Will you buy into ‘John Lewis economy’?

Plans to encourage greater employee ownership of businesses have reignited interest in staff share schemes – but financial advisers are warning investors not to become too exposed to one company.

This week, deputy prime minister Nick Clegg put forward ideas for creating a “John Lewis economy” in which staff will own stakes in the firms they work for, as is the case at the department store partnership. He argued that this employee ownership model fostered both growth and responsible capitalism.

At present, the number of fully employee-owned companies in the UK remains small, but many of the UK’s largest stock market listed companies – including Tesco and BT – already offer their staff a tax-efficient way to buy into their shares.

HM Revenue & Customs is currently looking into simplifying the legislation surrounding employee share schemes, and potentially opening them up to thousands more employees. All of the schemes offered today can be beneficial, noted Malcolm Kerr, analyst at Ernst & Young, provided they are offered alongside existing remuneration.

“The value of any share is unpredictable so, ideally, share schemes should be in addition to salary not instead of it,” he explained.

Around 85 per cent of companies that can offer employee share schemes already do so, according to ifs ProShare, the industry body for the employee share ownership in the UK.

Save as You Earn (SAYE), introduced in the 1980s, is currently the best known, and most widely used. Under SAYE, all employees – not just senior managers – can save up to £250 per month of after tax earnings over three, five or seven years, with any interest accrued tax free. At the end of the term, this money can be used to buy shares at a discounted price, fixed when the scheme started.

Staff ownership boosts performance

Nick Clegg’s call for wider employee share ownership was backed with a claim that the model benefits businesses as well as staff members – but the latest research suggests outside shareholders can benefit, too, writes Elaine Moore.

In his speech, the deputy prime minister claimed that employee-owned companies suffer less absenteeism, achieve higher staff retention rates and have more motivated staff.

At present, there are only a handful of fully employee-owned companies in the UK, including John Lewis, Arup engineers, Make architects and Scott Bader chemicals. Of these, John Lewis has demonstrated above-average performance. While it had a difficult year in 2011, like almost all retailers, it has reported higher like-for-like Christmas sales than its rivals.

However, analysis by law firm Field Fisher Waterhouse found that even public companies with above-average staff shareholdings outperform their peers.

Its UK Employee Ownership Index tracks the shares of publicly quoted UK companies that have at least 10 per cent of their share capital held by employees excluding board directors – and finds they produce higher returns. This index has consistently outperformed the FTSE All-Share over three, five and 10 years, according to the firm. Last year, the shares of employee-backed companies rose 16 per cent, compared with an average increase of 11 per cent in the FTSE All-Share index.

Researchers at Field Fisher Waterhouse said that businesses substantially owned by employees achieved this performance thanks to engaged staff, high governance standards and a longer term outlook.

At present, SAYE schemes pay no interest on the money saved, but tax experts say the share price discount can makes them an attractive option for employees. “They can be a tax-efficient and national insurance-efficient way to remunerate employees,” said Danny Cox at Hargreaves Lansdown.

But a major drawback of SAYE schemes, according to ifs ProShare, is the low monthly sum that can be saved – a limit that has not been raised for years.

Share Incentive Plans (SIPs) allow employees to invest more: up to £7,500 a year before tax, into a trust that holds company shares. However, under this scheme, investors are immediately exposed to movements in the share price – and must keep their investment in the trust for a minimum of five years to qualify for tax benefits.

Carol Dempsey, reward partner at PwC, pointed out that this term can be too long. “The problem is that people don’t stay in a job for life now,” she said. “We think the term should be three years.”

Senior employees have additional ways to invest larger sums. Company Share Option Plans (CSOPs) allow employees to put aside up to £30,000 to buy shares at their original price after three years of employment, while the Enterprise Management Incentive (EMI) schemes allow them to acquire shares worth up to £120,000, as long as the company has assets of less than £30m.

Whether company performance is always enhanced by these schemes is not clear, though.

Total stock held by staff is rarely sufficient to give them a say in the running of the company, noted ifs ProShare, and the holdings may not necessarily have an effect on the share price.

Advisers have also warned of the dangers of relying too much on one company. Linking household earnings, pensions and savings to the fortunes of a single employer puts investors at risk of losing everything if the organisation fails. Some warned that the success of John Lewis, which paid staff 18 per cent of their salary in profit-sharing bonuses last year, must be set against the losses at Northern Rock. When the bank was nationalised, employees in the popular share scheme found themselves facing redundancy and holding shares that had become virtually worthless.