Employee ownership can boost engagement

Employee ownership is a hot topic, and there is evidence that share schemes can boost staff engagement and productivity

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  • Deputy prime minister Nick Clegg wants more employees to have a stake in their employer.
  • Staff at employee-owned organisations are more engaged in the workplace and more committed to their employer.
  • Employee-owned organisations typically experience lower rates of absenteeism and staff turnover.

Employee ownership has been a subject of much debate this year, following a call by deputy prime minister Nick Clegg for more employee-owned businesses.

Clegg told business leaders in January 2012: “We need more individuals to have a real stakein their firms. What many people don’t realise about employee ownership is that it is a hugely underused tool in unlocking growth.”

Later that month, Clegg commissioned The Nuttall Review of Employee Ownership, which was published in July.

The review summarised existing academic literature on the benefits of employee ownership, identified the key barriers to its uptake, and made recommendations on reducing these barriers.

The review was welcomed as a catalyst for fuelling the growth of employee-owned businesses. Iain Hasdell, chief executive of the Employee Ownership Association (EOA), says: “We see the Nuttall Review as the first step to employee ownership being a legitimate, fixed, automatic part of UK industrial policy.”

David Poole, national director of the Employee Share Ownership Centre, adds: “It is about getting employee ownership on the agenda. Our feeling is not to let the ball drop.

“We have had a lot of extra attention paid to the industry because of the review. It is now about grasping the opportunity to carry on working with people like the Department for Business, Innovation and Skills to help make more companies aware of the concept.”

Employee-owned businesses typically take the form of direct ownership, with staff as registered shareholders, or collective ownership, which involves a trust with employees as beneficiaries. Organisations can also use a hybrid of these two models, which typically operate in a wide range of industries, including engineering, manufacturing, financial services and retail.

Advantages of employee ownership

There are many advantages to employee ownership. Peter Matthews, managing director at Baxi Partnership Professional Services, says: “It is really giving people a means for their voice to be heard. It is about getting all employee owners to think about their rights, which is enjoying the benefits, and their responsibility to contribute to the success of that business.”

UK organisations with a collective worth of £25 billion have already recognised such benefits, according to EOA data.

A report by Cass Business School, Model growth: Do employee-owned businesses deliver sustainable performance?, published in January 2010, lists higher productivity and stronger employee commitment as two further benefits of employee ownership.

“Running alongside this higher productivity is evidence that this translates into brilliant profitability,” says the EOA’s Hasdell. “There is still a view out there that employee ownership somehow sacrifices commercial endeavour for democracy. That is untrue.

“The evidence over a series of years from the Field Fisher Waterhouse share index is that returns on investments made in employee owned businesses outperform the stock exchange very considerably. That is because the businesses that have been recipients of that investment have been more highly productive and profitable.”

Research published by Loughborough University in September 2012, commissioned by IFS Proshare, found 75% of respondents who take part in a share plan are more motivated and committed to their employer. John Collison, head of employee share ownership at IFS Proshare, says: “The report’s conclusions should send a strong signal that, even in turbulent times when share plans may not be as rewarding as some participants had hoped, their positive, engaging effect on employees remains.”

Increase productivity

Judith Greaves, head of share plans at Pinsent Masons, says one of the main drivers for employers putting employee ownership in place is to increase the productivity and wellbeing of staff. “It helps for the individual to feel they are part of the organisation and I think that comes across in the way they deal with the outside world,” she says.

“When employers do it well, staff get a better understanding of what it means to be a shareholder, the different things they can do with their money, and they are probably more financially aware as a result.”

It is harder to quantify the wellbeing factor among staff who have access to employee ownership. Baxi’s Matthews says: “Figures a numbers are more difficult to come by, but the anecdotal evidence is that absenteeism, sickness and staff turnover go down, because people really do recognise they have a stake in the company. On the other side, innovation, contribution and ideas about how to do things differently go up, as does profitability.”

Hasdell adds: “The softer side is that the so-called feelgood factor is alive and kicking in employee-owned businesses.”

Employee share ownership has received a lot of attention this year because of the Office of Tax Simplification’s (OTS) report on tax advantaged employee share schemes, which was presented to Chancellor George Osborne in March 2012.

The report made three main recommendations around HM Revenue and Customs-approved share plans: the introduction of a self-certification process for sharesave, share incentive plans (Sips) and company share ownership plans (Csop); further investigation into whether the Csop scheme is still relevant for UK organisations; and, if Csop is found to be still relevant, a merger between that scheme and enterprise management incentive (EMI) schemes.

National consultation

A national consultation on the OTS report closed in September, and the Chancellor is expected to comment on it in his Autumn Statement on 5 December.

