Employee Share Ownership Schemes in the UK ‐ an Evaluation
| Author | Ray Richardson,Aaron Nejad |
| Date | 01 July 1986 |
| DOI | http://doi.org/10.1111/j.1467-8543.1986.tb00684.x |
| Published date | 01 July 1986 |
British Journal
of
Industrial Relations
24:2
July
1986
0007-1080
$3.00
Employee Share Ownership Schemes
in the
UK-
an Evaluation
Ray Richardson and Aaron Nejad*
There have been two periods of sharp growth in the number of employee
share ownership schemes in the
UK
during the post-war years, both
stimulated by changes in the tax regime. The Finance Act of
1972
marked
the beginning
of
the first period by giving tax advantages to certain executive
share option and share incentive schemes and to share-based profit-sharing
schemes. The Finance Act
of
1973
offered further favourable tax treatment
to a new type
of
Save
As
You Earn (SAYE) contract which extended share
options to non-executive employees.
The second period
of
sharp growth started with the Finance Act
of
1978,
and is still continuing. At present there are three main types
of
employee
share schemes which attract tax advantages; approved all-employee profit-
sharing schemes, first introduced in the Finance Act
of
1978;
approved all-
employee savings-related share option schemes, introduced in the Finance
Act of
1980;
and approved discretionary share option schemes, introduced
in the Finance Act of
1984.
Under the terms
of
the first of these, a company channels up to a certain
percentage of its annual profits, not usually more than
5
per cent, into a trust.
The trust then buys either already issued, or newly issued, shares in the
company and allocates them to eligible employees, up to a limit; this is
currently
21,250
or
10
per cent
of
the individual’s annual salary. If the
employee retains his shares for a sufficient period, currently
five
years, he is
not liable for income tax on their value, nor on their growth in value. The com-
pany can offset the costs
of
the scheme against any corporation tax liability.
Savings-related share option schemes require an individual employee to
take out a standard SAYE contract, which binds him to save up to a
maximum of
2100
per month for either five or seven years. In addition, the
employee acquires, at no cost to himself, an option to buy the company’s
shares up to the full value of the contract when the contract expires. The
price at which the shares are to be bought is specified when the contract is
taken out, but it may not be less than
10
per cent lower than the price which
prevails at that time. The employee is not liable to income tax on any gains
*
Reader in Industrial Relations, London School
of
Economics and Research Student, London
School
of
Economics.
234
made if the option is exercised. Discretionary share option schemes give an
option to selected employees, exercisable between three and ten years after
the option is granted, to buy the company’s shares at a price not ‘manifestly
less’ than that prevailing when the option is granted. Any gains are free
of
income tax liability and the maximum option is either f100,OOO or a sum
equal to four times the employee’s salary.
As a result of the legislation, financial participation has grown very rapidly
in the last seven years. By March 1985,462 profit-sharing schemes and 403
savings-related share option schemes had been approved. The growth and
popularity of the discretionary share option schemes, the vast majority
of
which are executive share option schemes, has been even greater in the short
time they have been available. 202 schemes had been approved by March
1985 and 916 were still under consideration.’ On the face
of
it, therefore,
financial participation is achieving very substantial penetration and may well
be having a very significant impact on company performance.
British Journal
of
Industrial Relations
THEORETICAL BACKGROUND
The 1978 legislation was introduced by a Labour Government under
pressure from the Liberal Party, with which it was then in informal alliance.
Without this pressure it seems doubtful that Labour would voluntarily have
encouraged profit-sharing schemes, which in the event received all-party
support. The Conservative Government since 1979, however, has been far
more favourable to employee share ownership, for reasons that were clearly
articulated in a debate on profit-sharing schemes in the House
of
Commons
in December 1981 by the then Financial Secretary,
Mr
Nicholas Ridley:
‘.
.
.
we have to consider two principles. One is that employees should be able to
participate in the profits
of
the company in which they work, that they should own
a stake in their company, and that they should be motivated to try harder on its
behalf by the financial incentive of the shares that they own. The other, which is an
equally laudable but separate proposition, is that the more widely share
ownership can be spread throughout the community, the more individual
investors there are in the stock market, and the more all
our
citizens own capital,
the better
it
will be
for
general political reasons.”
In this paper, we concentrate on the first
of
these principles, that share
ownership will energise and involve workers and lead to an improvement in
company performance. Many institutional innovations have been advocated
to this end
in
the last 10-15 years, particularly in the area of workplace
arrangements. They include financial participation schemes, worker
co-
operatives, formal mechanisms
of
worker participation in decision making,
schemes for
job
redesign and the application
of
‘Japanese’ management
techniques. Some
of
the proposed innovations, like financial participation,
change the pattern of ownership. Others leave ownership untouched but
seek
to
affect the locus
of
workplace control, or what is sometimes called the
extent of organisational democracy. Still other innovations change neither
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