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Frequently Asked Questions

What Questions do people have in relation to Employee Share Ownership?

There are a number of areas that companies commonly ask us questions on in relation to the implementation of a employee share scheme. Some of the following questions and answers may help in assisting you make the right decision for your company.

What evidence is available to support the theory that employee share ownership is beneficial to a company?

In September 2012 we published research undertaken by Loughborough University. This has taken over three years looking at HMRC approved employee share plans.

The study takes quantitative data from approximately 1,500 employees participating in HMRC approved share plans as well as including almost 50 hours of one-to-one interview findings.

This was undertaken during 2008-2010 when general share price performance in the UK could not havebeen much worse. Against this background it would not have been surprising if views of employee share ownership were almost entirely negative. However, this was not the case.

Given many of our economic ills have been created by financial short-termism it is worthy of note that this study highlights that employees view employee share ownership as a long term investment.

The fact many employees state they would not have invested elsewhere or bought shares on the open market if they were not taking part in an employee share plan is another prominent point
for policymakers to consider. As well as indicating that employee share ownership can serve as auseful means of widening the share ownership base in the UK this implies greater levels of savings and investment could be achieved too.

Building on positive findings in relation to the savings and investment elements of HMRC approvedemployee share ownership plans, the research demonstrates the impact that an instilled sense of ownership can have on employees; there are strong examples of the impact employee shareownership can have on staff retention as well as on employee performance too.

I was a little surprised, but nevertheless pleased, to learn of the consequences that share ownership has on employee’s ability to manage their money and understand financial matters more widely. For example, more than 30% stated participation had a significant impact on their financial understanding(35% SAYE and 25% SIP) with an additional 30% stating it had some effect.

In addition over 20% of employees in a share plan developed an enhanced understanding of thecompany they worked for i.e. they had a better understanding as to what the company was doing strategically; the reasons for changes in share price and so on.

In short, this independent research adds to a body of evidence from the UK, Europe, the US andbeyond, which makes a positive case for employee share ownership. Policymakers should consider the findingsto ensure employers, employees and the economy as a whole continues to benefit from employee share ownership.

You will also find information about a major piece of academic research by Freeman and Conyon which suggests a strong beneficial connection. There is a raft of other research, particularly related to companies in the US where employee share ownership is widespread. This research indicates a clear link between employee ownership and improved corporate performance, so long as this is combined with a management style that makes employee shareholders feel like part owners.

For example, the US General Accounting Office found that participatively managed employee ownership firms showed an annual productivity increase that was 52% better than other firms.

The UK Employee Ownership Index, compiled by Equity Incentives compares share price growth of UK quoted companies committed to widespread employee share ownership with the growth in the main stock market indices.

US and French quoted companies with widespread employee share ownership also show strong out performance.

Are shares an effective motivator?

Where employee effort adds value to the business and where this is clearly communicated to employees, share ownership can be the most satisfying employment benefit available.

Can share ownership reduce staff turnover?

One goal of an employee share scheme is often to encourage employee loyalty, through permitting employees to receive their shares, or exercise their share options, only after a certain length of time with the company. Many of the companies we talk to say that this does work in practice.

Does share ownership make working for your company more attractive?

It is likely to if it is simple for employees to understand and clearly communicated. If you are a knowledge based business, you may need to offer a benefit package that competes with companies offering stock options or similar to many, or all of, their employees.

Can a share scheme significantly improve cash flow?

By partly paying your employees in shares, you can relieve immediate pressure on your precious cash flow. This is often particularly important in a business's early years.

Does share ownership help focus employees on the longer term?

Whilst cash and other short-term benefits are key, a company will often be looking for ways of getting your employees to focus on the longer term. They may need good reasons for investing their time, and company resources, in projects not likely to generate a quick return. Share ownership can send a signal that they are expected to do so and will be rewarded for the results.

In a group comprising several related businesses, can share ownership give employees throughout the group a common focus?

Employees working in a particular subsidiary or division may identify primarily, or only, with that specific business. But where all the businesses in a group are related and inter-dependent, it is essential that they also focus on the bigger picture. A share scheme that uses group company shares as a reward for divisional or subsidiary performance can help your employees strive for success at all levels in your business.

Are the tax incentives significant?

The UK government is committed to encouraging employee share ownership through targeted tax incentives. Employees who are given shares, or able to buy shares at a discounted price upon exercise of share options, are not required to pay income tax or national insurance on this valuable benefit, if one of several HMRC tax advantaged employee Share Plans is used. Under a SIP, employees can now buy tax advantaged shares in their Company out of pre-tax income.

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