December, 2009
Press release: Greencap on High-Growth Path With Employee Ownership
An Australian environmental risk management company plans to double in size to a market capitalisation of $100 million with the help of an innovative employee ownership scheme.
Greencap Ltd was today recognised for implementing the most successful Employee Share Ownership Plan (ESOP) for companies with more than 200 employees by the Australian Employee Ownership Association (AEOA) in Sydney.
High-tech packaging firm TNA Australia was also recognised for the most successful share ownership plan for business with less than 200 employees.
AEOA President Ian Woods said Greencap was an outstanding example of how employee ownership could deliver win-win results for small to medium-sized enterprises.
“Greencap embraced employee ownership as a strategy to attract, retain, motivate and reward its staff,” Mr Woods said.
“It offered an ownership stake to 260 employees – from executives to key contractors – and achieved a remarkable take-up rate of 100 per cent.
“Collectively, Greencap employees now have a 5 per cent stake in a profitable $42 million company that is growing and has excellent prospects for the future.”
Greencap Managing Director, Jeffrey Broun said the company had worked hard to build a successful workplace culture that encouraged innovation and growth.
“Nationally, Greencap works like a federation of local firms with specific expertise in their area of business and in their region,” Mr Broun said.
“The Employee Share Ownership Plan has helped bring together our employees from across our various business units, and to create a stronger sense of shared purpose.
“This workplace culture will be extremely important as we continue to expand into the future.”
Mr Woods said research had shown the employee ownership model regular outperformed traditional business ownership structures.
“Australia was once touted as the Worker’s Paradise, but as a country we have been reluctant to embrace the benefits of employee ownership.
“Companies like Greencap, however, are leading the way by showing how employee ownership can be part of a strategy for long-term sustainable growth.”
AEOA was recently awarded a $1.8 million Federal funding grant to establish the Australian Employee Buyout Centre in South-west Sydney.
The centre will open early next year.
Federal Assistant Treasurer, Hon Senator Nick Sherry will present the AEOA Awards at the conclusion of AEOA’s Annual General Meeting in Sydney on 10th December, 2009
The Australian Employee Ownership Association (AEOA) has since 1986 been Australia’s key non-profit and broad based Association dedicated to the promotion and development of employee share ownership in Australia.
The ESOP Awards recognise the achievements of those companies who have successfully introduced broad-based employee share ownership plans and are selected according to formal judging criteria by an independent judging panel appointed by the AEOA Management Committee. Members of the judging panel are independent of any applicant or consultant with a client applying for an Award.
The independent judging panel comprised of the following people:
§ Mr Bill Patullo, consultant, former Human Relations Manager, BHP Ltd; and
§ Mr Mike Sewell, Managing Director of Market Group Investments Pty Ltd, a company investing in SME’s.
The judging criteria was based on plans which:
(a) were broadly based, that is, open to the majority (if not all) employees of the organisation;
(b) had involved effective communication procedures (for example, handbooks, presentations, online communication); and
(c) encouraged workplace participation by employees.
Tax reform to employee share schemes to encourage good corporate governance – Nick Sherry.
From: Ethical Investor Newsletter no.338, Wednesday, 16 December 2009. Written by Oliver Wagg. (http://www.ethicalinvestor.com.au/ ).
Federal government reform of employee share scheme tax fits into a broader agenda to encourage good corporate governance, increase Australian productivity and return the budget to surplus, said Assistant Treasurer Nick Sherry.
Speaking to the Australian Employee Ownership Association (AEOA) in Sydney on 10 December,Sherry said employee ownership boosts workplace productivity through greater employee involvement and engagement, and increases job satisfaction.
“Employee ownership can contribute to innovation in the workplace, lower staff turnover and engender a culture of corporate social responsibility,” he said. “Most importantly, it means employees share in the wealth and successes created through their hard work.”
The changes to the taxation of employee share schemes were part of a package of reforms announced in the May federal budget. Soon after, it became clear the government needed to change its approach and it decided to consult with industry stakeholders, such as the AEOA.
The government softened previously planned reforms with several concessions, including raising the income threshold below which workers are eligible to certain exemptions on upfront tax to $180,000 – in line with the top income tax bracket – up from the $60,000 in the original budget announcement.
Sherry admitted development of the reforms in past six months “has not always been smooth.”
“In those six months we’ve managed to come together and settle most points of difference.”
The final legislation includes a number of measures, such as the introduction of reporting requirements: employers that provide employee share scheme benefits now have to provide information to the Tax Office.
Sherry has asked the Board of Taxation to consider two further issues raised in consultation: how to best determine the market value of employee share scheme benefits; and whether employee share schemes for start-up, research and development or speculative-focused companies should have separate tax deferral arrangements.
The board will report its findings in relation to these issues to Sherry by February
For the full text of Senator Sherry’s speech, see “Address to Australian Employee Ownership Association”.
Federal Assistant Treasurer, Senator Nick Sherry to address AEOA AGM on 10th December.
The Minister in charge of employee share schemes legislation and regulation, Assistant Treasurer Senator Nick Sherry has accepted an invitation to address the AEOA AGM on the topic of the new employee share schemes legislation and the development of employee share ownership in Australia.
The AGM will take place from 3:00pm on Thursday, 10th December, 2009 at the Unions NSW auditorium at 377 Sussex Street, Sydney.
Details and program can be seen in the notice of meeting and annual report for the 2008/09 AEOA AGM in the “Members” section of this web-site.
