Employee share ownership can increase employee productivity and more so if it is part of a programme of employee engagement, but not everyone i convinced.
If you read nothing else, read this…
- Research suggests that employers with significant employee ownership tend to have higher productivity.
- Staff productivity appears to be higher where employee ownership is part of a wider employee engagement programme.
- The tax status of a share scheme has little impact on employee productivity.
Productivity in the UK’s top 50 employee-owned businesses, in which staff own between 25% and 100% of the organisation, increased by 4.5% year-on-year in 2014, compared with productivity in the UK economy as a whole, which was flat. This was one of the key findings of The Employee Ownership Top 50 , published by the Employee Ownership Association (EOA) in July.
Iain Hasdell, chief executive of EOA, says: “The value of shares in businesses with significant employee ownership has outperformed the value of shares on the FTSE All Share index by an average of 7% over the last decade or so. Share price is an indication of profitability and profitability is an indicator of productivity. We know that employee ownership, whichever ownership model [employers] adopt, can have a positive impact on productivity.”
The EOA study is one in a long line of reports suggesting a link between employee ownership and productivity, such as Cass Business School’s report, Model Growth: Do employee-owned businesses deliver sustainable performance? by professor Joseph Lampel, doctor Ajay Bhalla and doctor Pushkar Jhaand, published in January 2010, and Loughborough University’s report, The human and organisational impact of employee share ownership by doctor David McConville, Alison Smith and professor John Arnold, published in September 2012.
Alan Scott, head of employee share ownership at ifs ProShare, says: “[The Loughborough University report] shows that even in times of economic stress, employee share ownership is an effective vehicle for increased productivity. Employees who participate in a share plan are usually more productive than employees who don’t, even within the same company.”
Not everyone is convinced about the power of share ownership
Nigel Mason, director at investment organisation Capital Strategies, which publishes the UK Employee Ownership Index , says: “What the index shows is a correlation between employee share ownership and investment performance, but that’s not the same as cause and effect. For example, employers with employee share ownership may just happen to be in strongly performing sectors.”
Malcolm Hurlston, chairman of The Employee Share Ownership Centre, is equally unconvinced about the power of employee ownership. “There is a shed-load of academic research, none of which convinces me,” he says. “The best evidence is the readiness of most hard-nosed FTSE employers to spend money on it [such as on employee share plans],” he says.
Employers are unlikely to ever be able to assess the true impact of their share ownership schemes because they do not launch them in a vacuum; they will often be part of a wider strategy on employee empowerment and reward, which will also have an impact on the productivity of staff.
This was essentially the conclusion of The Office of Tax Simplification’s Review of tax advantaged employee share schemes: Final report , published in March 2012, which reviewed a number of research reports covering the impact of employee ownership on productivity. It stated: “On balance, the evidence suggests positive effects, but methodological and data limitations mean that the evidence cannot be regarded as definitive.”
The report concluded that employee share ownership does have positive effects on productivity, but that these effects are often very small. Positive effects tend to be larger for employers with majority employee share ownership, rather than in organisations with more standard employee share schemes.
The report also found that the positive impact is greater, or is only achieved, when there is employee participation in decision making.
The impact of share schemes’ tax status is unknown
But it is unknown whether or not a share scheme’s tax status impacts productivity.
Nevertheless, Phil Ainsley, managing director of Equiniti Employee Services, says: “Using tax-advantaged [approved] share plans has added attractions as there are material tax benefits for the employee as well as reduced costs for the employer.”
Ifs ProShare’s Scott concedes that unapproved plans can offer more flexibility to meet a particular employer’s requirements, but he believes that the benefits of approved share schemes far outweigh the cons. “There is a wealth of resources and additional support and guidance for those [employers] looking to introduce an approved scheme,” he adds.
But Capital Strategies’ Mason believes that the extent to which a share scheme is broad-based and part of a culture of employee engagement and participation is more relevant for employers than a scheme’s tax status.
“I think the choice between approved and unapproved is one of the least important considerations when [an employer] is choosing a share scheme,” he says. “Instead, an [employer] should consider employee share ownership as one feature – and only one feature – of a broad programme of employee involvement, participation and engagement. This has to be led from the top so that it is completely authentic and not just a cynical ploy to sweat the assets harder.”
The Employee Share Ownership Centre’s Hurlston agrees: “[Employers] should choose the scheme which best suits their commercial realities, whether approved or not. What matters is whether the employees are looking at a motivating quantum and whether the plan, of whatever kind, is well communicated.”
Gripple employee ownership scheme boosts productivity
Hugh Facey, chairman of Gripple, which manufactures wire joiners and tensioners for the agriculture and viticulture markets, has no doubt that employee ownership has had a positive impact on his organisation’s productivity.
He says: “A sense of pride exists among all our staff and has allowed employees to take control of the destiny of the [organisation], thereby creating a culture of working together for the benefit of each other.”
Measures of success include attendance levels that are significantly better than the industry average and a culture of innovation.
“It is the policy of the [organisation] that 25% of sales should come from new products less than four years old,” explains Facey. “Innovation is therefore key to the [organisation’s] growth and plays an important part in driving the business forward and keeping ahead of the market.”
Gripple, which features in the Employee Ownership Association’s top 50 employee-owned organisations, like its sister company Loadhog, is now 100% employee owned. Employees are asked to purchase at least £1,000 worth of shares after their first year of service, with the employer providing a loan to help staff who need financial support to do so.
Employee ownership is not optional for the 441 Gripple staff or the 50-strong workforce at Loadhog: it is central to the ethos and structure of the two employers. Indeed, Gripple has taken the employee ownership model a step further by establishing a private employee-owned company called GLIDE (Growth Led Innovation Driven Employee), which receives gifted shares from the chairman and vice chairman over a 10-year period with the aim of ensuring that Gripple’s culture and founding principles are maintained by future generations of employees.
WOULD YOU ADVISE AN EMPLOYER TO INTRODUCE AN EMPLOYEE SHARE PLAN IN ORDER TO INCREASE PRODUCTIVITY?
Robert Postlethwaite, managing director at Postlethwaites, says : “Yes, I would if there was scope for productivity improvement. The [employer] would need to explain clearly to employees how the share scheme worked and continue regular communication about performance and its impact on share value.”
Malcolm Hurlston, chairman of The Employee Share Ownership Centre, says: “No. [Employers should not] waste [their] time. For an employee share plan to work productively, [an employer] needs to commit quantum communications and top level commitment.”
Graham Rowlands-Hempel, consultant for employment and incentives at Linklaters, says: “Yes, it may not be possible to prove beyond doubt that employees who own shares are more productive, but it makes common sense that they will be more motivated. After all, they are part owners of the [organisation], so its success will be good for them and this must affect behaviour in a positive way.”
Nigel Mason, director at Capital Strategies, says: “Yes, always, provided it is meaningful in scale, non-contributory and part of an authentic commitment to employee involvement and participation in the business.”