff.
Ken Lawrie, head of reward, says it was keen to ensure the schemes were well communicated. “We view share ownership very positively and we have support from the top down. The objectives we set were encouraging participation in the first year of 20 percent or so, and we have achieved considerably above that.”