Employee Share Schemes Legislation Passed
The new legislation on Employee Share Schemes – The Tax Laws Amendment (2009 Budget Measures No 2) Bill 2009 and Income Tax (TFN Withholding Tax (ESS)) Bill 2009 – was passed yesterday afternoon, 2nd December, 2009 by the Senate without amendment. The Bills effectively await Assent. This means the employee share scheme changes were passed unamended. You can see the Bills and what debate there was on them here…
For a complete overview of the legislation and all the supporting material on the tax changes, see the Australian Tax Office’s new web-page “Reforming the taxation of employee share schemes”.
November, 2009
Book Review: Jobs of Our Own – Building A Stakeholder Society, by Race Mathews
Former Victorian Government Minister and AEOA member, Race Mathews advises that his successful book on employee ownership – “Jobs of Our Own” – first published in 1999 has been revised and released as a new edition this year (2009).
AEOA Secretary, Klaas Woldring has provided an excellent review of the new edition of the book. You can see this review here …
The AEOA encourages all people interested in broad and deep employee ownership in this country to read this book.
When Sharing is not Caring
While the “bright” side of the proposed new employee share and option taxation provisions of Division 83A ITAA 97 is being able to conjointly access the:
• The $1,000 per annum exempt share benefits to those with adjusted taxable incomes of no more than $180,000; and
• The tax deferred benefits of (i) $5,000 per annum salary sacrifice, and (ii) further share benefits subject to “real” risks of forfeiture and “genuine” restrictions on disposal.
The “dark” side, as outlined by Gary Fitton, in his article published by Thomson Reuters in the Weekly Tax Bulletin, Issue 46 of 6 November 2009, is the impact upon traditional employee option plans, which have been the most common employee equity delivery vehicles on recognised Australian Stock Exchanges.
The following article outlines some disturbing consequences for the employee taking up options from 1 July 2009, without considering the employee taxation environment created by the proposed provisions of Division 83A ITAA 97.
See the article “When Sharing is not Caring”.
October, 2009
US Steelworkers Union Forms Collaboration with MONDRAGON, the World’s Largest Worker-Owned Cooperative
United Steelworkers “USW News” Media release: October 27, 2009
Pittsburgh (Oct. 27, 2009) – The United Steelworkers (USW) and MONDRAGON Internacional, S.A. today announced a framework agreement for collaboration in establishing MONDRAGON cooperatives in the manufacturing sector within the United States and Canada. The USW and MONDRAGON will work to establish manufacturing cooperatives that adapt collective bargaining principles to the MONDRAGON worker ownership model of “one worker, one vote.”
“We see today’s agreement as a historic first step towards making union co-ops a viable business model that can create good jobs, empower workers, and support communities in the United States and Canada,” said USW International President Leo W. Gerard. “Too often we have seen Wall Street hollow out companies by draining their cash and assets and hollowing out communities by shedding jobs and shuttering plants. We need a new business model that invests in workers and invests in communities.”.
See the USW/Mondragon Agreement here …. and the USW/Mondragon Media Release here …
New Employee Share Schemes Legislation Tabled in the Federal Parliament.
The “Tax Laws Amendment (2009 Budget Measures no.2) Bill”, 2009 containing the new employee share schemes legislation was tabled in Parliament on 21st October, 2009. You can follow progress of it here…
For a summary, see the Assistant Treasurer’s (Senator, the Hon. Nick Sherry) press release “Legislation Introduced to Reform the Taxation of Employee Share Schemes”.
Re-Inventing the Firm: We have a once in a lifetime chance to renew our idea of what the company is for…
A Research Report by William Davies for Demos (UK), August, 2009.
The financial crisis has called into question many of our core assumptions about economic structures, governance and institutions. But there has been little attention paid to the basic unit of economic collaboration and production: the firm. In recent decades, Britain developed a corporate monoculture in which the ‘shareholder value’ creed treated firms simply as the property of their shareholders, to be traded exploited and disposed of in pursuit of profit.
Government policy making has done little to call this culture into question, depriving our economy of a richer vision of what a good company is and what it can do. This crisis is a chance to ask deep questions about our firms: how can they meet social and political as well as economic goals? How can firms be modelled so that not only shareholders but employees, the economy and society profit?
Many of these models already exist. Mutual and employee-owned models of business operate with longer time-horizons, achieving higher levels of performance and customer satisfaction. They nurture greater power for individuals over their economic lives and increase the accountability of managers.
This report argues it is time to bring these models out of the wilderness and into debate about where capitalism goes next. Presenting a wide range of quantitaive data alongside three new case studies of employee-owned firms, it offers a new vision of economic autonomy where democratic companies drive a happier and more sustainable economy.
You can access the full report at: http://www.demos.co.uk/publications/reinventing-the-firm
September, 2009
Media Release: Chris Bowen MP, Member for Prospect and Minister for Financial Services, Superannuation and Corporate Law, Minister for Human Services
New local Employee Buyout Centre to support over 600 jobs
September 11, 2009: Federal Member for Prospect and Financial Services Minister Chris Bowen today congratulated the Australian Employee Ownership Association (AEOA) for securing over $1.8 million in Federal Government funding for a pilot project which will support 603 jobs in the South West Sydney area.
The creation of the Employee Buyout Centre will convert a dozen salvageable businesses with 600 jobs at stake into viable firms. The centre will empower and assist employees to buy out the companies they work for, as an alternative response to deal with company insolvencies, closures and break ups in South Western Sydney.
“This pilot project is one-of-a-kind and well-suited to south-western Sydney with its thriving industries including building, transport, construction and light manufacturing,” Mr Bowen said.
“The work of the Employee Buyout Centre will go beyond the health of one company. Employee buyouts will support jobs, keep capital in the community and provide employees with a greater sense of workplace participation. Employees will have a real stake and interest in the success of the company they work for, and collectively own.”
The AEOA successfully applied for funding through the Federal Government’s Jobs Fund program which provides a maximum of $2 million funding for one-off capital projects to create jobs, build skills and produce long-term improvements in local communities.
