Debi O’Donovan and Matthew Stibbe look at the share scheme case histories of three firms and analyse their ability to influence the workforce
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Running share schemes for staff may have lost some of the shine they had back in the heady days of the dotcom boom. Cast your mind back five years and you will no doubt recall regular rumours of many ordinary employees earning tens of thousands of pounds from sharesave payouts.
The stock market may not be performing as spectacularly these days, but we are still seeing schemes being launched for the first time, while others are standing the test of time.
Zenith Vehicle Contracts
A company that is relatively new to running share schemes is Zenith Vehicle Contracts, but its experience shows how quickly employee shareholding can evolve.
Just 18 months ago, the management team conducted a management buy out (MBO) of the company. At that stage, 15 people (excluding directors) shared a six-figure sum.
Then, in July this year, a second buy out was conducted with 23 staff sharing £1.8m – with an average payout of £70,000 – comprised mainly of share options.
With two such successes under its belt, the company is now keen to launch a scheme aimed at an even larger number of staff. The new plan, which will include an option pot that is 30% larger than the last one, will be launched in October benefiting 40% of the 90-strong workforce.
Andrew Cope, chief executive of Zenith Vehicle Contracts, says: “Initially, it was a private company where you had five key shareholders. They recognised that if they really wanted to develop their company they had to get the buy-in of the senior management team and [launching a share scheme] was a way of incentivising and spreading the benefit from a financial perspective so that the business grew.”
Those that benefited in the first round then acknowledged that they needed to incentivise their second team if the business was to continue to grow. “I was part of that original tranche when we did the MBO and I was then a typical shareholder. And I said: ‘Well it worked for me, so why not do it again and this time I will give away a bit more. Which is what we did and we got that back sort of two-fold a couple of years down the line. It is our way of dragging, in a meaningful way, people into the heart of the business,” he explains.
Cope points out that the difference between Zenith’s scheme and others in the market is that the firm was handing over fairly hefty chunks of shares. “It is all very well having a share scheme but unless it is really meaningful it doesn’t really deliver. You have got to give away something to get something back,” he says.
The next scheme will be aimed at all staff of a certain grade or who have worked a certain length of service. How the scheme is to be run is still under discussion, but Zenith has decided it will be based on gifted shares.
“We can grant them options in a tax-efficient way because we have just started out in a new business. When you are in an existing business it is difficult to do that in a tax-efficient way because you are giving somebody a benefit. It is very complex now how you deliver share schemes and what the most tax-efficient way is. But, in effect, they will be granted those shares as part of the original buy out.”
Cadbury Schweppes
Cadbury Schweppes has been running a sharesave scheme since the Inland Revenue first introduced the benefit in 1974. Steph Hallett, share plan manager at the confectioner and drinks manufacturer, says: “We were possibly one of the first companies to launch [the scheme].” Back then, the company was bringing its history of Quaker paternalism into the twentieth century.
Twenty eight years on, in 2002, the company added the government’s newest approved scheme – a share incentive plan (Sip) – to run alongside the sharesave scheme and complement it.
When new employees join the company they get information on both sharesave and Sip schemes. They get one opportunity to join sharesave each year. Three weeks before each annual launch the company sends a postcard to each employee’s home address and follows that up with an invitation pack. The HR department also runs site briefings and sends out posters to all its sites.
“I don’t think we do anything unusual and we’re possibly lower tech than other companies because a lot of our employees are shop floor,” says Hallett. The company eschews CD-Roms and whizzy internet presentations because the scheme must reach the maximum number of employees and not everyone has access to the internet.
Sharesave take-up is around 40% of eligible employees, sometimes rising to as much as 50%. However, because the scheme has been running for so long, some employees are already making the maximum monthly contribution and can’t join new schemes. The company is pleased with the level of participation. “It’s a positive number,” says Hallett.
Sharesave is popular with staff. Some people have built up a very good shareholding and there is a positive word of mouth vibe which encourages new joiners to sign up. It also helps that the company has never had an underwater plan. “People are familiar with it and understand how it works,” explains Hallett
The company doesn’t directly measure the value of the scheme to the company but there is a deep-seated belief in the principle of employee share participation. Hallett also acknowledges the value of employees taking notice of the share price and monitoring the company’s performance. The company’s Sip is unusually generous. Cadbury Schweppes offers partnership shares and matches them with one free share for every five shares that employees buy. In addition, there is no forfeiture clause on the matching shares which means that employees keep these bonus matching shares even if they leave the company before the scheme comes to fruition. “We believe that people invested their money to get the matching share so they should keep them,” says Hallett.
Despite this, take-up lags behind sharesave at around 22%. Hallett speculates that the perceived risk puts off some people. In addition, employees already have ample opportunity to participate in the company’s long-running sharesave scheme. The Sip is a less well-understood and proven scheme but this may change over time.
Because employees have to hold onto Sip shares for five years to achieve the tax benefits, the first batch of shares doesn’t mature until May 2007. Perhaps the hoped-for success of this first scheme will encourage more people to participate. Certainly the company is seeing a good take- up from new joiners which suggests that the scheme is inherently attractive.
Imperial Tobacco
Back in 1996, Imperial Tobacco launched a share scheme when the company demerged from the Hanson Group and listed in its own right. The share price back then was £3.96 and today it stands at £15.49. Consequently, every annual contract has been in the money and employees have benefited from the scheme.
Imperial Tobacco recently won an award for Best European Employee Share Ownership Plan from the European Centre for Employee Share Ownership. The judges were impressed by the scheme’s clear objectives, transparency and employee take-up. As many as 76% of its 2,500 UK-based workforce have signed up for a scheme, while 41% of the worldwide workforce of 15,000 has joined. In the UK, the scheme is a sharesave scheme with monthly savings and options that are held over a three- or a five-year period.
An Imperial Tobacco spokesman said: “We are proud of our employee share ownership plan. It is encouraging that so many of our employees have taken the opportunity to participate in the plan and are able to share in the success of the company.”