A second chance for share schemes

Having fallen out of favour for many businesses, is it time to take another look at introducing employee share schemes?


Employee share ownership used to be a really big thing. At a time when Britain had a perhaps unjustified but nevertheless firmly established reputation for bad industrial relations, it was thought that things might improve if more employees had a stake in the business, because they would understand how they were damaging their own financial interests as shareholders by being unco-operative as workers. Accordingly, employers were encouraged to set up savings schemes where a small amount was taken out at source from the monthly pay packets, the Government helped with a mild tax break and the accumulated money was used to build up personal shareholding for the employees.

Unfortunately, the idea that ‘owner employees’ would work harder to secure the success of the business did not work. Firstly, the employees did not really understand what they had – they knew their shares were worth a bit of money but the link between the day-to-day value of their shares and their day-to-day activities in the company was too remote to be meaningful or motivational. The gyrations of the stock market seemed wholly disconnected to the world in which they lived.

Second, the dividends on the shares were ploughed back directly to increase the size of the holding, so they did not even get to appreciate at first hand how this financial flow was ultimately linked to corporate profits. And third, even when employees had participated in a scheme for a long time and built up a holding of some value, it was still almost always of secondary importance when set against their earnings. Their financial interest as salary or wage earners trumped their interest as shareholders, so it made sense to press for higher wages, even if this did dent corporate profitability.

For all these reasons, widespread share ownership among all employees is no longer fashionable. That is not to say the concept is dead. Selective share ownership is still seen as motivational if targeted in the form of options or grants to key executives, linked in some way to their performance and the hitting of targets.
"According to an analysis prepared for ESOP, a charitable body which promotes employee share ownership, listed companies operating such schemes significantly outperform the market"

It is debatable, however, whether it is the prospect of receiving shares that makes the difference, or if the same effect would be achieved if the executive received the equivalent amount in cash. Indeed, if one wants to be provocative, there is a raft of academic evidence suggesting that while performance pay will most certainly distort behaviour, it is much less clear whether it effects how hard or intelligently a person works.

Share ownership is also common in small company start-ups. This is partly because the small group of people launching a company are often in some sort of partnership, so there is a degree of co-ownership right from the beginning. But it is also a useful way to keep costs down. A grant of shares with the hope of future riches is a well-established way to persuade staff to work for less.

But perhaps more mainstream companies should dust off their employee share schemes and make a real effort to get more people on board. According to an analysis prepared for ESOP, a charitable body which promotes employee share ownership, listed companies operating such schemes significantly outperform the market. An index has been constructed of those public companies where 3% or more of the equity is held outside the boardroom by employees. In 2015, the FT ESOP index rose 26.4% against a rise in the FTSE All-Share of just 0.8%. This was its fourth successive year of outperformance.

Of course, correlation is not causation, and it is notable that there is little in common between the companies in the index. The list includes some well-known names like Hargreaves Lansdowne, Admiral, Next and BT as well as a long tail of tiddlers listed on AIM. It also includes a couple that might not immediately be thought of as models for others to follow – Mike Ashley’s Sports Direct and Glencore, the commodity trading and mining giant. The first is noted for its fairly robust treatment of employees, the other for the fact that a substantial number of its key traders are already multimillionaires. Glencore was of course a drag last year, but the fact remains that employee-owned companies as a whole did outperform their peers.

Anthony Hilton is the award-winning former City Editor of The Times and the London Evening Standard

The original version of this article was published in the March 2016 print edition of the Review.

Published: 24 Mar 2016
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