Feature – Global free share plans

If you read nothing else, read this …
• Since planning is integral to success, do not underestimate the time required to set up a global free share plan.

• Communication is vital to achieve support, establish co-ordinators in every country, and above all, engage employees.

• Do a cost-benefit analysis after the first year to assess whether running such a scheme is worth the investment – but be clear about what your definition of success is.

It is said that nothing in life comes for free. So when employers bestow gifts of up to £3,000 worth of free shares upon each of their employees across the globe it appears to defy conventional wisdom.

Presenting free shares to staff is perceived as an equitable way of rewarding employees for good corporate performance. “Free shares benefit lower paid employees, which was the main group we wanted to target,” explains Gráinne O’Connell, group compensation and benefits manager at Vodafone, which gave 350 shares to 58,000 employees across 18 countries in July.

It also offers a way of building stronger relations between a multinational and its staff. “Offering 10 free shares to staff was a token to thank employees for their commitment and give them a small stake in the company,” says Andy Wilkinson, share plans manager at media group Pearson, which launched a global free share award scheme in 2003 and repeated the exercise this year.

While such a programme might seem simple to implement on paper, it can be challenging in practice. Firstly, there are the difficulties posed by differing tax and regulatory regimes around the world. Pearson’s method of tackling this was to cover all tax liabilities for employees upfront.

Paying due diligence to such details might seem bureaucratic, but when the penalties are criminal or civil sanctions, it is a vital exercise. In China, for instance, regulatory obstacles prevent citizens from holding shares in a foreign company.

In situations where share ownership is prohibited, one solution is to issue the shares to a corporate sponsored nominee (a form of trust). This avoids the problem of staff directly holding shares, since they are not held under the employee’s name. It also removes the burden of administration. “An employee in Brazil, for example, will not receive occasional cheques in sterling for some small amount,” explains Wilkinson. “Instead, dividends are paid through a dividend reinvestment plan.”

Another option is to set up a ‘phantom share plan’. Richard Greenhill, director at the not-for-profit organisation ProShare, explains: “A company can allocate the equivalent value of the free shares in ‘units’, which then move in line with the company’s share price. When the shares mature, the employee is paid a cash bonus equivalent to what the value of the shares would be worth.”

A multinational organisation with operations in both the developed and developing world must also be aware of global inequalities when planning its scheme. “Offering free share awards might seem an equitable thing to do, but if you are an employee in the Philippines, the free shares might be worth more than your monthly wage,” says Tim Rolfe, senior manager in the human capital practice at Ernst & Young.

This was an issue Vodafone encountered in Albania. “We did consider cutting back on the grant level to reflect the difference in salary,” admits Vodafone’s O’Connell. “But we looked at the percentage value of the award compared to pay and we decided it was not significant enough to change the equitable basis of the scheme.”

It is vital that organisations address such cultural differences early on, but in some regions, employees may not understand the implications of being a shareholder. “These plans put pressure on organisations to be good communicators,” says ProShare’s Greenhill.