Share schemes reduce staff turnover and increase competitiveness by aligning the interests of staff with those of their employers, and they attract tax breaks, notes Sally Hamilton
Employers cannot get much more democratic than offering staff a stake in the company through a share scheme. In return, staff are likely to feel more involved in the success of the business, work harder and think twice before moving to a competitor.
There are two main types of government-approved scheme that employers can offer their whole workforce. These are sharesave (also known as save as you earn or SAYE) and share investment plans (Sips). Employers can also choose to offer a company share option plan (CSOP), used more selectively for middle-ranking employees, which gives tax relief on options worth to up to £30,000. In addition, there is a myriad of unapproved schemes that may be offered to higher-ranking staff, but without the tax benefits.
According to Fiona Downes, head of employee share ownership at IFS Proshare, an organisation which promotes share schemes, around 3.5m employees belong to an approved scheme.
Mike Landon, a principal at Mercers Human Resource Consulting, says: “Broadly all types of share scheme align the interests of the employee with that of the company. The executive schemes, such as long-term investment plans, are used more for the recruitment and retention of top executives. [They] are likely to influence the share price more because they have some control over aspects of performance.”
Landon adds that schemes open to all staff, such as sharesave and Sips, can give employees a more positive view of their company. “A scheme can help employees feel part of a group and give them a sense of belonging, especially where there are a large number of subsidiaries. They act as a glue. The share price is a key figure for employees to focus on and can educate them about the business” he explains.
And while recent accounting rule changes have taken some shine off sharesave by causing these schemes to raise costs in firms’ profit and loss accounts, employees like the scheme so they are likely to remain firmly on the employee engagement agenda. A crop of recent successful and high-profile maturing plans, including that of Tesco’s, show that ordinary workers can occasionally profit handsomely when their employer’s share price rockets.
With sharesave schemes, the employer can choose a three-, fiveor seven-year plan. Employees save up to £250 a month into the scheme and when it matures they have the option to buy the shares at the price when the scheme started. As an additional incentive, the employer can also offer up to a 20% discount.
Sips, meanwhile, offer income tax and national insurance breaks if employees hold the shares for five years. Staff can invest up to £1,500 a year or 10% of their salary, whichever is lower, and the company can choose to match the shares they buy at a maximum ratio of two-to-one. The employer can also offer free shares worth up to £3,000 a year.
Geoff Price, director of global share plans at Computershare, says that organisations offering matching contributions or free shares unsurprisingly enjoy the best take-up rates, with around 50% or more of the eligible workforce typically signing up. “Without matching or free shares, 20% might be considered a good participation rate,” he adds.
According to Justin Cooper, head of share plans at Capita Share Plan Services, such schemes are rarely used as a recruitment tool. “In the US, where there is a massive shareholder culture, employees will have share plans high up their list of priorities when looking for a job. In the UK, employees ask about other benefits first such as the pension,” he says.
However, Cooper says evidence suggests that once they belong to such schemes, employees are more engaged. “Companies with 10% or more of their share capital in the hands of their employees through share schemes consistently outperform leading indices such as the FTSE All-Share.”
Price agrees that employees can feel more engaged where share schemes are offered as an employee benefit. He cites a study by professor Joseph Blasi of Rutgers University in the US, which suggests the threshold for success is when employees’ share benefit equals at least 7% of their annual remuneration. “The higher the percentage, the stronger the engagement,” Price stresses.
Since employees do not gain access to their money for at least three years, without the loss of any benefits, sharesave and Sips are regarded as a staff retention tool. Martin Osborne-Shaw, managing director of Killik Employee Share Services, says: “The more years you are in a share scheme, the more you have got to lose by leaving, especially if the share price is rising steadily. Employers gradually put golden handcuffs around the employee.”
To encourage uptake, and therefore benefit from engaged employees, communication is key. This includes explaining the advantages and disadvantages in a factual way, without making any financial recommendations. If employees want more detailed information they must be directed towards independent financial advice.
At retailer Marks & Spencer, where one third of its 65,000 employees are enrolled in a sharesave scheme, communication is taken seriously. Ann Govier, manager of employee share schemes, says: “All eligible employees receive an invitation letter [at launch] from our chief executive together with a brochure. This is supported in stores with posters and team briefings.”
Informing the whole workforce about the success of any maturing schemes is a tactic that can be used to get more employees to join up to future launches.
And while a share scheme alone might not fully engage employees, it is clearly an important tool in the staff perks kit bag.
CASE STUDY: Jones Lang LaSalle
Real estate services group Jones Lang LaSalle (JLL) believes its sharesave scheme helps it stand out from its competitors. Shameel Ahmed, head of reward at the firm, says: “Most of our rivals are partnerships and cannot offer a sharesave scheme. It’s definitely a competitive advantage when recruiting.”†
JLL introduced its first scheme in 2002, offering a 15% discount on the shares. Now, up to 37% of its employees are enrolled in a scheme. “Comparing this to the benchmark of UK-listed companies, where the take up ranges between 15 to 20%, we are doing very well.” Its first five-year scheme matured earlier this year and produced good returns for savers on the back of strong share price performance.
JLL recently launched its first sharesave scheme for staff in Ireland, where 46% signed up. “They had heard good things about the UK scheme, plus we knew how important it was to communicate, communicate, communicate.
“The scheme definitely helps to engage staff. You see a lot of buzz around the time of maturity as they watch the price on a daily basis on the intranet. They can see how their role can help the company’s global performance,” Ahmed adds.