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New Strategies for broad based share plans and executive equity

“The World Centre, which I founded alongside its UK sister, the Employee Share Ownership Centre, has been coming to Davos to debate employee equity ownership arrangements in multi-national companies for 13 successive years. Once again, the impressive Steigenberger Belvedere Hotel plays host to our forum, because we have been well looked after here. 

We arrive in the slipstream of the World Economic Forum, at which presidents, chancellors, business leaders and a motley host of advisers and celebs meet to discuss global policy initiatives on economic co-operation, freer trade, environmental improvement etc in the context of national economic self-interest. This year, especially, they have been forced to look through a darkened glass. Protectionism is gaining ground as the European economic and social benefits model comes under sustained attack from the East. The forecasters warn that we can expect no real economic growth in the West this year, due to the severity of the economic crisis, which is being aggravated by continuing failure of EU politicians to re-align the faltering Eurozone. We will remain in a state of near paralysis until the fate of the euro is settled one way or the other. That can only mean yet more unemployment and even greater economic hardship and social tensions.

Wider and deeper employee financial participation is needed more than ever in the developed world as the occupational pensions crisis deepens and corporates either freeze or reduce rank-and-file pay. Only last month we learned that Royal Dutch Shell, the last FTSE 100 company to operate a final salary pension scheme for new members of staff, will close it next year. The Association of Consulting Actuaries has spoken of a “seismic collapse” of company pension schemes and now only one third of UK private sector employees have any sort of occupational pension arrangement. What about the other two-thirds? – How are all these millions of economically disenfranchised employees going to live after retirement, if they can ever afford to retire at all ?

Though employee share ownership was never intended to replace wage and salary increases, nor indeed pensions, it is the long-term savings aspect of employee equity, which we must promote more often and more widely. Prospects for most employees have never been so bleak and to be cut adrift with minimum redundancy payments is hardly inviting. How much better to have a savings cushion, built up through years, perhaps decades, of participation in company stock/options plans.

The Centre has been very active on both the domestic and international fronts during the past 12 months. It is no accident that we were chosen as UK partner by the European Economic & Social Committee for its impressive Pro-Employee Financial Participation (what we call employee share ownership) promotional campaign, which culminated last October in a spectacular three-day Brussels conference, at which both I and our international director, Fred Hackworth, were invited to address delegates from the 27 EU member states. I launched a five-point plan for trades unions, while Fred spoke of the need to elevate Eso into the standard tool kit used by European companies facing business succession problems. This came after the Centre’s UK director, Dave Poole, organised a stimulating employee equity workshop in London last May, at which a number of UK-based SMEs participated, as part of the Pro-EFP project. One key point emerging from the workshop was that many SMEs have almost no idea of how to set up an employee share scheme and no knowledge of anyone local who can help them achieve this. Yet thousands of small and not-so-small businesses throughout the EU face or will face severe succession problems within the next five years. No wonder that the European Commission is very interested in the role that employee share plans can play in the rescue of privately-held companies which otherwise risk being broken up or liquidated with the loss of many local jobs.

In the UK, the Centre is helping the Office of Tax Simplification to find ways of making tax-approved and unapproved employee share ownership schemes less cumbersome and simpler to operate. Whether this will result in any fundamental changes is yet to be seen, but the Company Share Option Plan (CSOP) seems most regrettably to be withering way. The number of live CSOP schemes has declined from more than 5,000 in 2000-1 to just 1,910 in 2009-10, when a mere 40,000 employees received CSOP options, compared to ten times as many a decade ago. It is a challenge to our sector to put this right.

By contrast, the Share Incentive Plan is sailing ahead: almost four million employees received or purchased partnership shares under the SIP in the 2009-10 tax year. Meanwhile, the much-loved SAYE-Sharesave is just about holding its ground, though it is far below its peak a decade ago when there 1,300 active schemes involving more than 1.3m employees.  

