Share schemes have had a rough time, and employers must tailor participation to suit their own workforce, says Laverne Hadaway
If you read nothing else, read this…
- Stock market falls have shown just how risky share schemes can be for staff, so they must beware of putting too much of their savings in their employer’s shares.
- The correct level of staff participation in an employee share plan varies between sectors and depends on the demographic of the workforce.
- In most workforces, participation rates are between 25% and 45%, but for some, just 10% is appropriate.
- Employers could do more to let staff know the value of their share scheme and link it in with other savings benefits, such as pensions, to give it a greater impact.
Employee share plans have a downside that has become increasingly apparent. David Cassidy, chief executive of Wealth at Work, says: “They concentrate risk.”
The turmoil in the stockmarket has concentrated employers’ minds on just how many employees can easily end up putting all their savings eggs into a single employer’s basket. This is one benefit where high participation rates across an organisation might just spell out bad, rather than good, reward communication practices.
So it is important for employers to determine what is likely to be a good level of participation for their particular workforce demographic. This can come down to the aim of the employee share scheme.
Phil Ainsley, head of employee share plans at scheme administrator Equiniti, says: “It depends on why they are setting it up in the first place. Do they want to promote staff retention or recruitment? Most companies will offer share schemes if their rivals do. Or do they want to provide corporate glue for a company with lots of different brands?” Peter Leach, director of Killik Employee Services, says employee take-up of workplace share schemes can depend on the sector the organisation is in, the demography of the workforce, and the type of plan offered. “In a retail organisation, employees will not be as well paid and are less likely to have spare cash compared to a hedge fund company, for example,” he says. “A 10% participation rate may be good depending on the demography of the company.”
Participation rates according to sector
Ainsley has a similar view, arguing that the attractiveness of a scheme and employee participation rates can depend on how well that particular sector has been performing. Although the food sector is doing well at present, general retailers are doing poorly, he says. But there is still high participation in the financial sector because of the good level of understanding among staff about share schemes and their tax advantages.
Employers’ participation rates can vary greatly. For Equiniti, the average rate across the schemes it runs for employers was 25% in 2008. “We have lots of retail clients, such as Asda and Tesco, so participation rates are likely to be lower,” says Ainsley.
IFS Proshare’s 2008 survey of workplace share schemes reveals average participation rates are between 25% and 45%, but for about one-third of survey respondents, participation rates are as high as 75%.
If participation rates are likely to be low, there is an argument that it might simply be too expensive to set up a scheme. But share scheme providers refute this. “It may not be viable from an employer’s point of view because of the cost of set-up,” says Ainsley. “But, in fact, it is not expensive to run or establish. It is an assessment employers will have to make for themselves based on the cost of establishing and administering a plan, communication and the value they feel their company gets from a scheme.”
There are several ways to measure and quantify the costs and benefits, including employee retention and satisfaction levels, but these depend on staff fully appreciating the plan’s value. “I am amazed at the number of companies that do not provide total reward statements,” says Ainsley. This means staff may have little idea of a scheme’s value.
Combining with other benefits
Employers may also be missing a trick by treating share schemes separately from other perks. Share schemes and pensions are two of the most significant employee benefits, after salary, that are highly tax-efficient and cost-effective, but staff are usually encouraged to sign up on the basis of past performance or just because they ‘should’
“There is no sense of calibration between share schemes and pensions. There is no holistic planning,” says Cassidy, who believes share schemes should be presented as short- and medium-term savings plans, with pensions as long-term. “They should all be seen as parts of one big flexible savings plan.”
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