Jill Evans, head of share plans at Yorkshire Building Society Share Plans, who was a member of the OTS committee, says: “We looked at literally simplifying share plans to make them more attractive and lots of little technical suggestions.”

Hasdell adds: “The OTS looked specifically at barriers and incentives, so is there anything currently in the way preventing employee ownership in the tax system, and should there be any additional incentives? There has to be greater incentivisation for employers that are conventional owners to [consider] employee ownership, and for employees to want to become employee owners.”

Last month, the Chancellor suggested a scheme whereby employees would be offered between £2,000 and £50,000 worth of shares in their employer. However, rather than an incentive to promote greater employee ownership, the shares would be given in exchange for an agreement by employees to give up their employment rights, such as wrongful dismissal, the right to redundancy pay and the right to request flexible working, as part of a new employment contract due to come into force in April 2013.

Needless to say, it may be some time before a government-backed scheme sparks a rush by employees to become shareholders in their employer.

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Source: Cass Business School research, published January 2010

CASE STUDY: AG PARFETT AND SONS

AG Parfett & Sons

Family-friendly plan bears fruit

Independent cash-and-carry retailer AG Parfett and Sons has been an employee-owned business since 2008, having been family-run previously.

Chairman Steve Parfett says: “It became clear that it was not the right time for the next generation of the Parfett family to take on management of the business, and we had a long and comprehensive review of the various options available to us.”

The Parfetts considered a management buyout, an initial public offering (IPO) and selling the business to a competitor, but dismissed all these options because of their potentially damaging effect on staff.

Instead, Parfett was keen to explore employee ownership, having worked as a graduate trainee at Waitrose, part of the employee-owned John Lewis Partnership. “In my view, it is the business model that is most like a well-run, caring family business,” he says. “It enables you to take a long-term business view, to take into account the efforts of everybody in the business and make everyone feel involved.”

Parfett opted for an employee trustbased share scheme, which means shares are held in a trust for the organisation’s 600 staff, rather than each employee having shares in their own name.

Parfett says: “All the ownership is one trust, one pool for the employees’ benefi t. Instead of owning shares or dividends on shares, the benefit is in the way the business is run, the ability to have their say and receive an annual bonus.

“It is a long-term process to build the benefits of engagement and productivity. Certainly, lots of our employees show more interest and care more.”

Share scheme glossary

SHARESAVE: Employees can use between £5 and £250 of their monthly net pay to buy discounted shares, which must be held for three, five or seven years, depending on the scheme.

SHARE INCENTIVE PLANS (SIPS): Employees can buy shares with their gross monthly pay, receive matching or free shares from their employer or reinvest dividends on Sip shares into dividend shares.

COMPANY SHARE OWNERSHIP PLANS (CSOPS): Selected staff may be awarded options to buy shares in their employer.

ENTERPRISE MANAGEMENT INCENTIVES (EMI): Under these schemes, which are targeted at small and medium-sized businesses operating in certain trades, selected employees may be awarded share options.

EMPLOYEE TRUSTS: Trusts are established by employers on behalf of their employees. The organisation grants the shares of which employees are the beneficiaries.

VIEWPOINT

Graeme Nuttall

Graeme Nuttall, partner at Field Fisher Waterhouse and author of The Nuttall Review of Employee Ownership

Employee ownership has never been higher on the UK political agenda. The 2012 party conference season culminated in headlines for Chancellor George Osborne’s ‘swap rights for shares’ plan.

There are also other measures out for consultation. This autumn, the government will deliver its full response to The Nuttall Review of Employee Ownership, published in July, and the Treasury will complete its review of employee ownership before the Autumn Statement on 5 December, while the Cabinet Office continues to promote public sector mutualisation.

It is important to remember what underpins this push to promote employee ownership into the mainstream of the UK economy. There is a strong case for greater diversity of business models, so as to move away from the ‘PLC monoculture’ and the employee-ownership business model, in particular, offers a winning combination. It delivers improved business performance and increased employee wellbeing, often with community benefits.

Academic literature supports employee ownership’s claims to deliver this winning combination of better business and happier employees. There has, however, been a tendency to disbelieve the advantages, even among those associated with employee ownership.

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The Nuttall Review looked at existing research, including work done by the Employee Ownership Association and the Mutuals Taskforce. The review found considerable evidence to suggest that employee ownership did indeed improve business performance and increase economic resilience. There was also greater employee commitment and engagement, with reduced absenteeism.

Rather than wait for additional research, most employers and employees are happy to follow their own instincts, learning from the many flourishing companies that already have an employee-ownership business model.