Employee share ownership plans in the UK

1
Employee share ownership plans in the UK

• Andrew Pendleton
• University of York
• Visiting Fellow, University of Sydney

2
The UK approach

• Bi-partisan and long-standing political
  commitment to ESO
• Use of clearly-defined plan types, providing
  off-the-shelf plans.
• Attempts to enhance flexibility recently. 2 new
  plan types from 2000
• All-employee plans primarily a listed company
  phenomenon but recent policy focus on extending
  to smaller firms/unlisted sector
• Most ESO involves minority shares (_at_5) of
  company equity. Substantial employee ownership
  relatively rare.

3
The UK approach - taxation

• Capital gains tax on gains from selling shares
  rather than income tax as benefit from employment
• Capital gains tax has fairly sizeable annual
  allowances (_at_ A20,000)
• Use of taper relief in CGT regime, providing
  further benefits

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UK plans

• Save As You Earn (SAYE) (1984). A.k.a.
  Sharesave
• Company Share Option Plans (CSOP) (1980, revised
  in 1996)
• Share Incentive Plan (SIP) (2000)
• Enterprise Management Incentives (EMI)(2000)
• Approved Profit Sharing (1978-2002)

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SAYE

• Options awarded to exercise in 3 or 5 years.
• Up to 20 discount (tax-free) on current value
• Savings contract for up to A7,500 p.a.
• Tax-free bonus on savings contract
• CGT on gains from sale of shares

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Company Share Option Plan

• Up to A75,000 options can be held by employees,
  with participation at firms discretion
• Primarily an executive plan but some use as
  all-employee plan

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Share Incentive Plan

• 4 modules
• Free Shares (A7.5k p.a.), Partnership Shares
  (A4k), Matching Shares up to x2 (A7.5k),
  Dividend Shares (A4k)
• Partnership shares purchased from pre-tax income.
• Holding periods of 3-5 years
• Innovations
• Non-voting shares
• Forfeiture
• Performance-linkage for free shares

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Enterprise Management Incentives

• Award of options up to limit of A250k per person
  and A7.5million per firm
• Light touch compliance regime
• CGT clock starts ticking from date of grant not
  exercise.
• Restricted to companies with gross assets less
  than _at_A40 million

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Number of live plans(source HM Revenue and
Customs statistics
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Incidence of plans by market sector(Source HM
Revenue and Customs statistics)
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Incidence of share plans at workplace
level(source Workplace Employment Relations
Survey 2004)

• 19.6 of private sector workplaces with 5
  employees have a share plan present
• 32 of employees in this sector are in
  workplaces where a share plan is present

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Incidence of share plans of private sector
workplaces(Source WERS 2004)
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Incidence of share plan types (Base workplaces
with a share plan)
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The incidence of share plans over time(Private
sector workplaces with 25 employees)
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Incidence of share plans by organisational
size( of private sector workplaces in each size
category with share plan)
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Incidence of share plans by sector

• In most industrial sectors around 20 of
  workplaces have a share plan
• Manufacturing much lower than the norm _at_7 of
  workplaces have a share plan
• Share plans most common financial services over
  80 of workplaces have a share plan

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Are workplaces with SAYE or SIP more
participative?

• Share plan workplaces are associated with
• Trade union recognition
• Use of briefing groups and employee surveys
• SIP workplaces associated with use of quality
  teams

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Which workplaces are more likely to have all
employee share plans?

• Those belonging to larger firms, especially very
  large firms (5000 employees)
• Those belonging to listed firms
• Domestic ownership (for SAYE plans)
• Good financial performance (for SIP plans)
• Workforce composition does not affect likelihood
  of having a plan.

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Influences on individual participation in
subscription-based share plans

• Age and income the primary influences on decision
  to participate (as in other forms of saving)
• Age and income also primary influences on
  contribution level. Tenure also important
  (familiarity?)
• SIP participation approximately 2/3s that of SAYE
  where both plans present

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Topical issues in ESO

• Impact of accounting standard?
• Danger of portfolio concentration amongst
  employees
• Are the new plans getting to smaller firms?

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Further information

• Further information on the Workplace Employment
  Relations Survey is available from
  www.wers2004.info
• For information on UK approved share plans
• www.hmrc.gov.uk/shareschemes/
• See www.ifsproshare.org.uk for information from
  the main non-governmental body providing
  education and research on share plans
• My details ap516_at_york.ac.uk