Employee share schemes can boost staff morale and performance. But just how much potential is there for trouble if the share price underperforms? Steve Hemsley reports In 1997 Asda earned a Crystal Mark from the Plain English Campaign for 10 documents designed to explain to employees the benefits of the company's share scheme. A year later, Safeway won a Golden Bull from the same organisation for a job ad that described a shelf stacker as an "ambient replenishment controller". Unlike Asda, it refused to send anyone to collect the honour. What these two awards illustrate is that when corporate messages are conveyed to either existing or potentially new employees, they must be communicated clearly to be effective. In the case of complicated employee share schemes, companies must not only explain the potential financial benefits of taking part but also clarify the legal terms and conditions including any tax implications. Information that can appear particularly dull to most people at the best of times can be particularly boring to someone who has previously had no interest in the stockmarket. The success of the Asda scheme demonstrates how well an employee share policy can work for both employer and worker if it is marketed effectively internally and as part of a wider PR strategy. The chain's Clear As A Bell Campaign uses staff focus groups to test share related literature before it is distributed to all employees, while Tesco executives tour branches answering questions about its scheme. The Institute of Personnel and Development warns that if a share scheme is not communicated effectively, or if it is only offered to certain employees, it can cause divisions in the workplace. In addition, some staff will always be suspicious of the company's motives and may need more time and information before they are convinced of the benefits. ProShare, an independent company set up in 1992 to educate companies about the benefits of running employee share programmes, says two thirds of UK companies now offer schemes and they have risen in popularity over the last 20 years. The last Labour government introduced tax breaks for profit-sharing schemes in its 1978 Finance Act and in the 1980s Margaret Thatcher's Conservative cabinet, which publicly declared its intention to create a share-owning democracy, launched Save As You Earn in 1980. This was followed by discretionary share option schemes in 1986 and company share option plans in 1996. The new Labour government announced the All Employee Share Option Plan in the last Budget and this will be launched in August. ProShare's employee share ownership training manager Justin Cooper says: "These schemes were originally popular in the financial services industry but they have been adapted over time to meet the needs of the retail and service sectors where those taking part will often be the second wage earner in a family, maybe part-time and will usually not have a great deal of disposable income." ProShare commissioned market research company Consensus Research International to survey individuals across a number of sectors to see if offering share options did improve staff morale and performance. Directors and senior managers were excluded from the study which talked to 300 people, 81% of which worked full time and 19% part time. The results revealed that 43% had bought and been given shares in their company, while 37% had bought shares using savings and 19% been awarded them. The survey claims that 73% felt that by owning shares they gain from the company's success and 55% said it made them more aware of the corporate aims and objectives. About a third (32%) said owning shares encouraged them to improve their job performance while two fifths of respondents said owning shares made them less likely to leave the company in the short-term. The survey also discovered that it was respondents in social groups AB, those working in the midlands and part-time employees who were more likely to stay with a company offering share options, while middle managers, females and those aged over 45 said shares made them feel more actively involved in the company. Yet not everyone is as excited about employee share schemes as ProShare. Shopworkers union Usdaw says there are cases for and against these schemes, with the case against based on what happens when the share price falls dramatically and share-based paper fortunes turn to dust. "Even under risk-free arrangements such as SAYE schemes the failure of the share price to perform as expected can be very damaging. Employees can become demotivated, the company image tarnished internally and externally and the perceived value of reward packages diminished," it says. Diageo recently sent a memo to all staff telling them to sit tight and not to worry if they were concerned about the poor performance of old economy stocks as money flooded into dot.coms. Its share price on June 1 was 572p down from a yearly high of 713p, while the Unilever chairman wrote to the board asking them to convey a don't panic' message to the 67% of UK staff in its scheme as its share price also moved downwards. Somerfield, which introduced three schemes in 1996, has suffered more than most because its share price is currently "underwater", that is below the option price at which employees will be able to buy shares at the end of the scheme. Rather than increasing business awareness among staff to drive and enhance their performance, a low share price combined with poor publicity has prompted Somerfield to admit its scheme is having the opposite effect among management and those on the shop floor, while making recruiting and retaining staff extremely difficult. Employees at other food companies must also be slightly concerned over the direction grocery shares have moved in the last year, and this is probably one of the reasons the supermarkets were reluctant to talk about their schemes for this article. On June 1 shares at Sainsbury stood at 305p, up from a low of 239p when Dino Adriano was replaced as chief executive by the Prudential's Sir Peter Davis in March, but down on the 12 month high of 453p, while Tesco at 202p was down on its 12 month high of 220p. As well as concerns that the food and retail sectors can fall out of favour among investors, with the share price consequently being driven down, there is also always the risk of a wider stockmarket crash, although those taking part in an employee share scheme should not be overly concerned. The FTSE All Share Index took just two years to return to the level it was at before the October 1987 crash, and within 10 years it had doubled its pre-crash value. The motto when owning shares has always been that they should be held for the long term. One of the main reasons SAYE has proved so popular in the grocery sector is that schemes operate over a period of three or five years and encourage staff to stay put in an industry where employee turnover is notoriously high. The Sainsbury and Safeway employee share schemes are administered by the Halifax which runs more than 400 programmes in total, including BT's, its biggest with 120,000 participants. A Halifax spokeswoman says grocery chains and food manufacturers must be careful when deciding how a scheme will work. "Businesses have to remember that if part-time workers are included they must be able to meet the repayments, for example," she says. "In the companies where these schemes work successfully, we find that staff not only take more of an interest in their own company but also in other stocks, and it is not uncommon for employees who have been introduced to shares for the first time in the workplace eventually buy into other third party companies." There are examples of employees doing very nicely from taking part in share schemes, and staff at Asda in particular have benefited over the years. In October 1999, for instance, 3,000 Asda employees shared £6.6m from the company's Sharesave plan, receiving between £800 and £23,000 each. Its Colleague Share Ownership Plan launched in the early 1990s was devised by tax lawyer David Reid, managing director of Reid Associates, who says Asda wanted a scheme that would allow the company to act as the employees' agent and that any employee benefits would be paid for by the overall increase in Asda's market value. Thankfully this has soared in recent years. The Asda board was aware that its unique scheme would not work if the share price went into medium-term decline. "The bottom line is companies introduce these schemes for hardnosed commercial reasons. In such a competitive market for staff, share option schemes remain one of the best ways to recruit, retain and motivate employees as well as having tax advantages," says Reid. While most of the large food companies have had employee share schemes in operation for some time, each year other growing companies contact the Inland Revenue to consider whether they should be introducing something similar. Fred Hackworth, director of the Employee Share Ownership Centre in London, warns small and medium-sized companies to be aware of the costs as well as the benefits of launching a share scheme for staff. "As a ballpark figure I would say they are not suitable for any company with a turnover of less than £4m because of the start up costs which can be as high as £30,000 in the first year. Then there are ongoing legal and administration costs," he says. "A small grocery chain or manufacturer with sales of between £1m and £2m would be better offering staff cash bonuses or other incentives." Staff are being encouraged to take a level of interest in their own company's financial performance that would have been unheard of 20 years ago, and in the world of employee share ownership schemes, it is not only stocks that can go up as well as down but also workforce morale. {{COVER FEATURE }}