By David Isaacs, Head of Registration and Employee Share Plans Development
What’s the biggest challenge facing your boardroom?
Our share plan expert and market-development guru, David Isaacs, thinks it could be finding that Venn diagram that meets the needs of employees, shareholders and corporate engagement.
But are you looking in the right places for answers? And are you actually overlooking a solution that employee share plans have been able to provide for many years already?
To find out, Jai Baker went to David with his questions, and will be publishing a series of articles over the next three weeks to tell you what he thinks.
Jai: I think it’s clear that employee share plans have provided many benefits to employee participants historically. However, in an era of low interest rates, volatile share markets and economic/job uncertainty, are share plans still fit for purpose? Are they doing a valuable job for employees and employers?
David: Share ownership for employees, and even company ownership, is definitely high on lots of agendas. Share schemes have been receiving lots of media coverage over the last couple of years, especially with the Labour Party pledging to redistribute shares to workers in the UK. (One key point of this policy is that it is not about the redistribution of shares; it also allows up to £500 of profits to be shared with all employees.
'Employee share plans are perhaps more relevant now than they have ever been'
Across the channel, France’s president, Emmanuel Macron, has just pushed through a law for mandatory profit-sharing schemes for employees in firms with more than 50 workers. In the US, Democratic presidential hopefuls, Bernie Sanders and Elizabeth Warren, propose to tackle soaring wealth inequality by giving employees a stake in their companies – and increased authority over the profits and decisions made by their employers.
Employee share plans are perhaps more relevant now than they have ever been, and it’s difficult to see how any employer could fail to engage with their potential benefits:
- Increased productivity
- Increased employee motivation
- Increased employee engagement
- Shared rewards
- Improvement of employees’ financial wellbeing
Since the beginning of tax-advantaged share plans in the 1970s, millions of employees have benefitted from owning shares in the companies that they work for, and their companies have generally seen a related improvement in company performance.
So, should we just carry on extolling the virtues of employee share plans if they are just as relevant to employees and important for company performance as we always thought they were?
Well, I think the overall societal and corporate governance landscape has become much more complicated, and it now has a main focus on stakeholder and employee wellbeing. Employee share plans can play an important role in supporting that.
I like to think, with all the work that has been done recently, that employers and employees are more aware of potential mental health problems within the workplace.
Everybody experiences stress in the workplace at one point or another, but if financial worries are a factor in your life, it can be devastating to your productivity and mental wellbeing.
'Employee share plans offer savings opportunities that can help keep financial worries in check'
Employee share plans offer savings opportunities that can help keep financial worries in check. It’s worth noting that for some colleagues, an employee share plan may be the only savings they have.
I empathise with business leaders as they are feeling pressure to rethink the role of business in society more than ever.
- Social norms are changing, including expectations from employees, customers, and even investors
- There’s a growing realisation that a focus on one key stakeholder or metric is flawed
- Investors such as BlackRock’s CEO, Larry Fink, are increasingly pressing companies to focus on their purpose and how they contribute to society
- Perhaps most importantly, the world faces challenges like climate change, inequality, resource scarcity and loss of biodiversity. The current shareholder-focused system is not entirely fit for this purpose
If this is the case, is there a place in this ‘modern’ movement for existing employee share plan models?
Earlier this year, the Business Roundtable (founded in the USA in 1972 as a voice on the principles of corporate governance) issued a statement redefining the ‘purpose of a corporation.’
The group, comprising 200 US CEOs, transformed American business goals. They prioritised investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities – leaving behind the old strategy of putting corporate functions first to serve shareholders and maximise profits.
All stakeholders are now viewed as important. This is not a new idea; you can look back and see General Electric’s Jack Welch and Unilever’s Paul Polman both extolling the virtues of long-term investment in 2009, with care for the economy and society at their core.
Corporate governance in the UK is asking for a shift of emphasis to include stakeholders, employees and shareholders. So, it’s possible to see where employee share plans might have an ongoing, greater role to play.
Indeed, it might be said that employee share plans could be the ready-made model for preserving and enhancing employee engagement for companies. But, we must also be mindful of changes in working practices, such as the opportunity for workers who are not yet employees to share in capital growth.
What role do you see for employee share plans in the push for enhanced engagement with employee stakeholders?
The new engagement model seeks to level the playing field for each group of stakeholders. No longer should the shareholder always be deemed first in the pecking order when it comes to the input and benefits of a business’ profitability.
Shareholder rights remain in law and regulation, but in 2019 there are corporate governance reforms that will require greater engagement by boards with employees and workers, and more corporate reporting about the workforce. New requirements ensure company boards consider the interests of employees, business relationships with suppliers and customers, the wider community, and the environment during the decision-making process.
Perhaps the most significant change is the requirement for the boards of premium-listed companies to engage with employees and other stakeholders, so that they can effectively understand their views and interests.
'Engaged employees are those fully invested in their firm and their work'
How much more powerful could this engagement be if employees were also shareholders through an employee share plan?
Employees manage thousands of processes, and control the vast majority of companies’ business relationships. Their views can be hugely informative to a board when it comes to operational effectiveness and strategy development; and their commitment to a company can uncover business risks at an early stage.
Engaged employees are those fully invested in their firm and their work. They actively think about the firm’s processes – and identify improvements. Their enthusiasm reflects a corporate culture that encourages engagement. Most importantly, they are productive.
The revised UK Corporate Governance Code gives three possible methods for engaging with employees and the wider workforce, with the aim to enhance the 'employee voice' in the boardroom. This may be through a director appointed from the workforce; a workforce advisory panel; a designated non-executive director; or a combination.
