The Economist Intelligence Unit: What are the different types of staff share schemes? How does their take-up vary?
Robert Postlethwaite: There are three main scheme types:
1. Management holds a minority stake in the company, typically 10% altogether
2. Employees and management hold a minority stake, typically 10% or a little more
3. Employees as a whole hold a controlling stake i.e. more than 50% and often 100% (e.g. John Lewis and Arup in the UK, or Mondragon in Spain)
The take-up is generally higher when employees are getting free shares than when they’re asked to make a personal investment.
What are the most commonly adopted schemes?
It depends on whether the company is private or listed. Share schemes for senior employees are now almost universal at listed companies. Those that involve all or most employees are also increasingly common. In private companies, it tends to be more limited to selective schemes involving senior employees; only a minority of private companies have adopted share schemes but that proportion is steadily growing.
Overall there is a rising awareness of the benefits of share schemes and higher confidence in how to do it. This has been particularly strong in Anglo-Saxon countries such as the US, the UK and Australia, though globalisation is leading other regions to consider staff share schemes more seriously.
What are the incentives and risks behind adopting staff share schemes, both for employees and for employers?
The incentive for an employee will probably be the prospects of capital growth (ie, having an investment which grows in value) and of receiving a share in profits through dividends. Both of these are linked to the company’s performance and the employee’s longevity at the company. As a result, the advantage for the employer is that staff share schemes incentivise employees to stay in the company and do their best to maximise its performance.
The risk for employees who have bought shares with their own money is that the shares could decline in value. So most companies would go for a scheme that mitigates that risk—if they have a scheme that involves buying shares, they might offer x number of shares for y number of shares bought.
The risk for the employer would be that employees don’t understand the scheme, meaning that they wouldn’t behave in the way the company would hope for. In the case of a scheme where employees have committed their own money and the company faces a long-term decline in share prices, then employees’ morale might suffer.
What impact, if any, can a staff share scheme have on a company’s performance?
Academic research has shown a positive impact of staff share schemes on company performance, as long as management style is of a kind that encourages employee ownership (for example, by supporting employee initiative). Research by Cass Business School also found that companies which had share schemes during the recession starting in 2008 were much more resilient to the crisis.
This interview is part of a series managed by The Economist Intelligence Unit for HSBC Commercial Banking. Visit HSBC Global Connections for more insight on international business.
