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Strengthening Employee Share Ownership in the UK

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Strengthening Employee Share Ownership in the UK Strengthening employee share ownership in the UK Scott Corfe James Kirkup SOCIAL MARKET FOUNDATION FIRST PUBLISHED BY The Social Market Foundation, February 2020 11 Tufton Street, London SW1P 3QB Copyright © The Social Market Foundation, 2020 ISBN: 978-1-910683-83-5 The moral right of the author(s) has been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. THE SOCIAL MARKET FOUNDATION The Foundation’s main activity is to commission and publish original papers by independent academic and other experts on key topics in the economic and social fields, with a view to stimulating public discussion on the performance of markets and the social framework within which they operate. The Foundation is a registered charity and a company limited by guarantee. It is independent of any political party or group and is funded predominantly through sponsorship of research and public policy debates. The views expressed in this publication are those of the author, and these do not necessarily reflect the views of the Social Market Foundation. CHAIR DIRECTOR Mary Ann Sieghart James Kirkup TRUSTEES Baroness Grender MBE Nicola Horlick Tom Ebbutt Rt Hon Dame Margaret Hodge MP Peter Readman Melville Rodrigues Trevor Phillips OBE Professor Tim Bale KINDLY SUPPORTED BY This report was funded by the Investment Association. 2 STRENGTHENING EMPLOYEE SHARE OWNERSHIP IN THE UK ACKNOWLEDGEMENTS The SMF is grateful to the Investment Association for sponsoring this research project. The views in the report do not necessarily reflect those of the Investment Association. The Social Market Foundation retains full editorial independence with respect to its research. The authors are grateful to all those who participated in the two roundtable discussions held as part of the work. The SMF is grateful to all current and former members of staff, with particular thanks to Nicole Gicheva. ABOUT THE SOCIAL MARKET FOUNDATION The Foundation’s main activity is to commission and publish original papers by independent academic and other experts on key topics in the economic and social fields, with a view to stimulating public discussion on the performance of markets and the social framework within which they operate. The Foundation is a registered charity and a company limited by guarantee. It is independent of any political party or group and is funded predominantly through sponsorship of research and public policy debates. The views expressed in this publication are those of the author, and these do not necessarily reflect the views of the sponsors or the Social Market Foundation. ABOUT THE AUTHOR Scott Corfe Scott Corfe is the Research Director of the SMF, he joined in June 2017 as Chief Economist. Before joining, he was Head of Macroeconomics and a Director at the economics consultancy Cebr, where he led much of the consultancy’s thought leadership and public policy research. His expert insights are frequently sought after in publications including the Financial Times, the Sunday Times, the Guardian and the Daily Telegraph. Scott has appeared on BBC News, Sky News, Radio 4 and a range of other broadcast media. Scott was voted one of the top three forecasters of UK GDP by Focus Economics in 2016. 3 SOCIAL MARKET FOUNDATION CONTENTS EXECUTIVE SUMMARY ............................................................................................................. 5 CHAPTER 1: INTRODUCTION ....................................................................................................11 CHAPTER 2: EVALUATING THE POTENTIAL OF EMPLOYEE SHARE OWNERSHIP ......................... 15 CHAPTER 3: THE STATE OF EMPLOYEE SHARE OWNERSHIP .................................................... 23 CHAPTER 4: INTERNATIONAL EMPLOYEE SHARE OWNERSHIP PRACTICES ............................... 32 CHAPTER 5: THE EMPLOYEE SHARE OWNERSHIP POLICY LANDSCAPE IN THE UK .................... 36 CHAPTER 6: INCENTIVISING EMPLOYEE SHARE OWNERSHIP ................................................... 46 ENDNOTES ............................................................................................................................ 55 4 STRENGTHENING EMPLOYEE SHARE OWNERSHIP IN THE UK EXECUTIVE SUMMARY This report analyses the scope to promote wider individual employee share ownership in the UK, and the potential benefits of doing so. The report assesses the potential for employee share ownership to reduce inequality, tackle the UK economy’s productivity crisis, improve financial resilience and increase employee voice within companies. The importance of employee share ownership There is a growing literature in support of the view that that employee ownership often enhances long-term productivity and performance within companies; improves employee engagement and commitment; incentivises investment in staff and acts as a tool to retain workers; and could contribute to the financial resilience of employees. Financial inequality and sluggish UK-wide productivity growth are two of the most-discussed economic issues of our age, and employee share ownership offers potential to help tackle both of these. Furthermore, evidence suggests that employee ownership is viewed positively by the wider public and politicians alike. A survey of 1,000 listed company employees, commissioned as part of this research, found that: • 68% said that they like the idea of holding shares in the company that they work for. • 60% believe that employee shares/options would incentivise them to stay with their employer for longer than originally intended. • 58% agreed that share ownership would/does make them “more motivated to do well in my job”. This suggests that employee share ownership could improve workforce productivity. • 56% said that employee share ownership would make them more interested in other types of investment – suggesting that it can encourage individuals to engage more with savings and investment products. • 46% of those surveyed that held employee shares/options said that they did so because they expect shares to increase in value in the future. 42% said they did so as another way to save/earn money, and 36% said they held shares to benefit from dividend payments. Expanding employee share ownership could generate significant financial returns to UK households, especially given the context of individuals currently holding excessive savings in current accounts and low-return instant access savings accounts. SMF research from 2017 showed that savers effectively lost around £8 billion in savings over the past five years due to holding savings in accounts where returns trailed behind inflation.1 In contrast, share ownership over the long-term has offered inflation-beating returns. The FTSE All Share Index has increased by on average of 3.6% per annum since 1997 (according to London Stock Exchange statistics). In addition to these capital gains, shareholders receive dividend income; data from the end of 2018 show a dividend yield of 4.5% for the FTSE All-Share. 2 Suppose a UK employee held a relatively modest £1,000 worth of employee shares i, and these increased in value by 3.6% per annum (as per the average of the FTSE All Share since 1997), with i The current median value of employee shares held is £5,000. We use a lower figure here to provide some conservative estimates of the benefits of broader employee share ownership. 5 SOCIAL MARKET FOUNDATION a dividend yield of 4.5%. This would generate a gross return of about 50% (£500) over a five- year period, if dividend income is reinvested in shares. Even after taking into account inflation of 2% per annum, this still leaves a healthy real return of 34% - that is 6% per year. Further, employee gains might be magnified if higher levels of engagement and productivity (through increase sense of involvement in the company) translate into higher rates of base pay. Low rates of employee share ownership despite benefits Despite these benefits and positive opinions, employee share ownership rates across the country are low. In the period 2014 – 2016, just 3.6% of the UK adult population (or approximately 1.9 million people aged 16 and over) held some form of employee shares. In part, this reflects the limited number of companies currently offering employee share ownership schemes at present; just over 13,000 companies in the UK operate some form of tax-incentivised employee share ownership plan. This is out of a total of 1.4 million private sector enterprises with at least one employee. People who were of working age were more likely to have employee shares than individuals who were over the State Pension threshold (4.2% versus 1.8%, respectively). Cost appears to be a significant barrier to wider rates of employee share ownership among UK households. According to the survey commissioned as part of this study, 38% of listed company employees that had been offered shares/options declined them because of a lack of spare income to purchase shares. This was the most commonly-cited reason for not holding shares, followed by concerns about shares declining in value (31%) and not being interested in participating (24%). Research by Oxera found that larger companies (by employees, turnover and capital) are more likely to offer employee share ownership –
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