How to make employee share ownership schemes work

When
they are effectively implemented, employee share ownership schemes can have a
far-reaching impact on organisational effectiveness. But the benefits come at a
price. By Keith Rodgers

Running
a scheme that truly motivates employees and helps retain key individuals can be
time-consuming, requires senior management commitment and has significant
cultural implications. Here, three share ownership experts share their tips on
making schemes work

Manage
and meet expectations

Michael
Keeling, president of the ESOP (employee share ownership plan) Association in
the US, argues that the most important issue for HR is to ensure employees are
not left with the impression that ownership will bring tremendous overnight
change.

Imagine
that at the beginning of the week, your company kicks off an employee ownership
scheme. What changes? Do employees think they can spend the afternoon on the
golf course, as many might assume the CEO does? Do they think the air
conditioning system that didn’t work effectively on Friday will suddenly work
properly on Monday?

“If
you don’t watch all that rhetoric, you will develop false expectations. Nothing
is worse than the disappointment and cynicism that can set in once people work
that out,” says Keeling.

What
should change, however, is that the organisation becomes more responsive to the
issues raised by employee-owners. The working environment must reflect the
change in ownership status – otherwise, it’s all going to go badly wrong.

As
Corey Rosen, executive director of the National Center for Employee Ownership
in the US, points out, it is not enough to declare an ‘open door’ policy – no
company is the world has a ‘closed door’ policy. It is about building the
structures that share information and decision-making and empower people.

Communicate
consistently

Share
ownership experts insist that it is not enough to introduce a scheme and then
discuss it with employees once a year. For one thing, some schemes can be
relatively complex and employees may not fully understand them first time
round. New employees will also need to be brought up-to-speed on programmes.
And, individual employees’ attitudes towards the scheme will shift over time,
so the benefits of ownership will need to be reinforced. “You need a total
package, year after year – the HR person needs to understand it is a journey,
it never ends,” says Keeling.

Win
management buy-in

HR
is often the main line of communication regarding ownership schemes, so if
there is a big disconnect between employee expectation and management
commitment to shared ownership, it will be squeezed between the two. Management
has to be committed both to the principle of ownership and to the resource
required to make it work.

Don’t
trivialise

Giving
people a small option award – £1,000 worth of shares, for example – won’t make
them eternally grateful. It will be seen for what it is: a largely symbolic
(and empty) gesture.

Beware
of global differences

Fred
Hackworth, director of the UK-based Employee Share Ownership Centre, points out
that in many countries, share ownership is not deeply embedded in business
culture. Outside the US, it is a prominent force in several northern European
countries, including the UK – indeed, the centre’s chairman, Malcolm Hurlston,
is credited for his role in bringing the US ESOP to the UK in the mid-1980s. It
is also growing in acceptance in many parts of the Far East. But in several
southern European countries, as well as South America and Africa, the concept
is far less established.

Choose
a scheme for the right reasons

Rosen
points out that the choice of scheme is often heavily influenced by tax
considerations. If companies can find a scheme that suits both the corporate
and employee tax needs, that’s great. But tax efficiency isn’t everything. “My
suspicion is that people take it too seriously,” he says. Organisations need to
think through all the pros and cons of different schemes in relation to their
specific needs.

Cater
for market volatility

Underwater
options – the term used when the share price has fallen below the offer price
by the time the option can be exercised – have become a major problem given the
steady decline of worldwide stock markets. Reissuing shares is not a viable
solution – after all, institutional shareholders will have been hit just as
hard by share price declines. One remedy in a volatile market is to make more
frequent grants of smaller amounts of options, rather than rely on one award
that could become meaningless.

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