“A range of job seekers and workers will benefit with the project expected to create or retain 603 jobs, 30 traineeships and 30 work experience positions,” Mr Bowen said.
The Employee Buyout Centre will be based in Fairfield and will work with local providers and business groups to offer mentoring and support services to businesses and employees throughout the buyout process.
AEOA President, Ian Woods, welcomed the Federal Government’s decision to fund the Employee Buyout Centre adding, “This project is a unique example of what can be done to promote and protect jobs in Western Sydney through innovation.”
“The AEOA is looking forward to working with local communities and businesses, unions and other stakeholders to drive the project and show what can be done by bringing people together.”
About the AEOA
Since its founding in 1986, the Australian Employee Ownership Association [AEOA] has actively promoted employee ownership (or co-ownership) of the businesses where they work. It was formed by 20 companies as a member-focused, non-profit, private sector association to assist members with their employee ownership and participation efforts. Its mandate is to help Australian companies, trade unions and governments attain greater productivity and flexibility in the business sector, and to provide new jobs for Australians through shared ownership and workplace participation.
For more information on employee buyouts, see the “Employee Buyouts” handbook. See also our new web-page on the Australian Employee Buyout Centre.
Understanding the current measures taken by the Rudd Government and its implication to employee share schemes.
AEOA President, Ian Wood has accepted an invitation to be a panelist at Link Market Services Employee Share Scheme Update.
This meeting will be an evening dedicated to providing an up-to-date look at the current proposed reforms and leading case studies, as well as a panel discussion on the future of employee share schemes.
The meetings will take place in Melbourne on Wednesday, 23 September, 2009 and Perth on Wednesday, 30 September, 2009, both commencing at 5:30pm.. The main speakers will be:
• Phillip Muhlbauer, CEO, Client Relationship Group, Link Market Services
• Angela Perry, Head of Employee Share Services & General Counsel, Employee Share Services, Link Market Services.
Social Enterprise Discovers Employee Ownership
AEOA Public Officer, Alan Greig has been invited to present at a workshop at the Social Enterprise World Forum (SEWF – http://www.sewf09.com/ ) in Melbourne on 7th and 8th October. The presentation to be made is called “Why Share Ownership?
Employee ownership champion, Margaret Elliott, OBE of the employee owned Sunderland Home Care Associates (SHCA) will also be presenting at the SEWF about the business form that SHCA takes. SHCA is wholly owned by an Employee Benefits Trust (UK version of the ESOP). For a discussion on the SHCA structure, see the report by the Employee Ownership Association UK “Caring and Sharing: The Co-owned Route to Better Care” at: http://www.employeeownership.co.uk/publications.asp ).
For an excellent article on Margaret Elliott’s work with employee ownership and social enterprise, see: http://www.socialenterprise.org.uk/pages/margaret-elliott-sunderland-home-care-associates.html .
This invitation provides a good opportunity to raise the profile of employee ownership and to highlight the potential benefits of the ESOP in social service businesses (one of the fastest growing industries in Australia).
See also the article “Employee Ownership and Social Inclusion” in “2008 News” under January.
See also the AEOA discussion forum “Social Inclusion – More Than A Job”
Luncheon Discussion with Margaret Elliott of the UK ESOP owned company, Sunderland Home Care Associates.
The AEOA is pleased to be able to host a luncheon meeting with Margaret Elliott while she is visiting Australia, on Friday, 9th October, 2009 at the Royal Exchange Club of Sydney, commencing at midday. Cost: $60. Booking details for this event can be seen in the Luncheon Invite .
Margaret Elliott set up Sunderland Home Care Associates (SHCA) in 1994. SHCA has grown into a massive success (Social Enterprise of the Year at the 2006 Enterprising Solutions Awards), finding work for over 250 local residents while supplying care to over 500 elderly and disabled people.
The company has a turnover of 1.75 million pounds and is fully employee-owned, with staff receiving above market pay and conditions as well as having a say in all major decisions. Though many lacked formal education before joining, more than 150 employees have now gained NVQ Care and Business qualifications and all the others are currently undergoing courses.
This commitment to their employee-owners has helped the company achieve very low levels of staff turnover, better relationships with clients and a higher quality of care overall, evidenced in consistently high scores from the Commission for Social Care Inspection.
Margaret was awarded an OBE in the 2008 New Year’s Honours List for her services to employee ownership and the City of Sunderland. Margaret is also a Director of the Employee Ownership Association UK.
August, 2009
Report by the Senate Economic References Committee on Employee Share Schemes
The Senate Committee inquiring into the employee share schemes legislation has released its report on 17th August.
You can see this report here…
Exposure Draft – Taxation of Employee Share Schemes.
On 1 July 2009, the Government issued a Policy Statement, setting out the final taxation treatment of share and rights acquired under employee share schemes, to apply from that date.
On 24 July 2009, the Assistant Treasurer announced further industry consultations including release of an exposure draft and Board of Taxation consultation on technical aspects of the package.
An Exposure Draft Package has been released for comment. The package includes:
- an exposure draft version of Schedule 1 to Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009;
- an exposure draft version of Income Tax (TFN Withholding Tax (ESS)) Bill 2009;
- explanatory materials in support of those exposure draft Bills; and
- associated regulations (with some explanatory materials).
The exposure draft of the first mentioned Bill does not yet include application and transitional provisions. That part of the Bill is still under development and will be released as soon as it is complete. (For information on the Board of Taxation’s consultation and review on technical aspects of the rules, see: http://www.taxboard.gov.au/content/employee_share_schemes.asp ).
Interested parties are invited to comment on the draft guidelines. Closing date for submissions: Monday, 31 August 2009.
