Tesco has become the latest poster child of employee-share schemes. The supermarket announced in July that thousands of its workers are set to split a £30m payout as part of its ‘save as you earn’ plan, which offers staff the chance to buy discounted shares in the company.
The concept, while not a new one, has been gaining traction among UK businesses looking to lift productivity and attract talent by offering people a stake in the business. More than 14,000 companies in the UK offer an employee-share scheme, according to the Social Market Foundation, including large brands such as BT and Whitbread.
For finance leaders seeking to navigate today’s economic and workforce challenges, employee-share schemes hold considerable potential: 81% of UK companies have seen it boost their business, with almost three-quarters stating it has helped them to recruit and retain staff, according to a report by HMRC.
Offering employees a slice of the pie is an appealing practice. It is also challenging – and not without its risks. In order to fully maximise the benefits, finance chiefs must first consider why they want to set up a share scheme and how to do so safely and effectively.
Why shares schemes are good for business
Introducing a share scheme has been a “crucial differentiator” for UK tech firm Cognexo, according to its commercial and financial director Jonathan Jerome. “It makes us more attractive to potential employees and is a great way to retain our existing team because it aligns their interests with the company’s success,” he says. “When employees have a stake in the company, they’re more motivated, committed and productive.”
From an external perspective, Jerome also says it has enhanced the company’s reputation in the market. “It shows we’re a progressive and employee-friendly organisation, which has improved our relationships with customers, suppliers and other stakeholders,” he adds.
Alongside productivity gains, share schemes can be an important tool for bolstering the financial wellbeing of employees. In the current cost-of-living crisis, 60% of full-time employees are stressed about finances, according to a recent report by PwC. This is higher than the number who were worried about finances during the height of the pandemic. The report found that, even among employees earning $100,000 (£78,000) or more per year, nearly half (47%) expressed concern over their finances.
Financial stress is a major roadblock to employee performance. Four in 10 (42%) executives say it often prevents their employees from doing their best work, according to research by HR firm Dayforce. It is then in every finance chief’s best interest to seek ways to bolster the financial welfare of their staff.
The risks and challenges of employee-share schemes
Despite the benefits, the rules regulating the various share plans and how they must be administered can be complicated – particularly those relating to tax advantages. Michaela Lamb, tax partner at accounting firm Gravita, says this can be a deterrent for companies and employees alike.
Lamb has seen employees fall victim to tax liabilities due to erroneous tax codes or a failure to file tax returns. “It may look like an enormous perk on paper, but can turn into a nightmare if not properly managed,” she says. “A little bit of education goes a long way.”
It may look like an enormous perk on paper, but can turn into a nightmare if not properly managed
CFOs are responsible for understanding and communicating the possible tax implications, Lamb explains, such as whether there are any upfront tax charges at the time of share acquisition and disposal. “Businesses are sometimes reluctant to do this because they do not want to be liable for having recommended tax advice,” Lamb says. Overlooking these complexities, however, can result in the loss of potential tax advantages for the business.
To implement a successful employee-share scheme, CFOs should leverage the expertise of experienced specialists, stresses Simon Denye, corporate tax partner at DSG Chartered Accountants. “These professionals can guide the design and implementation process, ensuring that the plan aligns with the company’s commercial objectives and achieves the desired outcomes,” he explains. “They can help navigate the intricate tax rules and compliance obligations, saving the company time, stress, and money.”
Another “common pitfall” when it comes to the roll out of share schemes is insufficient consideration of the company’s commercial objectives when designing them, says Denye. “This can lead to misalignment between the company’s and employees’ goals.”
Why messaging matters
Finance chiefs are responsible for dispelling any scepticism from employees and stakeholders about the value and security of such incentives while promoting engagement.
“Communication is key,” says Jerome, who made sure to provide training and resources to both management and staff, along with access to advisers to highlight the benefits, risks and mechanics of the scheme, when introducing its employee-share plan. “When the scheme is being launched, explain to the participants what you are doing and regularly update employees about how the scheme is performing and how it benefits them. Building trust is crucial.”
It gives workers a stake in the company, incentivising hard work, commitment and productivity
It is equally important not to over-sell the scheme by making unrealistic promises as to what the company is going to be worth in the years to come. Sending the wrong message can lead to concerns among existing shareholders about the potential dilution of their ownership stake.
Jerome found that establishing clear, transparent criteria for how share prices should be determined and properly communicated to everyone was key. “We structured the share scheme carefully to balance the benefits of employee ownership with the interests of existing shareholders,” he says.
Jerome recommends that finance leaders first define what they want to achieve with the share scheme – whether it’s attracting talent, improving retention, or aligning employee interests with company goals. “It is important to think very carefully about who within the organisation you want to include in the scheme. It might not be available to everyone, so that brings with it its own set of challenges,” he adds.
The broader impact on workplace inequality
Luke Hilyard is the director of High Pay Centre, a think-tank that advocates policies designed to reduce economic inequality. He believes the theory behind employee share schemes is sound. “It gives workers a stake in the company, incentivising hard work, commitment and productivity, while ensuring that more of the workforce shares in business success,” he says.
However, many workers simply don’t have the money to invest their pay packet into share options. Of Tesco’s 300,000 employees, only 52,000 took part in the company’s ‘save to earn’ scheme.
“It’s striking that very few firms report consistently on this,” Hilyard says. In his view, this is because there are few organisations where such schemes account for a significant proportion of total share ownership. There are fewer still where shares are evenly distributed across workers of all levels of the company and where the scheme is accompanied by some kind of formalised voice in the company’s governance.
“When these schemes fail to meet these criteria they’re a lot less meaningful,” he says.
Similarly, the gender disparity in access to share schemes has doubled in the past year, according to analysis by equity management platform Vestd. In 2023, men were twice as likely as women to receive access to a company share scheme – they are now four times as likely.
This is largely due to the existing gender pay gap in the UK. As Lamb points out: “Men tend to earn more, increasing the number of shares they are able to purchase,” she explains. “Likewise, when women go on maternity leave, they do not always meet traditional share scheme thresholds.”
For CFOs looking to improve the engagement and uptake of their employee share schemes, they should first seek to address existing inequalities that prevent staff from getting involved.
Five ways to strengthen the chance of employee-share scheme success
- Clearly define what you aim to achieve with the share scheme—whether it’s attracting talent, improving retention, or aligning employee interests with company goals.
- Ensure you trust the advisers who are going to deploy the scheme. If unsure, assess your options and speak to anyone you know who can point you in the direction of reputed advisers.
- Ensure that shares are valued fairly. This will probably involve using external valuation experts to provide an objective assessment.
- Communication and education is crucial. Explain to participants what you are doing and be clear about the benefits, risks and mechanics of the scheme.
- Remember to review the scheme overtime to ensure it remains aligned with company goals and market conditions. Regularly update employees about how the scheme is performing and how it benefits them. Be prepared to make adjustments if necessary.
Tesco has become the latest poster child of employee-share schemes. The supermarket announced in July that thousands of its workers are set to split a £30m payout as part of its ‘save as you earn’ plan, which offers staff the chance to buy discounted shares in the company.
The concept, while not a new one, has been gaining traction among UK businesses looking to lift productivity and attract talent by offering people a stake in the business. More than 14,000 companies in the UK offer an employee-share scheme, according to the Social Market Foundation, including large brands such as BT and Whitbread.
For finance leaders seeking to navigate today’s economic and workforce challenges, employee-share schemes hold considerable potential: 81% of UK companies have seen it boost their business, with almost three-quarters stating it has helped them to recruit and retain staff, according to a report by HMRC.
