Utter the words ‘employee share ownership’ and many people mistakenly think that this refers to the ‘John Lewis model’. John Collison argues that the time is ripe for policymakers and commentators to do more to understand and encourage the relatively simple concept of employees holding or saving for shares in the company they work for.
Employee share ownership can range from a small company with five employees to the likes of Asda, BT, National Grid and many more that have thousands of employees who hold shares in the company they work for. The approach has proven to increase productivity both in the UK and abroad. This not only applies to companies who offer share plans against those who do not, it applies to employees at the same company: comparing participants against non-participants. Given the UK’s sluggish growth and generally poor productivity levels this is significant. Research has also shown that employee share ownership plans can lead to greater innovation, lower staff turnover, improved employee engagement and better workplace relations.
The concept has similarities to, and is often confused with employee owned companies, co-operatives or mutuals but they are not the same. Employee owned companies like the John Lewis Partnership and engineering firm Arup are largely or wholly owned by the people who work for them. The way in which companies like John Lewis operate does not lead to wider share ownership and investment, nor does it encourage the savings habit (as no financial contribution from the employee is usually required). Furthermore, employees are not able to leave or retire from their employer with a nest egg of shares for their future and there is no minimum holding period for shares in the company before staff can benefit.
In contrast, HMRC approved all-employee share plans offer all of the above benefits. So, if we were going to do something about creating tomorrow’s, or even today’s, investor, employee share ownership would appear to have the edge.
The most popular approach is an all-employee share plan, one that is made available to all employees at a company on the same basis; the Save As You Earn (SAYE) plan. It is one of the simplest savings products available and has been so since introduced in 1980.
According to the latest annual survey undertaken by ifs ProShare, over one million employees are making regular monthly payments into an SAYE plan. The plans work by enabling employees to save regular fixed monthly amounts between £5 and £250 over a three, five or seven year period. The fact that small amounts can be saved seems to have attracted people with lower incomes: HMRC figures state that a third of these savers earn less than £21,000.
At the end of the savings period employees can use the money to buy shares in their employer at the price they were three, five or seven years ago. What’s more, most employers offer a further discount of up to 20% on whatever the share price was three, five or seven years ago. Employees are safe in the knowledge that they do not have to buy the shares; they can instead opt to have their savings returned with a cash bonus. No tax is charged on the grant of the share option and no income tax will be charged on any profit made when the option is exercised.
Put simply, SAYE plans are a very simple, tax efficient, risk free way in which to save. They also have the additional benefit of being directly promoted by employers.
The success of the SAYE plan is followed closely by another all-employee share plan, the Share Incentive Plan (SIP) introduced by Gordon Brown in 2000. ifs ProShare survey evidence published earlier this year suggests that just under one million employees participate in SIPs.
Employees save up to £125 a month from pre-tax salary; there is a payroll deduction thus stripping out another potential obstacle to saving in the form of inertia. These require a minimum holding period before employees can benefit: shares held in the plan for five years may be removed free of any income tax or NIC liability.
Whilst SIPs could be considered slightly more complex because of the different range of options available (for example, partnership shares, free shares and matching shares), the principle remains the same: employees are gaining a stake in their employer and gaining a share in any future success.
The benefits of both SAYE and SIP mean that investors know exactly what they are investing in; the company they work for and therefore, indirectly, themselves. Also, no fees are paid by the employee; a constant source of confusion and complaint in relation to other savings products.
However, whilst the story of employee share ownership in the UK is generally a successful one, it can and must be improved if we want the economy to benefit from better levels of productivity and a higher savings ratio. The maximum monthly savings limits for SAYE have not been increased since 1991 and the SIP limits have not increased since they were introduced in 2000.
Government should act quickly to remedy this and end the inequity of blocking private equity backed companies from offering HMRC approved all-employee plans to lower paid workers; a move that would open up the availability of SAYE and SIPs to a further 3 million employees in the UK economy.
Politicians, commentators and journalists should better acquaint themselves with the tried and tested concept of employee share ownership, a concept that has proved tremendously successful over the last 30 years. Doing so would avoid the need for policymakers to reinvent the wheel by devising new ways to encourage greater levels of savings, boost productivity and improve workplace relations. Already in existence is a tried and tested approach, supported by successive governments but one that could achieve so much more if updated to meet the needs of our 21st century economy.
John Collison has more than twenty years share plans experience gained from working in the employee share plan teams at HBOS and Abbey before take responsibility for all share plan related elements of the work of the Financial Services Authority, Consumer Financial Education Body and finally the Money Advice Service. John was appointed Head of Employee Share Ownership at ifs ProShare in August 2011.