Employee Share Plans: On the Bright Side
Lost in the commotion of surprise, confusion and outrage at the Treasurer’s 2009 Budget night announcement of new taxation measures is that for many employees, especially those employed by large listed companies, the taxation treatment of share plan discounts proposed is actually better than the provisions which applied prior to 1 July 2009.
This is the case because the:
· $1,000 per annum tax exempt plan;
· $5,000 per annum salary sacrifice plan; and
· Tax deferred plan (subject to vesting as a long term incentive retention plan),
are now mutually compatible and do not require an employee to make a section 139E election to tax upfront the discounts in excess of the $1,000 tax exempt per annum.
In the article “Employee Share Plans: on the bright side” published in the Thomson Reuters Weekly Tax Bulletin Issue No 31 of 24 July 2009, AEOA Vice President, Gary Fitton discusses the new measures and how they would apply to specific situations.
ESOPs Struggling
What with the GFC and the Federal Government bagging employee share ownership over the last few months, it is not surprising that the proportion of employees receiving shares as a benefit of employment has fallen recently.
The latest figure (Australian Bureau of Statistics Labour Market Survey, August, 2008) is that 5.1% of the workforce receives shares as a benefit of employment. This figure compares with 5.5% in 2002, 5.9% in 2004 and 6% in 2006.
To look at this in perspective, the ASX has indicated that the proportion of Australians holding shares directly as individuals has also fallen from 46% two years ago to 41% presently (Australian Share Ownership Study 2008, ASX, June, 2009).
It is clear from this decline in employee ownership that for ESOPs to become as significant in the Australian economy as they are in other economies, much more attention needs to be paid to researching the benefits of such programs and that institutional support – including from Governments at all levels – needs to be much more substantial than it is at present.
Financial Crisis Opportunities: Ownership sharing without shares
“Government bail-out money should be used twice so as to also introduce employee ownership” according to Dr Shann Turnbull, a co-founder of the AEOA.
This idea attracted the interest of overseas experts when Dr Turnbull presented it to the Annual Conference of the ESOP World Centre in Cannes on July 9th 2009. For the power point presentation made by Dr Turnbull to this Conference, see “Australian Employee Ownership – Practices, Politics, Policies and Proposals”.
The government has committed hundreds of millions of dollars to support such industries as automobiles, textiles, green energy projects and many others without making the money work twice by being channelled through employee ownership trusts.
For a report on this discussion and how the idea works to expand employee ownership, see “Ownership Sharing without Shares”.
July,2009
Details of Further Industry Consultations on Employee Share Scheme Tax Reforms – Press Release by the Hon Nick Sherry, Assistant Treasurer, 24th July, 2009.
The Assistant Treasurer, Senator Nick Sherry, has released the timeframes for the final round of industry consultations on reforms to the taxation of employee share schemes, including releasing the Terms of Reference for the Board of Taxation review component.
The three stages are:
· a two-week consultation period on a draft Exposure Bill beginning in August;
· a Board of Taxation consultation on technical issues to report to the Assistant Treasurer within approximately one month of the release of the draft Exposure Bill; and
· a comprehensive Board of Taxation review on two further substantive issues to report to the Assistant Treasurer by 28 February, 2010.
Following the first two stages of this consultation process, it is envisaged legislation based on the policy statement will be introduced into Parliament in the Spring sittings.
The Assistant Treasurer has also released the Terms of Reference for the Board of Taxation’s review, being the third stage of the consultation process. The issues before the Board are:
· how to best determine the market value of employee share scheme benefits; and
· whether shares and rights under an employee share scheme at a start-up, R&D or speculative focused company should have separate tax deferral arrangements.
The full Terms of Reference of the review can be seen here….
Making employee ownership work: a benchmark guide.
With questions being raised about corporate practices in employee share ownership programs in Australia (see April News below), the following UK report provides some very timely and useful advice.
‘Making employee ownership work’ is a new guide from the Employee Ownership Association (EOA) UK and co-ownership advisers the Baxi Partnership, based on a survey of 25 EOA member companies including John Lewis, Unipart, Arup and Mott MacDonald. Designed for easy reference, the guide compares company practice under five headings: employee engagement, management systems and reward, governance and employee voice, employee ownership culture, and ethics and social responsibility.
The report covers all the matters of corporate practice that now need to be seriously considered in Australia if this country is to develop the kind of ‘success stories’ that are featured in this report.
The author of the report is Sarah Silcox. It was published in February 2009. The report can be accessed – along with all the other excellent EOA UK publications – at: http://www.employeeownership.co.uk/publications.asp .
TAXATION OF EMPLOYEE SHARE SCHEMES
Press release: Senator Nick Sherry, Assistant Treasurer, 1 July, 2009
The Assistant Treasurer, Senator Nick Sherry, today released a Policy Statement setting out the final taxation treatment of shares and rights acquired under employee share schemes, effective from today. The final policy provides further certainty to allow companies to continue to provide share schemes into the future.
“The Government strongly supports employee share schemes. We also support the role of the tax system in encouraging employees to be involved in share schemes – we made that clear in the Budget and we’ve been consistent in that support.”
“As with all tax policies, however, the overall integrity of the tax system is a critical concern. The Government must balance its obligations to ensure ongoing system integrity and the need to be sure that our tax system applies fairly and equitably to all Australians.”
“These are the motivations for the Government’s reforms to the taxation of employee share schemes,” said the Assistant Treasurer.
As previously announced, the existing law will apply to all shares and rights acquired before 1 July 2009. The Government will introduce the legislation during the Spring Sittings of Parliament.
See the “Policy Statement – Taxation of Employee Share Schemes” for the technical details on the reforms and the full press release.
