Share schemes may support wider social issues such as giving staff a savings discipline and can be used to reinforce performance for wider HR ends, but University of York professor Andrew Pendleton warns against unrealistic expectations of overnight, says Debbie Lovewell
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Employee share plans are a little like air travel. At one end of the scale, you have the budget airlines, which appeal to the masses and potentially offer significant cost benefits. At the other, sits the private hire jet maintaining an air of mystery to all but a select few. The one thing they both have in common is that all flights, no matter how expensive, carry an element of risk, however small. In share plan terms, this equates to the widely-available share incentive plans (Sips) and sharesave at one end of the spectrum, with executive stock option plans at the other.
After a period which saw many schemes under water, employee share plans have been enjoying something of a resurgence of late. Andrew Pendleton, professor of human resource management at the University of York, has been watching their progress for a number of years. “Looking at share plans over the 25-30 years we’ve had them in the UK, you [see] periods of rapid growth, then periods of stability and then periods of slight decline. I think we’re just coming to the end of a period of rapid growth and things will stabilise a little bit.”
This growth can only be seen among certain types of plan, however. Over the past couple of years, for example, Pendleton has witnessed a drop in both the number of firms offering and employees participating in sharesave schemes, along with a decline of HM Revenue & Customs company share option plans (Csops).
Enterprise management incentives (EMI) and Sips, meanwhile, have both gone through a period of growth. But the latter is the subject of some controversy and Pendleton explains that its growth does not automatically mean it has been a success. “There has [been] the steady but unspectacular growth of the Sip, which some people see as a success and some people see as less [so]. Really the plan is growing but perhaps not as dramatically as some people had hoped for. When the Sip was introduced, the government clearly attached a lot of store by it as a new form of share plan that was going to be much more attractive to firms that hadn’t hitherto used share plans. It clearly just hasn’t grown to that great extent. Although with partnership shares the tax benefits are considerable, there is more risk for the employee.”
He adds that the Sips’ failure to live up to expectations is partly due to its contradictory nature. “Ironically, one of the motives for the Sip was to introduce a flexible modular plan, but to create flexibility you sometimes have to create lots of rules and some companies perhaps see Sips as a little bit complex. Having said that, Sips were partially aimed at trying to get to unlisted companies and I think it’s been moderately successful in that. About 60% of companies with Sips are unlisted so it has reached down to parts other share plans couldn’t reach.”
The perceived complexity of share schemes can appear daunting for employers looking to implement a plan for the first time. But Pendleton believes that this shouldn’t prevent organisations from going ahead with their plans: “Clearly [admin] does prevent some firms [from launching share plans]. But because most firms use an external administrator, it needn’t be a major problem.”
Where firms more commonly trip up is expecting their scheme to achieve too much too young. “With people running plans for the first time, there’s sometimes an unrealistic expectation that the share plan will transform things more or less overnight - that staff will turn from being discontented to being completely committed to their job and that just doesn’t happen. So after initial enthusiasm, you then get a certain amount of disillusion,” he says.
In order to boost a scheme’s chances of success, communication is vital. “A lot of attention has to be paid to communication prior to the plan being introduced. There is an argument that perhaps greater consultation [with staff] might lead to better plans. Employees generally want more information. What they want to know is: what will happen at key dates in the future and what the implications of being in the plan are,” he adds.
Despite advising employers to remain realistic about the potential impact of share schemes, he explains that they can have a number of benefits for organisations willing to take a punt. “We know share plan firms tend to be better performers, but we don’t know what way round it is. Do they introduce share plans because they are better performers or does having a share plan make them perform better? What we can say is that they have a reinforcement effect. They reinforce other HR activities. As performance management has become harder and tougher in a lot of companies, share plans have helped to soften the blow a little bit. They’re a more diffuse alignment tool rather than a hard-edged performance instrument [particularly] all-employee schemes. They can be a way of helping to engender commitment in contexts where it is a pretty hard environment.”
Staff retention is also likely to improve, particularly in firms running sharesave schemes, which lock staff in for three to five years if they are to obtain maximum benefit. And once employees have participated in one scheme, Pendleton believes that they are likely to repeat the experience. “Research shows that once you’ve got someone into sharesave, for instance, they tend to keep joining and that clearly must have an effect on retention. People tend to be serial participants. Once they’re in one, they tend to stay in.”
Share plans may even help employers to address wider social issues. Encouraging staff to save through whatever means, for example, is one way of tackling Britain’s current debt crisis. In order for this to work, however, Pendleton believes that it requires a certain level of commitment from employers. Simply putting in a scheme is no longer sufficient.
“If you look at broader society, share plans play a valuable role in generating long-term saving. What has come out in research I’ve been involved with, is that share plans do get some groups that don’t normally save that much, young people for example, to [do so]. There’s also the danger that people lock up too much of their savings in employee shares. What is starting to emerge is that we need more financial education and those that are participating in employee share plans would benefit from financial education provided by their employer.”
A particular talking point over the past year has been the launch of new accounting rules from the International Accounting Standards Board (IASB), which require all share schemes to be accounted for in an organisation’s profit and loss account. As the standards have taken hold, there has been much speculation about what this will mean for employee share plans. “My impression is that it’s made quite a big impact on executive remuneration but probably had less effect on all-employee plans. But I suspect firms may make more use of capping below the statutory limits and may run less frequent offers. The main things that have come up for all-employee plans are the administrative headaches and the timing of the administration and various charges. I don’t think the accounting standard will drive out all-employee share option plans,” says Pendleton.
Overall, he believes that the market will not experience any lasting damage and predicts that the brakes will not remain on for very long. “In terms of growth, I think there will be rather modest growth over the next few years. But then these things are a bit cyclical and when the market starts to pick up again, I think we’ll start to see [share plan growth] speed up again. “I think share plans are with us for the long term. They’re certainly quite an engrained part of the large corporate scene, where several million employees have benefited from them. They’re a well-established, entrenched and well-institutionalised part of the scene.”
Biography: Andrew Pendleton
Current position:
Andrew Pendleton is professor of human resource management and head of the Master’s Programme in the Department of Management Studies at the University of York. He recently moved to the position from Manchester Metropolitan University, having previously worked for the universities of Bath, Bradford and Kent.
Government projects:
During 1999 and 2000, he worked with the government on the design of the share incentive plan and enterprise management incentive.
Specialties:
He initially fell into the area almost by accident. “I started doing a lot of work on employee-owned firms [because] I was interested in industrial democracy and industrial relations. As time has gone on, it has broadened out into share plans in listed firms.” His research interests also include the relationships between finance, corporate governance and HR, and areas of industrial relations.
Further reading
By professor Andrew Pendleton, University of York:
Incentives, monitoring and employee stock ownership plans: new evidence and interpretations (Industrial Relations, forthcoming 2006).
Employee share ownership, governance and industrial relations’ in Essays in honour of Harvie Ramsay, edited by B.Harley, J. Hyman and P. Thompson, (Palgrave Macmillan, 2005)
Profit sharing and employee share options’ in Strategic reward systems, edited by R Thorpe and G Homan, (Pearson Longman, 2000)
