N5 - Why Companies Use Share Plans?

Question 1

Main reasons why companies use share plans?

Answer 1

To incentivise/increase productivity

Drive innovation

Encourage employee engagement and commitment

Reward

Cash flow/cost advantage

Retention or golden handcuffs

Recruitment

Gain sharing/wealth sharing

Risk management

Regulatory compliance

Question 2

Other reasons companies use shares ?

Answer 2

Loyalty

Employee wellbeing- Nuttall Report noted The majority of workers from certain employee own companies were more satisfied compared to when they worked for non-employee owned companies.

Reduced absenteeism also noted in Nuttall Report the plans involving financial participation and or share options reduced absenteeism

Question 3

Incentivise/increased productivity

Answer 3

The value of what they receive shares is intrinsically linked to the value of the business. That’s encouraging employees to work harder in order to receive shares worth a higher value.

Earning part of the business and sharing, and its success can encourage employees to make the most of opportunities, and to be ineffective to come up with new ideas

The link between better performance and reward .

Feeling like they make a real contribution towards that success of the business

One of the main reasons, the UK government has been so active in giving tax breaks is because they believe it will potentially improve company productivity.

Question 4

Drive innovation

Answer 4

Innovation is key to continued success, and if so it should be identified as a reason for share ownership.

Owning part of the business, and sharing in its success, can encourage employees to make the most of opportunities and to be in innovative.

Innovation can be encouraged by imposing particular kinds of performance targets. This could be indirectly, encouraged by simply giving employees shares the value of which is intrinsically linked to the value of the business.

Question 5

London Business School research project

Answer 5

Productivity improved by up to 17% in UK Listed companies with an employee share plans.

Question 6

Cass Business School (Hampel 2010)

Answer 6

Reported that company is mostly or wholly owned by employees were more productive than comparable businesses that were not.

Question 7

Bryson and Forth (2014)

Answer 7

Surveyed 4000 employees globally, finding that those employees which participated in a share plan, will more likely to work beyond their contracted hours, and were less likely to be absent.

Question 8

2020 HMRC research carried out by Ipsos MORI

Answer 8

Employees found the SAYE plans have contributed positively to increased productivity and performance of employees and perceived employees to be more invested in the success of the company as a result.

Question 9

Nuttall Report 2012

Answer 9

Macleod and Clarke (2006)- strong relationship between employee engagement and innovation.

Lampel et al. (2012)- employee owned companies tend to have a long-term focus, attaching a higher importance to pioneering innovations and innovative ideas from staff, than the non-employee owned counterparts.

Question 10

Encouraging employee engagement and commitment

Answer 10

Giving employees an equity stake in the company, they will identify more closely with its success and failures. Financial services firms are required/encourage to ensure the senior staff/risk takers, acquire and hold shares in their employer.

Gives employees long-term interest in the companies performance, not just short-term interest in the next pay rise.

UK corporate governance code requires workforce Engagement to be reported share Ownership can be one of the vehicles that the company is using for engagement when reporting on this to shareholders.

Question 11

Ipsos MORI HMRC research 2020

Answer 11

Employers reported that company share option plans, increased employee engagement and motivation employees, found the employees asking more pertinent questions about the companies formance at key meetings and demonstrating more interest in productivity.

Question 12

Reward

Answer 12

Provides employees with substantial additional remuneration in medium to long-term.

Personal Group awarded all employees share rewards under their UK tax qualified share, intentive plan in recognition of their hard work during the challenging year of COVID-19.

BT delivered both additional share awards and cash bonuses to thank employees for the hard work during Covid pandemic .

All allows employees to take advantage of favourable tax treatment and therefore deliver more value to the employees .

Question 13

Cash flow/cost advantage

Answer 13

Cheaper for companies in cash terms, than paying increase salaries or cash bonuses. this is because when issuing new shares, there is no actual cash cost to the company.

Shares can competent employees for taking lower or no salary.

Tax advantage plans could also deliver more value to the employee through tax savings .

Question 14

Retention

Answer 14

Some plans provide that potential share benefits may be lost if an employee leaves the company, which helps retain employees.

Share plans, often in include required investing period or holding period before an employee can actually benefit .

Question 15

HMRC 2020- research on tax qualified plans

Answer 15

Fan that sharing incentive plans can be an effective tool to retain highly skilled staff. This is because those staff might forfeit or lose their shares if they leave and so the SIP provides an incentive to stay for the full forfeiture period in order for them to keep their shares.

Question 16

Recruitment

Answer 16

Gives companies a competitive advantage against competitors.

May be expected as part of the remuneration package.

Question 17

Risk management

Answer 17

Offering a third substantial part of annual bonuses into share awards, which best after a further period. this helps with wrist management by using shares companies can reduce the risk of paying out cash bonuses based on short term results, where in following years results could turn out to be less desirable.

Share plans mean the payment of awards are deferred and risk can be reduced through holding periods, verbal performance conditions and the possibility of recovering awards.

Question 18

Gain sharing/wealth sharing

Answer 18

Share plans, enable employees to have a greater capital wealth, then might otherwise happen if they only received income from their employment.

Not usually a primary objective, but it was for the conservative government in 1980s, using share ownership as a way to help people plan for their retirement and to be self-sufficient and self reliant.

Question 19

Regulatory compliance

Answer 19

Some financial services firms must use equity part of their regulatory compliance. Certain financial services firms are required toward some of its variable remuneration paid to senior staff in shares.

These rules can also require the use of Malus and clawback arrangements which allow for reduction or for for chair of an award in certain circumstances.