June, 2009
Senate Committee to Inquire into Employee Share Plans
On 23 June 2009, the Senate agreed to a motion moved by Senator Helen Coonan (from the Opposition) that the matter of the operation of employee share schemes in Australia be referred to the Senate Standing Committee on Economics for inquiry and report by 17 August 2009.
The matter includes examination of:
- the structure and operation of employee share schemes
- the benefits of employee share schemes
- the taxation issues relating to compliance of employers and employees participating in employee share schemes
- the recent announcement of proposed changes to the treatment of employee share schemes, the background to these changes, consultation undertaken to develop these changes and the anticipated impact of these changes on employees, employers and Australian business generally
the rules governing employee share schemes in other countries - any other related matters.
Submissions will close on 17 July 2009. Submissions made and Transcripts of the Public Hearings can be viewed here ….
See also the AEOA’s Submission to the Senate Inquiry .
AEOA Submission on the Reform of the Taxation of Employee Share Schemes.
The AEOA submission to the Federal Government on its Consultation paper (see below) can be seen here …
All the submissions made to the Reform of Taxation of Employee Share Schemes Consultation can now be seen at: http://www.treasury.gov.au/contentitem.asp?NavId=066&ContentID=1573
Employee Share Ownership and the Progressive Economic Agenda
(Per Capita Research Paper by David Hetherington, Executive Director, Per Capita).
The expansion of share ownership amongst employees advances a number of important economic priorities identified by the Federal Government, and has the potential to give Australia a stronger and fairer economy. Rewarding employees with increased ownership in the companies in which they work increases productivity, advances flexibility with fairness in the workplace and builds a national savings culture. However, to secure these benefits, it is critical that employee share ownership is extended widely to ordinary workers rather than concentrated at the top levels of management.
Employee share plans are frequently criticized for concentrating risk, for duplicating superannuation and for being regressive, but carefully designed policy can address each of these shortcomings. Existing Australian policy towards employee share ownership lacks this careful design. This report compares the employee share policies of the UK, the United States and Australia. It finds that, despite the wider economic benefits of employee share plans, ordinary Australian workers have little or no incentive to participate in them. Taxation arrangements mean that Australian workers can be penalized for participating in employee share schemes rather than making equivalent investments in the sharemarket. In Britain and America, on the other hand, tax structures favour employee share schemes over ordinary equity investments.
You can access the full report “Employee Share Ownership and the Progressive Economic Agenda” at: http://www.percapita.org.au/ .The report was sponsored by The Employee Ownership Group (www.employeeownershipgroup.com.au).
Troubled Times Might Dash Hopes of Real Reform
During the past decade, the AEOA has given a great deal of attention to policy development and has shaped its policy to focus reform upon the ‘shop floor’, upon unlisted companies and small business, and upon share plan integrity. (See “Our Policy”).
Above all, the AEOA policy is about ordinary men and women owning ordinary equity in the companies where they work.
Over the last decade also there has been an explosion in employee share options plans. There are some questions about the merits of options. While the jury is still out on the issue, there is reason to doubt whether options can ever provide anything more than icing on the employee ownership cake. The fundamental problem with options is that, while they promise to deliver large, short-term rewards, by their nature they do not deliver long-term, substantial, ownership of real equity in a business. It is the latter, and not the former, which is the key objective of employee ownership.
The really big issue for employee ownership is the amount of real equity employees can acquire.
One of the common findings of international research is that the productivity and efficiency effects of employee ownership do not ‘kick in’ until employees acquire a substantial number of shares in the companies that employ them. Productivity effects aside, employee ownership’s principal aim is to enable ordinary workers to become fully-fledged and active co-owners of the capital resources deployed by a free enterprise’ society. In this project, tokenism is the enemy. So it is vital to the success of employee ownership policies that employees can acquire big licks of equity.
Yet, against this, is the fact that there are three major features of the ESOP system in Australia that inhibit the acquisition of major equity in firms by employees.
- The first is the $1,000-limit on the number of shares acquired annually under the “Exempt share plan”.
- The second is the fact that the potentially powerful “Deferred share plans” taxes capital gains at the income tax rate.
- And the third is that share plans leveraged along American lines so far have found little place in the Australian employee ownership kit bag.
Behind these three obstacles to deeper worker ownership lies the notion that share plans are just another way of remunerating and rewarding employees.
This idea is deeply ingrained, as much among some practitioners of employee ownership as among the Treasury officials and Governments who frame our ESOP laws. It is being further reinforced by the proposed Budget changes. And it is precisely this idea (spiced by the dream of getting rich quick) that has stimulated an exaggerated interest, both here and abroad, in option plans. It is important for advocates of employee share plan reform to jettison this kind of intellectual baggage.
With the Government examining new policy proposals for employee share ownership, The AEOA will want to be convinced that anything new that is being proposed will bring substantial, concrete, and long-term benefits to ordinary working people. This means, from a Government perspective, an ESOP policy that delivers the largest number of shares to rank-and file workers, that boosts their savings, and that does so without blowing a hole in the budget.
It is a major challenge – but one which the AEOA is prepared to meet.
(This is an edited version of an article first published in the AEOA “Equity Report” magazine, Vol. 11 no. 2, November, 2001).
Reform of the Taxation of Employee Share Schemes – Consultation Paper
A consultation paper and exposure draft bill on the reform of the taxation of employee share schemes have been jointly released by the Treasurer, the Hon Wayne Swan MP, and the Assistant Treasurer, the Hon Chris Bowen MP.
Through this paper the Government seeks to provide a point of reference for public submissions on the Government’s 2009 Budget commitment to better target the concessions for employee share schemes and reduce the opportunities for tax avoidance.