Would it be so far-fetched to consider that employee share-ownership plans could engage a workforce, aligning rewards and success with the company’s performance?
If employee share plans are the ready-made answer to engagement, productivity and profitability, why have we not seen every company rush to embrace them?
Employers looking at an uncertain business environment may not be encouraged to offer, repeat or expand employee share plans, and employees may be disinclined to invest if they are uncertain about the potential rewards. However, these sorts of incentives may be just the thing for an employer to retain, engage with and incentivise a workforce to increase productivity in challenging markets.
There are now over two million UK employees who hold shares or options through a share scheme. Employee share plans are used by 80% of FTSE 100 companies. Overall statistics from the Save As You Earn and Share Incentive Plan schemes that we operate for our clients are encouraging:
SAYE statistics 2017 - 2018
- Average monthly savings per employee for all awards went up 13 per cent to £155.50
- The total value of employee savings increased by 10 per cent
- Number of new SAYE grants made stayed the same
SIP statistics 2017-2018
- The number of employees eligible for SIP went up 4 per cent and the number of participants in SIP rose 2 per cent
- The number of companies offering partnership increased by 3 per cent
- Participants contributing to partnership shares went up 16 per cent
- 88 per cent do not require any service period and 46 per cent of companies make a free share award once a year
Clearly, companies incur costs when they operate an employee share plan, as they would with most other employee benefits. But, whilst measuring all of the benefits may be difficult, there is hard evidence of improved performance and profitability that comes with a workforce able to engage with and share in the profitability of the company they work for.
If the current crop of employee share plans had their origins in the 1970s and the year 2000, can we be sure that they are still fit for purpose?
Employee share plans are still popular and have changed over the years to accommodate the changing working landscape. However, elements of the schemes are of their time and don’t fit with some major changes in the world of work that we have seen very recently. These elements may need to be addressed soon to maintain the relevance of employee share plans – and perhaps propel them into a modern engagement tool.
Patterns of working have changed and people are much less likely to remain with one employer for many years as they used to. Having a SIP holding period of five years or saving in a five or even three-year SAYE scheme may become less attractive if a period of employment is not expected to last. Also, entitlement to benefits from an employer usually depends on whether you are an employee, and the law and regulation refer to employee status.
'We need to look at new models that meet the requirements of the modern employment landscape'
We are in an era of zero-hours contracts, the gig economy and fixed term contracts. The workforce is changing and if schemes can’t be offered to significant parts of the new workforce because of their ‘status’, then we need to look at new models that meet the requirements of the modern employment landscape.
Perhaps the answer is a new type of scheme that enhances participation of gig-economy workers and young people who typically embrace the idea that at least every two years they should change their employer. If this happens, it would result in those employees not sharing the potential benefit of participating in a SIP and/or SAYE – even if they had chosen to join the employee share plans.
We know from our internal research that getting small or retail shareholders to vote at annual general meetings is challenging. Is this different when you look at employees who are participants in employee share plans?
For a general meeting event where paper proxy cards are issued, mainly to retail shareholders, on average only 5 per cent of the cards are returned with voting preferences -representing 21 per cent of the issued share capital.
On average, 53 per cent of issued share capital is voted in total on each resolution. So, it's safe to say that the majority of votes cast come from institutions and intermediaries holding shares on behalf of ultimate investors. These statistics are broadly the same when you look at participants in employee share plans voting at company meetings.
There could be several reasons for this:
- Real or perceived pressure from the company to vote in a particular way, enhanced by voting transparency that leaves employees feeling exposed
- A lack of understanding about the topics covered in the resolutions
- A lack of appreciation about what share ownership means and what benefits/powers it gives ’joint’ owners of the companies
So, in addition to promoting more use of employee share plans by companies to bolster engagement, would you advocate more financial education?
Traditionally, financial education around employee plans has focused on savings, investment and taxation. These are all key to employees making decisions about participation.
However, if engagement is to be achieved, then we have to look at building on this and developing a greater understanding of ‘company business’ at general meetings, including what rights and powers employee investors have as share owners and how those rights are exercised.
'The complexities of savings, investment, taxation, debt, employment and pensions need to be tackled in the school environment'
I believe if we tackle these issues, then the transparency concerns would be less influential in the minds of employee voters, and the levels of engagement and voting would be substantially improved.
For too long, formal education about practical financial matters has been limited and now - more than ever - the complexities of savings, investment, taxation, debt, employment and pensions need to be tackled in the school environment and curriculum.
Do institutional investors have a role in advocating employee share plans as an engagement tool?
Institutional investors have a huge stewardship responsibility towards the long-term health of the companies they invest in. This is clearly shown in the new UK Stewardship Code 2020 which takes effect from 1 January 2020.
'Institutional investors need to understand the values of employee share plans for the long-term ’health‘ of organisations and their employees'
It sets high expectations and, in particular, the new code establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. There is a strong focus on the activities and outcomes of stewardship - not just policy statements.
Institutional investors need to understand the values of employee share plans for the long-term ’health‘ of organisations and their employees.
How would you summarise an approach to employee share plans for the immediate future?
My advice is:
- Continue to embrace and improve the employee share plan provision we have
- Recognise the corporate governance engagement opportunity, as well as the positive performance and profitability outcomes
- Work to overcome barriers where workers may not be classed as ‘employees’
- Expand financial education and literacy to embrace shareholder rights and how they might be exercised
- Work with ‘stewards’ to improve their understanding of employee share plans
- Seek greater involvement from them to promote the benefits of employees who are engaged and incentivised with companies through employee share plans
Have you listened to our new Governance360 podcast yet?
You might be interested in our episode on share plan engagement...
Or find the whole series: