Archive by Gabbi Stopp
Employee share ownership can play an important role in the public debate on economic equality
It is not often that we share plans professionals see employee share ownership make the cover of the Financial Times – more’s the pity – but this has happened twice in the past month, with the Labour party’s announcements on employment-related matters at the TUC conference and the shadow chancellor, John McDonnell’s speech at the party conference on his ‘inclusive ownership fund’ for employees.
It is heartening to see McDonnell express his support for employees owning a stake in the businesses that they work for and ProShare looks forward to playing an active role in any consultation that may follow.
How that stake is achieved, and the economic rights that flow from it, is up for debate. SAYE and SIP remain on the statute books as effective and valuable ways for employees to make their pay go further. According to our latest data, some 2.5 million UK employees currently participate in SAYE, SIP, or both plans – while millions more have benefitted from them over the decades they have been in operation.
“Take-up of SAYE had increased from 35% in 2016 to 42% in 2017, and that SIP take-up had increased from 29% to 32%”
91 FTSE 100 companies currently operate a broad-based employee share ownership arrangement of some sort and we estimate that around 60–70% of the FTSE 250 have these types of plans in place too. We know from our work in supporting HM Treasury’s application to renew EU state aid approval for EMIs (enterprise management incentives) that thousands of smaller companies value the ability to incentivise and reward their staff with shares too.
SAYE and SIP are well-embedded into the companies operating these arrangements – our latest annual survey found that take-up of SAYE had increased from 35% in 2016 to 42% in 2017, and that SIP take-up had increased from 29% to 32% over the same period.
It is worth noting that under the new reporting requirements introduced by the Companies (Miscellaneous Reporting) Regulations 2018, from 1 January 2019, companies with more than 250 employees will be obliged to state how they have engaged with employees and whether or not an employee share scheme has been operated during the financial year.
It has long been ProShare’s view that companies do not get sufficient credit for empowering share ownership amongst their workforces, too frequently overshadowed by pay for the handful of individuals at the top of their respective hierarchies.
Perhaps the more radical element of Labour’s ESO proposal is that companies might be compelled to allocate a fixed percentage of their profits into a trust for employees, with dividends paid out to employees. This would be a shift from (or an extension of) the current voluntary ‘all employee’ model, where companies can choose which plan works best for their business model and workforce, to a mandatory ‘all-company, all-employee’ model.
There will be many questions to work through in consultation, not least how this new arrangement, if implemented, might interact with existing all-employee plans, shareholder dilution limits and other considerations.
Aside from these practical and legal issues there are also other matters to resolve, mainly how much real motivational value employees will find in an arrangement where their ownership is indirect, of an asset that they have no control over.
In McDonnell’s proposed model, it will still be the directors deciding on the level of dividend proposed to be paid out to all shareholders. This includes those with a notional interest in the employee trust and the decision is one of the key items of business at the company’s AGM for shareholders to validate – or not, as the case may be technically. In my 20 working years I have never seen a dividend voted down by shareholders at an AGM, however.
“The debate on economic equality presents us with an opportunity to take employee share ownership to a wider audience”
The indirect ownership model has its pluses, and quite rightly many supporters, but in companies where this model is highly effective there are many other factors that enhance and amplify its effect, with strong and distinct corporate culture and disciplined, competent line management being probably the most important of these. These factors obviously are beneficial to any company, regardless of its ethos towards ownership and employee engagement.
SAYE and SIP, in contrast, offer routes to direct ownership, with all the voting and economic rights of share ownership.
The UK’s political parties are currently in ‘conference-mode’ and in the coming weeks will be setting out their policies on a range of issues, assuming the agendas are not totally subsumed by Brexit.
We in the employee share ownership industry have been committed to extolling the benefits of ESO to employees, businesses and society at large for many years and it seems that the current debate on economic equality and fairness for all presents us with an opportunity to take all forms of employee share ownership to a much wider, mainstream audience.
What are other people saying?
‘What this will ensure is that in large companies, in addition to rewarding workers with wages, they will reward them with shares that will go into a pool that will allow them to have an ownership role.’
John McDonnell MP, shadow chancellor of the exchequer
‘It is 40 years since the Labour/Liberal government supported employee share ownership with the introduction of the tax-advantaged Profit Sharing Share Scheme. Successive British governments have supported employee share ownership in a variety of ways and it has become a key part of many companies’ business strategy to engage with employees and enable them to share in the success.
‘The increased disclosure about employee engagement will go along way to open up the discussion about how best to do this and for some companies properly designed employee share plans may be part of that.
‘I welcome Labour’s interest in increasing opportunities for further employee share ownership but the global nature of companies is complex, whether they are listed or privately held, and I would hope that the significant advances companies have made through the existing tax-advantaged share plans in British companies are not lost.’
Janet Cooper OBE, partner at Tapestry Compliance LLP and course director of the ICSA Certificate in Employee Share Plans
‘I have been a supporter of wider employee share ownership since one of my first bosses explained to me how our company SAYE scheme was effectively ‘free money’ and I agree with the ProShare view that companies – some of whom have been evangelising employee share ownership for years – do not get enough credit for it.
‘Last year, I was involved in the Ownership Effect Inquiry, chaired by Baroness Bowles and supported by the Employee Ownership Association, and I was struck by how many quite small businesses had really benefitted from a focus on turning their employees into owners.
‘A number of the CEOs from whom we heard spoke passionately and convincingly about the benefits this brought to their company. As Gabbi says, there are a lot of details to be worked out, but the proposal certainly seems worthy of serious consideration.’
Peter Swabey, policy and research director at ICSA: The Governance Institute
‘We would like to see an extension of employee ownership, to give people a greater stake and voice in their workplaces. The aim would be to give more people a share of capital and to spread economic power and control in the economy by expanding the decision rights of employees in the management of companies.
‘The evidence shows that broadening worker ownership creates more committed workforces and more productive and fulfilling workplaces. One route to doing this is by expanding the number of employee ownership trusts ... [and] a second route to expanding employee and wider forms of ownership is through co-operatives and mutuals.’
IPPR, in its report ‘Prosperity and justice: A plan for the new economy’