Given the community concerns with the changes announced on Budget night and the possible unintended adverse impacts on employee share scheme arrangements for ordinary employees, the Government has fast-tracked the consultation process.
As outlined in the consultation paper, the Government proposes that the taxation of discounts on employee share scheme shares and rights on acquisition will remain its starting principle. However, the Government will provide concessional tax treatment for particular schemes. The concessions are in the form of a tax exemption, or a tax deferral in limited circumstances.
To provide certainty to employers and employees currently participating in employee share schemes, the Government proposes that the new arrangements commence on 1 July 2009. In the interim, the existing law will apply to all shares and rights acquired before 1 July 2009.
Interested parties are invited to comment on the paper and exposure draft bill. Closing date for submissions is Friday, 12 June 2009.
For more details and to download a copy of the report go to: http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1559
Stop Arguing With Companies and Become the Company, Unions told.
The Australian Employee Ownership Association (AEOA) is urging the Australian union movement to stop arguing with companies and to encourage employees to become shareholders.
The organisation made a presentation on 1s June to delegates attending the ACTU Congress in Brisbane, discussing the need for Australian business to embrace employee share trusts as a way to fund business through the Global Financial Crisis (GFC).
In light of the recent budgetary employee share plan announcements, the AEOA will be calling on the Government to legislatively enshrine existing share requirements to encourage more businesses to set up employee share trusts.
“Employee ownership of companies is particularly important in this economic climate when various corporations are looking for injections of cash to stay afloat,” AEOA President Ian Woods said.
“Day after day, we’re hearing more and more companies crying out for Government funding or international investment to survive.
“By raising funds through employee share trusts, businesses can retain Australian ownership and ensure that decisions are made in favour of Australian and its employees – not just for foreign shareholders and the executive team.
An employee share trust is beneficial to both the company and the employees and can still attract favourable taxation treatment.”
Employee share ownership is implemented in about five percent of Australian businesses, compared to 20 percent in the USA and about 40 percent in France.
“The last year has shown us that the previous model of capitalism doesn’t work and that we need to look elsewhere to maintain economic growth into the future,” Mr Woods said.
“Unions should really be considering this as the model of the future as it provides the facility to enshrine excellent conditions for workers in all tiers of a company.”
(For more information on employee share ownership trusts and how they work, see our “Company ESOPs“ page. For more information on the ACTU policy on employee share ownership, see the ESOP discussion forum “ESO and IR Reform” ).
AEOA Presents in ACTU Congress Fringe Events Program
The seminar “Employee Share Ownership” took place at the ACTU Congress on 1st June, 2009 in Brisbane. The session discussed why employee ownership is necessary for continued prosperity for Australia and its workforce in recessionary times. It aimed to:
- Present options for “Keeping Australia Australian.”
- Clear up the myth created by ‘executive only’ employee share schemes.
- Present overseas initiatives and results.
- Explain what unions need to do to implement ESO in the workplace.
The following presentations were made: “AEOA President’s Introduction“ , “Employee Share Plans – A Practitioners Perspective“ , “Worker Ownership and ESOPs -Securing the Jobs of Australian Workers” and “Policies for Worker Ownership through the Financial Crisis“.
May, 2009
Government to consult on employee share plan changes
Please see below the Assistant Treasurer’s (Chris Bowen M.P.) announcement on the need to consult with industry over the planned changes to employee share plan tax concessions.
Media Release of 24/05/2009 – Joint Media Release with Treasurer – Employee Share Schemes.
The Government has today outlined the key principles that will underpin the consultation process on the Budget measure that deals with the taxation arrangements surrounding employee share schemes.
The Budget measure was designed to deal with the current tax arrangements applying to employee share schemes which involve excessive concessionality and provide scope for revenue losses through avoidance or for confusion as to the taxpayer’s obligations.
Business, tax profession and interest groups have acknowledged that there is an important tax integrity issue to be addressed with this measure.
Nevertheless, concerns have been expressed that the $60,000 income cap for access to the $1,000 tax exemption is too low. Concerns have also been expressed about the removal of the tax deferral option for higher value schemes.
Given the community concerns with the proposed changes and the possible unintended adverse impacts on employee share scheme arrangements for ordinary employees, the Government will be fast-tracking the consultation process, beginning with the release of a policy options paper in the next fortnight.
The government always consults on the detailed design of its tax measures and this measure will be no different.
As part of that consultation process the Government will be taking on board some of the concerns raised and examining the most efficient way of protecting the tax base and cutting down on potential avoidance and confusion at the higher end while maintaining the current support for employee share ownership schemes particularly for low and middle income workers.
The consultation process will seek submissions on concerns with both the existing and announced arrangements, and on proposed alternative solutions to address the identified problems. The consultation process will allow the wider public to provide the Government with comprehensive feedback on the new framework for the taxation of employee share schemes.
Bearing in mind the policy objectives outlined in the Budget measure, the policy options paper will canvass options that include:
- the reporting requirements which should be applied to address tax avoidance concerns, such as the application of withholding arrangements or enhanced Tax File Number (TFN) reporting.
- the level of the income threshold for accessing the $1,000 tax exemption for upfront taxation, which would ensure the continued availability of employee share schemes for low and middle income employees;
- whether there are circumstances under which it may be appropriate to provide for the deferral of taxation, the period of deferral and what those limited circumstances would be (such as when there is a real risk of forfeiture); and
- whether the tax law provisions which determine the market value of discounted and deferred shares or rights result in undervaluation.
Blunder Indeed
(The following letter by AEOA member, Owen Thomas, was published by the Australian Financial Review on Wednesday, 20th May, 2009 under the heading “ALP Ends Worker Share Schemes” – reproduced with permission of the author).
