The funding structure of firms can affect the provision of benefits. Differences include executive pay levels and tax advantages, says Peter White
Case Study – RAC
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To paraphrase the recently deceased Hunter S. Thompson: "Public limited companies are like a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free and good men die like dogs. There is also a negative side."
This sentiment, that stock market adorning corporations are evil organisations looking only to reward a small set of cash-rich investors, is commonly held by those who also accuse private, unlisted firms of acting (and rewarding bosses) like secret societies. But underneath these raging accusations lies an interesting question – is it better to work for a listed or unlisted organisation? While we accept that all firms work differently, we look at how funding and its primary partners affects the provision of benefits.
Sir Ralph Halpern, former boss of high street retailer Burton and infamous ‘fat cat’ of the ’80s, recently accused listed companies of not rewarding top staff well enough to prevent them from joining unlisted, private firms. He said bosses in publicly-quoted companies were not motivated in the same way as their private counterparts because they were not seeing the same shares and salary packages.
However, while executive reward is an important issue, such practices are having an impact on occupational pension scheme members across all UK organisations. If top staff leave listed firms to go private, performance will suffer, thus affecting share prices, which hold the key for millions of pension fund members whose futures rely on the stock market. But not all reward practitioners agree. Andy Christie, consultant at New Bridge Street Consultants, doesn’t think public companies reward better than private firms, where benefits such as long-term incentive plans and performance share schemes are more common.
"All in all, the overall package for an unlisted company in total remuneration is less generous, although in some cases they may pay a higher base salary initially," he says. But it is not just executive perk packages that vary between different types of organisations. Bruce Thompson, senior lecturer in human resource management at Middlesex University, says that if you ignore the fact that most PLCs are larger than their unlisted counterparts, there are more intrinsic differences in the benefits packages of ordinary staff. "An obvious difference between unlisted and listed [companies] is that unlisted companies are less scrutinised. They can get away with way-out benefits, for example a company yacht, which the PLCs can’t." IT software firm SAS Institute has shown that sometimes being able to get away with offering wackier benefits can be an advantage. The private company buys nearly 30 tonnes of M&Ms each year worldwide to keep its employees happy.
But, SAS, which competes against some of the most global share-happy IT firms, has rejected the lure of an initial public offering (IPO) because chief executive Jim Goodnight thinks it would ruin the culture of the firm. Businesses that are forced to answer to shareholders every couple of months can find it difficult to think long term. And while this often has more of an impact on research and development projects and new products, it will also affect the provision of benefits. Mark Eaton, director at benefits provider Personal Group, says that the decision making process is much simpler in private firms, meaning things can get done quicker.
"Private companies have people that are prepared to put their balls on the line," he adds. This reduced bureaucracy also means that benefit packages can be outsourced, thus using the best ideas from outside the organisation. Eaton suggests that publicly-quoted companies often cherry-pick the best ideas from a number of benefits providers rather than actually outsourcing their processes. Listed companies can take more advantage of employee share schemes than private firms.
Marcus Peaker, chief executive of Halliwell Consulting, says private firms that float on the stock market often use sharesave schemes to reward all employees. "If you think about a [sharesave] scheme, the price on float is normally set below the market anyway. There are quite a lot of advantages of starting your [sharesave] offering on the date of flotation because that first [sharesave] contract can be extremely valuable to employees because it enables them to share in all of the increase in value after float."
Firms that offer all-employee share arrangements, including sharesave schemes and share incentive plans, are also soon to be able to allow employees to receive double taxation relief. Thanks to legislative changes in the Finance Act 2004, which come into effect in April 2006, if employees put the shares they exercise into their occupational pension scheme, they can claim tax and National Insurance contributions twice.
However, employees of unlisted companies are not totally left out with regards to share set ups. Many unlisted firms offer stock and those with plans to float often set up such vehicles in anticipation. Firms that are not owned by another company and with assets under £30m can also take advantage of the enterprise management incentive plan, introduced by the Chancellor in 2000 to allow high risk trading companies to attract skilled staff during a company’s infancy.
