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Employee share ownership: an introduction

Employee share ownership (Eso) allows employees to acquire shares in their company, benefiting employees and companies alike.

Summary

Employee ownership can either be direct or indirect.

  • Direct employee ownership – under an employee share ownership plan, employees hold shares or have the option to purchase shares in their company at discounted and tax-efficient rates.
  • Indirect employee ownership – a company is owned (in full or in part) by a trust on behalf of its employees.

Employee share ownership plans (ESOPs) are by far the most common form of employee ownership in the UK. There are now over two million employees in the UK who hold shares or options through a share scheme, often receiving life-changing sums in the process. ESOPs are present in eight out of ten FTSE 100 companies.

The Esop Centre promotes direct employee ownership because it provides a strong link between the factors of production of capital and labour. This means that workers benefit from the growth of their company. If the company succeeds and the value of the shares increase the workers gain from their own efforts. This is known as ‘the wages of capital’.

What are the benefits for companies?

Evidence from empirical research suggests that when employees have a stake in the business they work for, this contributes significantly to improving the performance of the business. Productivity levels increase because employees have a vested interest in ensuring the company succeeds. A common focus on the share price reinforces the community aspect of the business to create the ‘corporate glue’. Share schemes have a positive effect on staff retention by providing employees with a longer-term focus on the company’s future performance and aid recruitment by adding an extra form of remuneration to the benefits package.

What are the advantages for employees?

Financial advantages. An employee share scheme is an additional form of remuneration, which is often tax-effective. If the share price increases over the course of the scheme (usually three or five years) then participating employees benefit. Companies may choose to give employees discounted or free shares or to match shares bought with additional shares so that the gains are even more marked. The schemes can also encourage a savings culture allowing employees to better provide for their futures.

Participatory advantages. By acquiring shares in their company, employees effectively become co-owners of their company. In the most effective cases, a share scheme is linked to a programme of increased employee engagement. Often when employees are more engaged, their performance and job satisfaction increases and absenteeism is reduced. Employee shareholders also have the opportunity to participate in the company’s decision-making, for instance by taking part in the annual general meetings or through other channels introduced by the company.

What are the disadvantages?

Although employee share schemes have numerous advantages, they are not a panacea. Share schemes are more complex to administer than cash incentive schemes and therefore more expensive to provide. As share prices can fall, the size of the reward is unpredictable, which is of special concern during times of economic uncertainty. For this reason companies often offer shares on favourable terms by, for example, offering free awards, discounts of matching share offers. However, share schemes are at worst almost invariably ‘no-lose’ for employees if the company fails to progress.

Types of share schemes

An employee share scheme will usually be a share option scheme, a share-gifting scheme, a share purchase scheme, or a mixture of these.

  • Share option scheme – where employees have the option to buy shares at some point in the future at a price set on day one – referred to as the date of grant. The aim is that if the share price increases in that time, employees can buy shares for below what they would be worth.
  • Share gifting scheme (or a free shares scheme) – where the company gives shares to the employees free of charge. These shares normally have to be held in a trust structure for a period of time.
  • Share purchase scheme – where an employee can buy shares in the company, normally at a discounted rate.

Tax-advantaged schemes

There has been cross-party support for employee share ownership in the UK since the late 1970s, with successive governments introducing new forms of tax-efficient schemes.

There are currently four tax-advantaged employee share ownership plans available to UK companies, together with the Employee Ownership Trust.

Save As You Earn (SAYE) / Sharesave

SAYE is an all-employee share option scheme. Employees save a monthly amount for three or five years which they then use to buy shares.

Company Share Option Plan (CSOP)

The CSOP is a discretionary share option scheme, traditionally used for selected employees, but can be used as an all-employee scheme.

Share Incentive Plan (SIP)

The SIP is an all-employee share gifting or share purchase scheme. Employers can match contributions with free shares.

Enterprise Management Incentive (EMI)

EMI is a discretionary share option scheme designed to help SMEs recruit and retain employees.

Employee Ownership Trust (EOT)

A trust owns a controlling stake in a company and provides bonuses on an equal basis to all eligible employees.

There are also a number of ‘tax-unapproved’ schemes such as Long-term Incentive Plans and the Joint Share Ownership Plan.