Debi O’Donovan, editorial director, Employee Benefits: At the Employee Benefits Awards two years ago Northern Rock was highly commended for its entry in the ‘Most effective share scheme 2006’ category. At that point the company was riding high and staff made profits of between £2,000 and £59,000 from two different employee share schemes.
Two years on and it is a very different picture with staff cuts and the bank’s nationalisation. Sadly, 85% of Northern Rock staff are (or were) holding shares in their employer.
We have seen this before; significant numbers of staff at Railtrack and Enron owned shares in their employer when these companies bit the dust.
I believe that the employer and their advisers failed these staff. The vast majority of employee share schemes are put in place to encourage staff to become shareholders in the companies they work for. In fact, this supposedly noble idea was the government’s stated aim when it launched the share incentive scheme (Sip) in 2000. To be fair, this aim was subsequently changed during the dotcom bust when it became obvious that encouraging staff to hold shares in only one company was not such a clever idea.
I fully support the strategy of directors having a substantial proportion of their own wealth tied up in the companies they work for – it concentrates their minds and they get to take the pain or riches as appropriate.
For average staff, however, employers and advisers should tread far more carefully. Saving into a Sip or sharesave is a very good idea, provided it is part of a diversified savings plan and staff appreciate the risks, particularly of a Sip. Yet time and time again employers and advisers boast of how much staff are saving into a sharesave or Sip. This is ominous news, and shows little thought for the other possible financial needs of staff.
Many companies (and often their shareholders) see high levels of share ownership among the workforce as a good thing. In fact, good employers who are a front runners when it comes to offering staff benefits are most in danger of inadvertently discouraging diversified savings among staff. For example, as many as 98% of Lloyds TSB staff hold shares in the bank largely because of they have been given free shares. But then they are encouraged to hold onto these shares when they mature.
In the rush to do good, employers and advisers could be doing their employees a disservice.