All this activity has helped put employee equity back onto the agenda of politicians, trade unions and parts of the media. We are currently discussing with the EESC a follow-up EU Eso project, which is scheduled to launch later this year.

Employee share ownership is making a deserved comeback in the popularity stakes. It serves not only as a business succession tool; but also as an incentive to encourage better performance and higher productivity from the workforce and as a moral prop for post-modern capitalism, giving waged employees a share in the profit-generating capacity of enterprises.

So the ways in which we incentivise talented employees are of enormous importance and rightly the subject of our first major session at this Forum. It is no exaggeration to warn that if your business cannot attract and hold top talent, it won’t have a future in this savagely competitive global village. This is why the Centre is interested in all forms of employee equity, not just approved share schemes for the entire workforce

The Centre has been warning for years that one day the lawmakers would step in, as a populist response to public rage over alleged – and sometimes real – executive reward excesses, especially sky-high bonuses, unless remuneration committees took the growing criticisms on board and did something about them. Now the politicians have jumped into the arena, with hob-nailed boots, some would say. At the time of writing, UK ministers were drawing up plans to prevent executive directors chairing remuneration committees which fix pay at other listed companies; to force firms to publish more details on the gap between their lowest and highest earners; link rewards to long-term corporate performance by statutory means, with more bonuses paid in shares and give new power to shareholders to veto executive pay packages. In the Netherlands, the government has launched a massive clampdown on public sector executive pay levels, with the promise of more legislation to come and in France the state is ordering its big banks not to pay large bonuses to executives and traders.

The implications of all this have yet to sink in. We may be not far off a time when a remuneration consultant will risk a prison sentence for having framed recommendations – on annual reward increments – to remuneration committees in the ‘wrong’ way.

Let’s all be clear on this point: the Centre is certainly not against companies giving executives, traders and other key employees stellar rewards for outstanding personal or group achievement in very tough world markets. But these rewards must be based on challenging criteria – eg Return On Assets – and the performance that triggers such rewards must be durable, rather than a flash in the pan. The so-called War for Talent of the last decade was in reality Dosh for Dolts.

The Centre and other European advocates of broad-based Eso plans must press their case harder for urgent and necessary reforms in the legislative and regulatory frameworks governing Esops and employee financial participation. In the UK, for example, the tax-approved individual share scheme participation upper limits for individual employees haven’t been changed for two decades and privately held companies are still discriminated against when they want to offer Eso to their employees. Our job is to encourage the spread of employee equity, not to hinder it.

Though the Conservative Lib-Dem Coalition government declared itself to be pro employee share ownership, promising that the impending privatisation of the Royal Mail would involve at least ten percent of the equity being offered to the employees, progress is slow for reason both of commercial complexity and Byzantine EU rules. Many state bodies were to be mutualised, but progress towards reaching these goals has been slow too.

For the first time, the Centre’s annual award for the Best International Share Scheme had to be split between Barclays, which nominated its own internal share purchase plan, and Computershare, which submitted a global share save plus plan it had designed for its client Ericsson, the telecoms giant, about which you will hear more later. Computershare deserves another mention, because it has kindly sponsored the printing of this handbook. Our two other brochure co-sponsors this year are Appleby Global and RBC Corporate Employee & Executive Services. You will find information about them all in this handbook.

Our two-day global equity forum brings together a range of experts – practitioners, HR and compensation specialists from leading banks, companies, partnerships, trustees and representatives from other organisations which have an interest in employee share and stock option plans at both global and local levels. Our programme is truly international – we have presentations from three continents. For the first time we have a trades union speaker – from Italy – which is also a positive sign of the times.

We trust that you will find the conference sessions interesting and relevant to your work. Equally, we hope that you will enjoy the socialising, networking and the skiing.”

This speech was delivered the World Centre for Employee Share Ownership Annual Global Employee Equity Forum Davos, February 2 and 3 2012

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