But, unlisted companies are not used to the same rigours of reporting business information as public firms. And two accounting standards, IFR 2 and FRS 20, are being introduced over the next couple of years that will force all firms to report the worth of their share schemes, which will have an impact on them offering the benefit. Angela Hennessey, who runs an eponymous consultancy firm that values the shares of private companies, says that the majority of unquoted companies will not carry on offering share schemes once the reporting, which comes in for private firms in 2007, becomes mandatory and will instead revert to higher cash salaries. "The shares [from share schemes] are only worthwhile if the employee can exit," she adds. And the distinction between types of private firms is important when looking at the differences in benefits packages.
There are two main types of private firm; one that is happy to exist without shareholders and one that has yet to look into the possibility of an IPO but has plans to. For organisations that are looking for funding, often from private equity houses and venture capitalists, the way they reward their employees is considered important. Robert Donaldson, partner, head of M&A and private equity at Baker Tilly, says: "[If] companies have well-structured reward structures, it takes away a concern that a funder might have and makes funding easier. Especially people or service-based businesses, where locking those people in is key and for a venture capitalist about to invest in a business where most of the assets walk out of the door every night having some confidence that those people are locked in, it does make a difference."
Halliwell Consulting’s Peaker adds that benefits can be most transformed during a change of ownership. "In most cases, it is the equity arrangements that are most affected because the days where listing meant that salaries automatically went up have gone." Dr. Robert Cressy, professor of finance at the Cass Business School, agrees: "Certainly share ownership and share options play a part in incentivising management in small and large private equity deals. Bonuses also incentivise management in buy-outs. Whether this actually creates incentives is a moot point. A large body of work on share options suggests that they mainly function to redistribute wealth in favour of new shareholders over existing ones." But it’s not all shares and management perks when it comes to equity deals and management buy-outs. Personal Group’s Eaton says that all round benefits packages tend to improve when a company has been bought out by venture capitalists.
"When [venture capitalists] take over a company there’s [usually] some dissatisfaction and reservation from existing members of staff and they put in [voluntary benefits] schemes to show that they’re not the bad boys after all." He adds that salary sacrifice schemes, which are usually inexpensive to implement, can improve staff morale and productivity, which allows funders to see an increase in share price and thus get a nice payoff.
Visible pensions speed up change
Pensions are causing lots of problems for all organisations at the moment, but in particular large publicly-quoted companies. FRS 17 is forcing them to disclose hitherto private information, and pension deficits are upsetting deal makers across the corporate landscape.
Debbie Harrison, senior visiting fellow at the Pensions Institute, says: "Because of the requirements of the London Stock Exchange, we’re seeing the problems clearly. If you’re a FTSE 100 or FTSE 250 company then what you do with your pension scheme is of public concern and everything’s in your accounts for shareholders to see." She says that this pressure for disclosure has not only been a major reason for the closure of defined benefit (DB) pension plans to new entrants, but has also helped the shift to close DB schemes to all future accrual. Alternatively, this pressure could also be seen as a welcome nudge to sort out problems quickly.
"Private companies, unless they’re looking for investment, can probably keep things ticking over fairly well, but it’s difficult because they’ve still got the issue. The problem is less visible to the outside world but it’s still a very severe financial problem, [and because of UK pension law] they can’t shove it under the carpet," says Harrison.
Case Study: RAC Roadside
Public limited companies are much more used to divulging information (be it financial or benefits related) than their private counterparts.
Sometimes this increased reporting can have highly positive spin-offs.Motoring firm RAC has found that in preparing certain reports, it was able to calculate the value of its people and any associated reward practices. As a business that relies on people rather than products, the publicly-quoted company decided that it would introduce a profit and loss account dedicated to staff costs. This report, its People P&L, counts the cost of absence, turnover and satisfaction, and can then determine how much money it can spend on benefits.
Managing director of RAC Roadside and former group HR director, Debbie Hewitt, says that by being able to calculate the cost of absence through the report it was able to do something about it. RAC then was able to use the savings to retain its final salary pension scheme and launch an employee share incentive plan. Jill Nealon, current group HR director at RAC, adds: "We believe that the People P&L is just as important as the fiscal P&L [because] happy colleagues equal happy customers which equal happy shareholders." And shareholders are expected to stay happy with its share price, which had risen to £9 by March this year from around £3 in 2003.