- While share schemes may not solve immediate financial worries, they can help boost long-term financial stability.
- Aligning staff with shareholders can improve motivation and engagement, reducing absence and turnover at a time when talent is at a premium.
- Proper communication of both the negatives and positives will help ensure staff get the most out of a share scheme.
The current economic climate means employees want more from their reward packages, with fresh talent and motivation becoming increasingly hard to come by. Not all employers can afford inflation-busting pay rises, which means it is worth considering what other benefits can engage and support staff during a difficult period. For some, share schemes may well form part of the answer.
The current picture
According to Ifty Nasir, founder and CEO of Vestd, the business has seen the number of schemes under its management double during the past year, continuing a growth trend seen during the pandemic. Meanwhile, participation in the HMRC-approved Share Incentive Plan (SIP) and Save as You Earn (SAYE) schemes is also on the rise.
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Murray Tompsett, head of ProShare, says: “Looking at our SAYE and SIP Report [published in August 2022], participation has risen so over the past two years, to above 40% of those who are eligible. It’s a big jump, up from about 32% or 33%. The average monthly contribution amount has decreased a bit, but that’s a good thing as it shows new people dipping their toes.”
Tompsett adds that in 2020, market forces caused many share prices to drop, and organisations offered further discounts to encourage participation. Informed employees understood that in three years’ time, when the shares matured, prices would likely have risen substantially.
While the events of the past few years have taught many consumers to be concerned about unexpected downturns, and perhaps wary of financial risk, some schemes offer a safety net that can help allay these fears.
“People are understanding now that the SAYE is relatively risk free, because if the share price drops, they can simply get their savings back,” Tompsett explains.
“So, it’s a popular plan. There has been increased awareness. People who do understand have benefited, and word of mouth has been really important for increasing participation.”
Providing more than pay
Share schemes are, due to their three- to five-year timeframes, not a solution to the immediate inflation and cost crises, and employees living from one paycheck to the next may not be in a position to set a chunk of money aside, particularly when the outcomes are not guaranteed.
Nigel Watson, partner at Burges Salmon, explains: “[Employees] have to give it time; for the equity either to recover or increase in value. It is an investment, at the end of the day, even though often it’s not always dressed up like that. People do need proper time horizons, otherwise they can become very disillusioned, because it’s not a ‘get rich quick’ scheme; [they] may not get rich at all.
“If [someone is] trying to solve the cost-of-living crisis, I’m not entirely sure this solves it in the here and now, because it’s about patience, it’s about time. By that point in three years’ time, the crisis hopefully will be behind us a little bit.”
However, employers do have the option to provide free shares to staff, either as part of their compensation package, as a reward for performance, or simply as part of a financial wellbeing package.
Mitie, which has a large proportion of employees working in front-line roles for lower pay, included a free share scheme as part of its financial support in 2022. This was weighted to allow those earning under £30,000 to receive more shares. While it might not provide immediate financial relief, this allowed the firm to add to its existing short-term support measures, and help staff longer-term at the same time.
Nasir says: “If the cost of living is going up by 10%, do businesses definitely need to match all of that through salary? Or, could employees take a slightly smaller reward today, in service of a reward tomorrow.
“It’s like putting money in the bank: each month you stash something away for the future, while also having a stake in the business, so you can actually contribute to the outcome. It’s potentially more valuable than just giving it to the bank.”
Of course, if a free share scheme is positioned by the employer as taking the place of a potential rise in current pay, there might be some consternation among staff who need more money to cope in the short-term. However, if the advantages are communicated properly, this could be positioned as a boon, particularly if the employer is unable to provide straight pay increases.
Indeed, share schemes come with tax advantages for employees, with any profit only subject to a 10% tax rate. For employers, they also come with national insurance (NI) savings.
The Social Market Foundation analysed Office for National Statistics (ONS) data to find that employees in the lowest earning 25% in the UK were £10,900 better off, on average, if they participated in a share scheme. This is, of course, largely due to the profits made when shares mature. But Tompsett adds that share schemes can have also have a more holistic effect on financial wellbeing.