Your editorial “Labor’s share schemes blunder”, AFR 19 May 2009, correctly names the Rudd/Swan amendments to employee ownership taxation. The changes to share remuneration taxation:
• Have created great uncertainty to possibly 1,000,000 Australian employee participants;
• Resulted in the suspension or cancelation of many general employee share plans; and
• Removed the “equity” remuneration component from the strategy of many “cash poor” start-up companies.
Australia now stands as one of the only countries in the world taxing share based remuneration in the tax year of allocation. Why?
The government’s reason for these amendments is found in “PM stonewalls on employee shares”, AFR 19 May 2009, Finance Minister Lindsay Tanner is quoted as saying schemes have been used “primarily as a tax-avoidance mechanism” for “higher-income earners”.
The blunder is these changes will not stop equity structures at the executive level. There are currently available a number of equity plans that operate under other sections of the Australian taxation act. These plans, not affected by the budget, can be designed to provide income taxation deferral (supposedly eliminated by these amendments) or option like rewards under the capital gains tax legislation (such as the limited recourse loan plan).
Assistant Treasurer, Chris Bowen when in Opposition and referring to the then Liberal government stated, “They have had 11 years in office but have done very little to increase the take-up of employee share ownership schemes.”
Well, the Labor government has certainly done something to general employee share ownership in Australia. It has ended it.
Owen Thomas Owen Thomas and Associates Pty Ltd, Greenwich, NSW.
If it was broke, then fix it properly
For once there is consensus between employers, employees, trade unions and the press – the changes to the tax regime on employee share ownership are ‘a disaster’.
The Australian Financial Review summed it up in its editorial on the matter on Friday, 15th May:
“In order to catch a few tax cheats, the Rudd Government appears to be wiping out the whole system. The changes are either a mistake or an old-style Labor assault on the entrepreneurial spirit. Given the tens of thousands of employees, rich and poor, affected, the changes must be reversed immediately.”
The Australian newspaper the following day – “Rort worries hits employee share plans” (16/5/09) – states that “there is only a very small group of senior executives, reportedly about 2000, who for most of the decade have been exploiting” employee share schemes.
This means that for the sake of stopping 2000 rorters, potentially two million employee share owners have to suffer the loss of their valuable employee share ownership plans.
It is clear that we can’t simply revert to “what there was before”. Something needs to be done once and for all to make employee share ownership work for those who it is intended to work for – the vast number of employees of private sector businesses economy-wide – and the businesses that they work for.
What needs to be done? Here are some suggestions:
1. Sort out the rorts issue through (i) registration and reporting on all share schemes as per the UK system, or (ii) capping the amount of shares or options that the tax concession will apply to or (iii) some kind of “with-holding” requirement on employers to make them obligated for any tax owed by their executives participating in a share scheme.
2. Reform the broad based share scheme legislation so that access, use and administration is simplified, employee share plans are standardised, tax is consistently applied across all structures and barriers to the entry of small businesses into employee share ownership are removed.
3. Improve corporate practice with employee share ownership through properly funded support, information and education services so that lower income employees (especially in SMEs) are encouraged into employee share ownership plans and employee participation structures for employee owners are implemented at both the company and workplace levels.
4. The Government needs to greatly increase the advice it is getting from industry sources on employee share ownership. This can be done by re-establishing the Employee Share Ownership Unit as the policy advisory office in Government, but this time located in The Treasury in the same way as it is in the UK. There is also a need to urgently re-convene the Treasury Employee Share Schemes Industry Consultation Group. This group would be right platform for clarification of ESO issues in relation to the tax changes
Unions Make Statements in Support of Employee Share Ownership
In the wake of the Federal Governments’ Budget tax changes on employee share schemes, trade unions are worried about the impact of the closure of such schemes on the welfare of their members, especially in relation to them no longer being able to be cut into a “piece of their employer’s pie”.
In the article in the Australian Financial Review on Friday, 15th May – “Anger grows as share schemes axed” – the following statements were made:
“Shop Distributive and Allied Employees Association national secretery Joe De Bruyn said share schemes were “potentially quite valuable for employees” and his union would be concerned if major employers such as Coles and Woolworths pulled their schemes as a result of the budget. ”
“The Finance Sector Union has raised concerns with (Assistant Treasurer) Mr Bowen’s office about the unintended consequences of the change. National policy director Rod Masson said the income threshold should be higher than the proposed $60,000. “If the government thinks a person earning $61,000 a year and working in a high pressure environment is a high income earner, they are kidding themselves”, he said.”
What Did the ALP Say When They Were In Opposition?
In the 20 September, 2006 edition of the Labor eHerald, the ALP national magazine online, Wayne Swan (then the Shadow Treasurer when the ALP was in Opposition and now the Treasurer who presented the 2009 Budget) said in an article – “Key Incentives for Sustaining Growth” – many positive things about the need for employee share ownership, such as:
“To my mind, the confrontational model of labour and capital has no place in the modern economy. We need people to see that they are sharing in the capital-creating side of the economy and not just competing in global labour markets. We need as many workers as possible to become stakeholders and share a slice of the pie.
Just as we strived for homeownership in the last century, workers should strive for share ownership in the new century. This is true even more so due to the ageing of the population and shifts in wealth.
If share ownership is good enough for CEOs it should be good enough for regular employees too. Many companies have already discovered share ownership plans can help align the interests of management and employees.”
Employee Share Scheme Tax Concessions Axed in the 2009 Federal Budget
Employee share ownership is about protecting jobs in Australia by being a part owner of the assets of the business that employs you and a participant in the decision making processes in that business – it is that simple a purpose.
The proposed Federal Budget changes announced on 12th May represent the single greatest threat to broad based employee equity participation in Australia since the concept first took root. The changes are as follows:
Budget Paper no. 2, Part 1: Revenue Measure – Employee Share Plans
“Budget Highlights
- Removing the tax deferral option will ensure that remuneration in the form of share discounts is taxed at an appropriate time and rate, and reduces tax avoidance opportunities.
