42 Degrees - Business from a different angle

As recently as 20 years ago, if you had suggested that it was a good idea for companies to give away shares to all their employees, you would have been dismissed as some kind of utopian socialist nutcase.

Obviously, you might want to give a slice of the action to select senior managers to reward their hard work and promote loyalty. But why would anyone want to waste money giving away their company to receptionists and van drivers?

Today, that kind of thinking seems as relevant as the Cold War. There has been what you might call a revolution in attitudes to employee share ownership plans (Esops). More than 2,000 companies in the UK, employing more than three million people, now operate all-employee share schemes in the UK.

" There are a variety of reasons behind this growth " says Joel Lewis of the Esop Centre which promotes employee share ownership. "The government has introduced a series of highly tax efficient schemes which make real financial sense. And we've had a ten year bull market in shares which makes them an attractive proposition for employees."

"Also, baby boomer entrepreneurs have recognised a good way to get their money out of their enterprises as they retire and reward to loyal staff at the same time."

So far, such schemes have been mostly adopted by larger companies. Only this spring more than 8,000 workers at supermarket chain Sainsbury's shared a £23m payout after a company employee share ownership scheme matured. Some were high-ranking executives, most were lowly checkout assistants, shelf fillers and junior clerical workers.

But increasingly smaller companies are wising up to the benefits of sharing their shares. "They are a very efficient way of attracting and retaining staff and improving productivity," says Geoffrey Bond , senior partner at share option advisors RM2. "These plans dovetail with things like Investors in People and ISO 9002. Recent evidence suggests that companies with employee share schemes grow faster than those without."

Many firms, especially in service industries and sectors that depend on intellectual capital, have discovered that employee share ownership isn't simply a fancy alternative to bonuses, but a major driver of success.

Cambridge-based technology firm TTP produces hi-tech devices for clients and on its own account. Now 20 years old, it employs 300 people and had a turnover of £30m last year. According to Chas Sims, a founding partner, it could not have been successful without giving shares away to employees.

"We set up with some venture capital backing and 25 people who provided funding as well," says Sims. "We felt we needed employees to have a substantial share of the company right from day one if we were to succeed in competing in a difficult market while retaining control and setting our own direction."

So every year the company allocates ten per cent of profits to buy shares that go into three pots. "First there is a flat amount, which everybody gets equally. Then there are further allocations given out depending on length of service and salary," says Sims.

Making employees shareholders has had two major benefits for TTP, he explains. First it means that the company has an edge when it comes to competing for the best talent. "We are only as good as the minds we employ," says Sims. "Our whole strategy is based on recruiting the best people and expecting a lot of them. Giving shares acts as an incentive for them to come here in the first place, it acts as an incentive for them to stay and it encourages an entrepreneurial attitude throughout the company.

But, more important still, it has given TTP the independence it needs to take risks and be truly creative in developing hi-tech products. "We live by our ideas but the pace of developing new ideas is often slower than the pace of financial reporting to outside backers," Sims adds. "They often want a quick return on their investments. Now we can afford to take a longer term view."

The upshot is a happy, creative and successful company where staff turnover is two or three per cent per annum compared with an industry average closer to 20 per cent.

The main benefit of giving shares to employees seems to be that it increases the engagement of people with their work. This is as true of people who work in jobs that are thought of as boring and repetitive as of 'boffins' indulging in creative science.

Henry Englehardt, CEO of the Admiral Group, realised this right from the moment he led a management buyout from the Brockbank Group in 1999. The company depends for its success on the performance of staff at its call centres in Cardiff and Swansea.

Every year it gives all employees £3,000 worth of shares and, in addition, it runs a discretionary share scheme for senior managers. "It's a no brainer" says communications manager Louisa Scadden. "Employees care more, they work harder and they stay longer as a result."

Employees and management now own 27 per cent of the company. Several hundred employees have already made up to £39,000 and 100 managers have made £150,000 each. It will come as no great surprise to learn that the company has been in the Sunday Times Top 100 Companies to Work For for the past seven years.

This is an important point, says Scadden. "Our share scheme is part of a wider series of measures aimed at creating a positive culture at Admiral. All staff have their own desks, every floor is painted different colours, the radio is on while they work. We have what we call a 'ministry of fun' and sometimes we have entertainers and magicians in the work place."

In other words, Esops aren't some magic bullet or a short cut to good industrial relations. "They work best when they are part of a broader package of measures designed to create a genuine culture of employee involvement, reiterates RM2's Geoffrey Bond. "They can be the icing on the cake for companies that actively encourage the work force to participate in all activities that affect the firm."