Can Employee Share Plans really contribute to Business Success?

An employee share plan is a mechanism provided by a company that enables its employees to share in the success of the organisation. Employee share plans offer benefits to employers and employees and can be a key tool in recruiting and motivating key employees by aligning the interest of an employee with the success and growth of the company. 

In this article, Jane Williams looks at the types of plans available, their potential contribution to the business, their place in a reward strategy and the key factors for a successful implementation.

Which Type of Employee Share Plan?

Whilst there are many different ramifications of share plans, the three broad types of plans.  These are general share plans where shares are offered to all employees after a specified period of employment and retained usually in a tax efficient vehicle for a period. 

The second type is where share options are issued.  Options are the right to buy a certain number of shares in their employing company, with the price fixed when the option is granted. The price at which the options may be sold is dependent on the performance of the share and the employee benefits usually from any price gain. 

The third broad type is phantom share plans which may be used when real shares are not available. In this case, an option is granted over a notional number of shares at a value based on current business performance.  On exercise of the option employees receive cash equal to any increase in value of the shares linked to the business performances. These shares can be free to employees as they are funded fully by the company or range to those where the employee pays the full price for the share.

The Benefits of Share Plans

Employees can be the single most important factor in a company and share plans are the vehicle through which they can benefit from growth in value of the company. Shares give a financial stake in the future of the company and employees share in the success which they are creating.  Conversely this does increase the financial dependence on the company which, if there is a downturn for any reason, employees risk losing perhaps a large proportion of their savings.

Another benefit is that employees may gain a better understanding of the business results and issues of the company.  This can be a very effective lever to increase commitment to the organization providing that the employee is content in their current role. Both of these factors may increase the quality of decision making and individual behavior which meets the business need.

The role of Share Plans in the Reward Strategy

Employee Share Plans usually fit well in an inclusive culture in which everyone and their contribution is valued. In common with most aspects of the reward strategy, share plans will contribute to results if the performance management standards and processes are aligned correctly to the business and sufficiently demanding.

Bonus and incentive plans concentrate everyone on the immediate targets through reward which is directly linked to specific target achievement whilst share plans promote identity with the longer term growth of value. This is a crucial aspect of Employee Share Plans, their affect on motivation and directing individual perspective to the longer term.

Potential Leverage for Employers from Share Plans

Success depends heavily on each employee’s perception of the plan’s value. The rate of participation in a plan is likely to be determined, not just by the terms of the plan, but sometimes by the degree of confidence held by employees in the profitability of company.

Employee shareholders need to see the value of their shareholding and any increase, or decrease, in value. The latter can be very de-motivating, particularly if the view of share growth is not viewed as a three to five year horizon. There are cases where individuals are checking the share price hourly and perhaps feeling very gloomy as a result!

Share plans are viewed as a good recruitment and retention tool and are seen a pertinent indicator of the company’s attitude to employees. There is differing evidence as to whether plans deliver improved performance. It may be that the key drivers lie elsewhere, for example in the performance management approach.

Senior management equity plans and employee share plans should help the organization to align interests with the shareholder, especially if the rewards from the former are linked to share price growth.

Key Factors for a Successful Implementation

It is important to understand what the company wishes to achieve from the plan, the fit with the business objectives, the reward strategy and the organization culture. 

The design of the plan has to be skilful for greatest effect. What performance targets, if any, will be used and what performance measures are best to monitor progress. Would shares or options provide the best vehicle, and over what timeframe?

Managing a phantom plan can be demanding where there is a limited market for shares, a need for independent valuations of the company, to set entry and exit prices, and to re-purchase shares with pre-determined conditions.  How much should a business invest in the plan in relation to the number of employees, revenue and profit margins and how to balance this investment with other aspects of reward could call for data and judgement on which have the greatest impact and value to staff.
The regulatory environment in terms of accounting and taxation charges to deliver in the most tax efficient way for the individual, and manage any implications for the business can present some challenges and it is very important to appreciate the differing legal requirements and values in each operating country.

In-house or Outsource?

The introduction of an employee share plan will increase pressure from employees for good consultation processes to promote good information and communication flows across the organization. Consideration is also needed in deciding how to manage the administration, firstly to determine the service which will be needed, which department will be responsible or to consider if this should be outsourced.  A communications plan will be essential to identify all the stakeholders and the best routes to communicate messages and information.  When the results are not as anticipated, forward planning to minimize any consequent drop in engagement or motivation will be helpful.

Look for good advisors or consultants in your local environment to assist with any successful implementation. 

Summary

• Know what you want to achieve
• Align to business objectives
• Design skillfully within the regulatory framework
• Refresh Performance Management standards and processes if necessary
• Open the communication and consultation channels

About the Author

Jane Williams F.C.I.P.D

Jane has an extensive HR track-record at senior levels as an HR Director and as Head of Reward in differing blue chip international environments including financial services, information technology, retail and manufacturing sectors.  Since founding People Innovation Ltd ten years ago, Jane has specialised in reward projects including bonus and incentive plans, pensions and benefits and equity plans.

Jane is also a Committee Member of European Human Resource Forum, a Member Institute of Directors and a Fellow of the UK Chartered Institute of Personnel & Development.  Jane can be contacted at:  jane@people-innovation.com