employee share ownership plan

employee share ownership plan (ESOP)

a scheme whereby employees acquire shares in the company in which they are employed. Although employees can of course purchase shares in their company on the open market, or companies can simply choose to donate shares to them, employee share ownership in the UK usually refers to three schemes, established by various Finance Acts, which confer tax advantages if formally approved by the Inland Revenue. Currently the main approved schemes are SAVE-AS-YOU-EARN SHARE OPTIONS, SHARE INCENTIVE PLAN, ENTERPRISE MANAGEMENT INCENTIVE PLAN, EXECUTIVE SHARE OPTION SCHEME, LONG-TERM INCENTIVE PLAN.

Employee share ownership schemes of these types are generally seen by companies as a tax-efficient way of rewarding employees rather than as an extension of INDUSTRIAL DEMOCRACY. They are essentially a FRINGE BENEFIT. Employees may of course gain voting rights at the ANNUAL GENERAL MEETING as a result of acquiring shares but the volume and dispersal of shares is usually such that these shareholders cannot by themselves make a significant impact on company policy. Companies often justify these schemes on the basis that they will promote an identity of interest between employees and their employer, which in turn will lead to improvements in job performance. There is some evidence that some share ownership schemes are associated with attitudes of this sort but it is questionable whether this leads to better individual performance. The link between share benefits (dependent to some extent on growing profitability) and individual effort is at best weak and indirect, and it is therefore doubtful whether they provide a strong incentive effect. Also to be noted is the downside of owning shares: through ‘bad luck’, ‘bad management’ or adverse trading conditions, a company's share price can go down as well as up!

Some observers see employee share ownership schemes as a way of weakening employee commitment to TRADE UNIONS and strengthening INDIVIDUALISM and entrepreneurial enthusiasm. But given that employees seem to judge these schemes primarily on their capacity to increase incomes, it is questionable whether any major reorientation of employees' attitudes can be achieved in this way See FINANCIAL PARTICIPATION, PRINCIPAL-AGENT THEORY, PROFIT SHARING, UNAPPROVED EMPLOYEE SHARE OWNERSHIP PLAN, MANAGEMENT BUYOUT.

employee share ownership plan (ESOP)

a scheme whereby employees acquire SHARES in the company by which they are employed. Employees can, of course, purchase shares in their company on the open market, or companies can simply choose to donate shares to them. In recent years, however, many companies have set up employee share ownership plans that formally transfer a proportion of the company's shares to employees, a movement encouraged in the UK by government tax concessions.

ESOPs are seen as a means of increasing employee loyalty and commitment to the firm, serving to reduce labour turnover and providing incentives to improve PRODUCTIVITY.

In the UK the main form of ESOP is currently the ‘Save As You Earn’ (SAYE) arrangement, first introduced in 1980. SAYE involves employees agreeing to save between £5 and £250 a month, tax-free, for three, five or seven years. At the end of each of these time periods, they can either decide to take cash plus a bonus or buy shares in the company at a pre-set price. This preset price is typically at a discount of 20% on the share price at the outset of the scheme. In 1999, Chancellor Brown introduced a new scheme - the All-Employee Share Plan. The new scheme is designed to give greater flexibility to employers in the way they can give shares to their employees, including: under a ‘free share plan’, employers can give up to £3,000 of shares a year to employees free of tax and National Insurance Contributions; under the ‘partnership share plan’, employees can buy shares out of their pre-tax monthly salary or weekly wages up to a maximum of £1,500 a year free of tax and National Insurance Contributions. Employers can then ‘match’ partnership shares by giving employees up to two free shares for each partnership share they buy Shares in both plans must be held for at least five years to qualify for the tax break. See PROFIT SHARING, WORKER PARTICIPATION, PRINCIPAL-AGENT THEORY.

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