“These plans build financial resilience, and they give staff that extra little foothold, that little nest egg, so that when times are tough, they do have resources to draw upon,” he explains.
“These plans also build financial awareness; people understand the value of putting something aside. So, when they move to a [business] that maybe doesn’t have the same share plan, they may well put the same amount into a bank account.
“These are good habits, they improve morale, and they increase productivity, financial resilience and wellbeing. They don’t replace salaries or pay rises, but they do work as a reward and retention tool.”
Watson agrees: “There is something called ‘reckless conservativism’, where you just stick your money under a mattress, which is the worst kind of saving. This usually comes down to education: understanding risk. Employers should focus on this being part of financial planning: prudent diversification, prudent asset allocation, which helps create a sustainable financial future.”
According to Watson, share schemes do have a role to play in the current heightened conversation around pay.
“There is more attention on lower paid staff, where before the focus might have been on board-level and senior management teams,” he explains. “Increasingly [employers] are asking how they can share the spoils more widely. This might be about the cost-of-living crisis, but it’s more about fair pay. There’s been a seismic shift, where equity is now seen as something you push down to everybody.”
Motivation during a talent crisis
A recent Employee Benefits poll found that 94% of respondents planned on expanding their workforce in 2023, but foresaw issues with talent shortages.
Nasir points out that older employees, including those who might have retired but decided to return to the workforce, are more likely to have available funds to invest in share schemes. This is a tranche of people with important skills and experiences, particularly needed by younger businesses and start-ups.
Whatever the demographic of employee, a well-positioned share scheme can have a direct impact on motivation and engagement.
Nasir says: “The essence of [Vestd] came from the whole notion of the ‘ownership effect’, which is the well-researched philosophy that if you have a stake in an enterprise, your relationship with it changes, and what you bring to the table changes.
“Even if it’s just a very small amount of difference during the hundreds of marginal decisions anybody has in a day, it can make a big difference. Having the team invested obviously brings some success for the business, but also rewards individual, because they get a piece of the growth.”
Tompsett adds: “These plans all have one common factor: they align the interests of the employees with those of the shareholders. It’s been proven that having employee share planners in place also increases engagement massively, and it has a really positive impact on productivity, at a time when the UK’s productivity is flagging.”
The mid-length timeframes set by share schemes might also give employees pause when considering moving on to another job, in addition to decreasing absence rates and improving morale and performance.
Making share schemes work
There are a wide range of share schemes available, some of which will work better for certain employers over others: for start-ups a scheme should be focused on future growth, flexing salary expectations now for the prospect of higher future reward. Meanwhile, SAYE can provide a lower risk option that focuses more on savings with the opportunity for growth.
There are also legal and logistical issues to be considered. Employers should take care to ensure a scheme’s risks are communicated effectively. Private businesses should also be wary of a lack of transparency around share prices, which cannot be simply accessed via the internet, unlike those of publicly-listed organisations.
All of this drives home the importance of communication, education and guidance. However, employers are often rightfully concerned about crossing into providing regulated advice. Employers should therefore focus on providing balanced information, while encouraging employees to seek independent financial advice from outside the organisation. A holistic approach to financial education in general should also help give staff make sensible decisions.
In providing this balanced information, Nasir says using scenarios and modelling can help build engagement, while demonstrating the track record – both positive and negative – of previous schemes.
Tompsett agrees that good communication around share schemes has never been more important, with the most effective often being word of mouth and local champions, who can make the concept real and relatable.
“We’ve always found that lower-paid people are often the most keen advocates, because it really does make a difference,” he adds. “They’re quite often the most savvy people, because it’s the difference between them going on holiday each year or not, or upgrading their car.”
Good communication is also integral to ensure that those already participating are supported and informed during more volatile periods.
Watson concludes: “Following COVID-19, the truth is finances do go up and down, and we’ve all suffered with the cost-of-living, and naturally [employees] might retrench; so it is about reframing investment as making sure [their] money is doing the best work for [them].”
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