Share-option schemes give staff keener interest in firm's future

By sharing the wealth, a company can improve productivity of staff, increasethe bottom line and get employees committed to the…

By sharing the wealth, a company can improve productivity of staff, increasethe bottom line and get employees committed to the day-to-day performance of the firm. Laura Slattery reports

How can employers improve productivity, increase profitability and involve a committed staff in the day-to-day performance of the company? By sharing the wealth, according to groups promoting the use of employee financial involvement strategies.

Employee share-ownership plans (ESOPs), save-as-you-earn (SAYE) schemes and a range of other share-option, profit-sharing and gain-sharing schemes are tax-efficient methods of fostering employee loyalty and reducing wage inflation, according to the Irish ProShare Association (IPSA).

For decades, US multinationals have aimed to emulate the Microsoft model of using share-option schemes to keep wages in check, while at the same time creating a number of more-than-satisfied millionaires on the back of a rising share price.

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Strong demand from the high-tech sector has led to more favourable tax conditions for a flexible range of schemes in the Republic.

Here, it is semi-state organisations undergoing a period of change or privatisation that have tended to use ESOPs, which were introduced to the Republic under the 1997 Finance Act and have been implemented at companies such as Eircom, ICC Bank, An Post, ESB and Aer Lingus.

Under the scheme, the employer or relevant minister transfers a certain percentage of shares, typically between 5 and 15 per cent, to an employee share-ownership trust. This is usually done as part of a transformation agreement negotiated with the employees' union, under which new working arrangements are introduced.

The shares are held in trust for a period of at least three years before they are distributed to employees. If the share price has risen, the employees can sell their shares and make a tax-efficient gain. Since the Finance Act 2001, employees no longer have to pay income tax on the shares received and will only attract a 20 per cent capital gains tax.

"There is no doubt that the tax changes introduced in 1997 encouraged the growth of ESOPs in this country, but there is still an amount of work to be done to make ESOPs more user-friendly for firms in the private sector and in particular for firms whose shares are not quoted," says Mr Bernard Daly, chairman of the ESOP special interest group at IPSA, which is affiliated to employers' group IBEC.

Share-ownership plans can have serious implications for private companies in terms of voting rights, disclosure to employees and the need to agree the share valuation with the Revenue Commissioner in advance of each scheme.

Mr Daly, who worked on the implementation of the ESOP at ICC Bank, believes there is no doubt that the ESOP facilitated a smooth transition into the private sector and that its new owner, Bank of Scotland, has benefited. The tax and possible investment benefits of the scheme eventually outweighed staff concerns about changes in working conditions.

In an approved profit-sharing scheme (APSS), employees can receive tax-free shares worth up to €12,697 a year. Options must be granted at the market value of the shares at the date of the grant as agreed in advance with the Revenue Commissioners, and there must be a period of three years between the date the options are granted and the date the employees can sell them.

An approved profit-sharing scheme forms just one aspect of Intel's total compensation reward strategy. More than 2,000 of the chipmaker's 3,200 employees in the Republic participate in the scheme, according to compensation and benefits manager, Mr Gary Boyle.

Employees can purchase shares with money received twice annually from Intel's employee cash bonus plan, which is based solely on profits made by Intel.

"Because approved profit-sharing plans are Revenue schemes specific to Ireland, it is a bit of an advantage for Intel employees here and it is viewed as such by other parts of the corporation," Mr Boyle says.

In addition, all employees receive stock options when they join the company and may receive further options depending on individual performance. Share purchase plans allow all employees to save from 2 to 10 per cent of their pay over six months and then use the money to buy shares at a discount of 15 per cent of the prevailing purchase price.

The Intel share price would have to collapse by more than 15 per cent to incur a loss. Recently, employees have depended on the discount to ensure a profit as the actual return has been close to the 15 per cent mark, according to Mr Boyle.

"Given stock market volatility, a 15 per cent return over six months is not bad," he adds.

Some 65 per cent of Intel employees participate in the plan.

"People in Intel are very much aware that total compensation isn't just about one thing. It isn't just about base pay," says Mr Boyle.

Under an approved SAYE scheme, sometimes called a sharesave scheme, employees' monthly contributions are taken from their salary without attracting income tax. After a three-year or five-year period, a tax-free bonus is added to the savings and the amount is then used to purchase shares in the company at a discount of up to 25 per cent.

Mr Tom Fleming, head of performance and rewards at Guinness UDV, describes the company's Sharesave plan as a "no-lose savings programme" in which 30 per cent of eligible employees take part.

"If the share price goes up, people can exercise the options and make a gain, or if not, they still have their savings plus interest," he explains.

As well as the Sharesave programme, Guinness structures its bonus plans so that most of the bonus packages, subject to Revenue maximums, consist of shares in its parent company, Diageo.

"It's a one-in, all-in way of rewarding employees for business performance. The only differential is that it is worked as a percentage of the employee's salary. Then they reinvest the bonuses in shares, so it's a virtuous circle of investment," says Mr Fleming.

"The scheme makes employees interested in the business, so it's not just faceless shareholders who are interested in the share price. Employees want to understand the what and the why behind the Diageo share price and it would be a talking point at lunchtime, if there's been a significant move," Mr Fleming says.

"Employees begin to understand shareholder issues a lot more clearly," agrees Mr Bernard Daly from IPSA.

Managing schemes requires close co-operation and partnership between both sides, creating a company culture of inclusion. Management and employees have a common interest.

Employee financial involvement strategies bind overall earnings to variations in corporate performance, so employees are forced to shoulder more of the business risks. Part of the philosophy behind employee financial involvement is to link individual performance with reward.

But for the Revenue approved share-option schemes introduced in 2001, the scheme must be open to all employees under "similar terms". Options may be granted by reference to length of service, salary level or other similar factors, but cannot favour individual employees.

The "similar terms" condition is included to ensure that schemes won't result in benefits arising mainly to an already highly paid chosen few.

But according to Ms Sheena Doggett, head of the share schemes unit at A&L Goodbody, take-up of the Revenue approved share-option schemes has been slow, mainly because of rigid implementation of this condition.

"The allocation policy cannot include the type of discretionary element commonly associated with such schemes," she says. Although up to 30 per cent of the options in a particular year may be granted to certified "key employees", in practice this does not give companies the flexibility they need to reward individual performance under global multinational share-option schemes, Ms Doggett believes.

According to Mr Daly, IPSA aims to work with IBEC, ICTU and the Government to ensure that the maximum is done to promote the proper useof share schemes and to enhance the taxation and legislative environment for employee financial involvement in the Republic.