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The importance of employee share schemes

This has become an important issue both in the UK and in the USA

Many employees have never even thought about share ownership, but this has become an important issue both in the UK and in the USA.

In Britain, the Labour Party favours forcing companies to give their workers ten per cent of their shares and a similar suggestion has been put forward in the USA by Democrat Bernie Sanders. However, there are both advantages and disadvantages to introducing employee share schemes.

Advantages

Giving employees shares in the company can motivate them to be more productive. It can also emphasise the link between shareholders and employees, demonstrating that they have the same interests. An employee share scheme can increase employee loyalty and reduce staff turnover.

An employee share scheme may also help to retain valuable staff and make it easier to recruit new employees. It could also be seen as compensation for lower salaries which can relieve the pressure on cash flow and is a tax efficient way of rewarding employees.

Employee share schemes can also be a means of raising working capital or of realising the owners’ investment.

If your scheme is approved by HM Revenue & Customs (HMRC), your company may benefit from corporation tax relief.

Disadvantages

Share price drops could have a negative effect on employee morale and could even affect staff retention.

Another potential problem relates to administration costs. In the short term, there are the costs of organising the scheme and gaining approval and in the longer term, there are the costs of keeping records and managing the scheme.

Dilution is another aspect of employee share ownership schemes that must be considered. The more shares that are issued, the smaller a percentage of the company each one becomes. This could be important as you need to retain 75 per cent of voting shares so that you retain control of the business.

It may become necessary to organise an internal market for the shares if employees wish to sell them unless your company is listed on the stock exchange.

Finally, it is important that your employees do not develop unrealistic expectations as to the financial rewards of share ownership.

Existing shareholders may be resistant to the setting up of an employee share scheme. If existing shares are involved, they would be taken or bought from the shareholders and in either scenario, someone loses out. Even if new shares are created, the value of existing shares would reduce so shareholders still lose money.

Creative suggestions

One key suggestion is for the introduction of a rule stating that when a company’s executives have shares issued to them, other employees should also receive them on a ratio basis between different employee grades. Since shares now form a significant part of the remuneration in many companies, this would be a way of addressing rising executive pay.

Whilst share value dilution would remain an issue, benefits including staff engagement and the associated improvements in retention and profitability might compensate for this.

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