- The measure will also limit access to the upfront concession to employees with an adjusted taxable income of less than $60,000.
The Government will better target eligibility for the employee share scheme tax concessions to employees with an adjusted taxable income of less than $60,000. The measure will take effect with respect to shares and rights acquired after 7:30pm (AEST) on 12 May 2009. This measure will have an ongoing gain to revenue which is estimated to be $200.0 million over the forward estimates period.”
By eliminating one tax concession (income tax deferral) and by reducing access to the benefit that remains ($1,000 tax exemption) to those on $60,000 p.a. or less, it is questionable whether the Government can ensure “that the concessions will encourage a better take-up and availability of employee share arrangements by low and middle-income employees”. How is eliminating one benefit and making the remaining benefit only available to income earners on $60,000 or less going to increase availability and take-up? It is also a fact that the deferred scheme was a considerable money spinner for the Government in terms of “tax take”. The revenue projections from the changes are therefore highly questionable.
The most recent statistics regarding employee ownership in Australia provided in the “Broad-based Employee Share Ownership in Australian Listed Companies: Survey Report”, University of Melbourne Law School, April 2009 (see May News item below) show that 57% of listed companies have a broad-based plan (or plans) and the most common plan was to take advantage of the $1,000 tax exemption.
Middle managers, senior employees and general employees of public companies and larger private companies will therefore be the groups most affected by the changes. Small business owners and senior executives of larger private and public companies will only be mildly affected, if at all. Smaller scale entrepreneurial start-ups providing share options to staff to assist cash flow will also be affected. Lower paid staff in smaller private businesses cannot access the concessions because the regulatory barriers in the system make it difficult for such firms to participate in employee share ownership (see the news item on the latest research in this area under “January” in this column).
Removing the deferred plan is not a positive move in light of these issues. It is a major negative. If excessive concessional benefit to executives was a concern, then cap this. If tax avoidance was a concern, then impose a withholding requirement on employers.
Positive employee ownership outcomes like reduced absenteeism, turnover and increased employee engagement are not achieved without wide and deep ownership. This involves all employees, not just those on less than $60,000 p.a.
In the USA, the National Centre of Employee Ownership provides research and statistics that show employee ownership increases productivity, sales and profits. Ownership in the USA is much wider than in Australia and results in the saving of jobs and businesses through employee buy outs on a much larger scale than ever seen in Australia.
Finally, employee equity companies are more likely to comply with social and environmental guidelines and the whole economy and social community benefits.
So why has the Federal government naively destroyed this positive social and economic structure that is good for the community and results in employees and employers both winning? Watch this space !
April, 2009
New Research: “Broad-based Employee Share Ownership in Australian Listed Companies: Survey Report”
This new report from the University of Melbourne Law School’s “ESOP Research Project” was published in April, 2009. The research report is based on a survey sent to 1711 ASX listed companies. Of these, 238 companies reported having broad based employee share schemes. The research indicated that employee share ownership was certainly popular in recent times – with the majority having set up such plans since 2000.
There were a number of negatives however in that the data will re-inforce the view that ESO might be only for the well off in the work force, with professional, technical and scientific staff constituting the largest average percentage of the workforce (57.2 percent), followed by clerical and secretarial (17.2 percent), craft and skilled manual (10.4 percent), sales and personal service (8.9 percent), and semi-skilled and unskilled manual (6.5 percent).
Respondents were also asked which of a number of employee participation practices were used within their company. 39 percent of companies had a formal structure for sharing company information with employees and 35 percent of companies had a formal structure for communication between all levels of employees and management (eg: employee surveys). Over a quarter of companies (27.3 percent) reported that their company had a joint committee of managers and employees primarily concerned with consultation: for example, a joint consultative committee (JCC). Only 4.9 percent of companies in the sample offered business literacy training to their employees.
Over one third of companies (37.2 percent) in the sample employed none of the above employee participation practices.
The study is the first also to examine the extent of employee involvement in the design and administration of ESOPs in Australia. The study found that broad-based employee share ownership in ASX-listed companies is overwhelmingly a management initiated and driven phenomenon. Employees and/or their representatives are rarely involved in decisions relating to the introduction of a plan or its design and administration, with only one in five companies having any consultation at all in the design, implementation or administration of their share plans.
The report concluded (page 73) that there appears to be significant variation in how companies are structuring their ESOPs:
“While it is not possible to draw conclusive observations from this survey, our findings suggest that the existing regulatory framework is having a significant influence in shaping the structure of ESOPs. For example, over half of plans capped employee contributions at $1000 per year and the overwhelming majority of plans restricted eligibility to participate to permanent full-time and part-time employees. Both these characteristics reflect structural requirements for accessing the taxation concessions. Around 45 percent of respondents agreed or strongly agreed that the tax concessions influenced the design of their company’s broad-based ESOP.”
In the research, company views on the adequacy of the existing regulatory framework for broad-based employee share ownership in corporate and taxation law were also elicited. The majority of respondents believed that the current regulations were too complex and constraining. There was strong support for the propositions that the $1000 tax concession be increased and that the CGT tax provisions should be extended to tax deferral plans. Over sixty percent of respondents agreed or strongly agreed that all ESOP regulation should be in a single piece of legislation.
A copy of the full report can be accessed at: http://cclsr.law.unimelb.edu.au/index.cfm?objectid=A9840D89-1422-207C-BA2319347B2EE439.
Sharing the gains
The April, 2009 edition of “Charter”, the magazine of the Institute of Chartered Accountants of Australia, reports that without significant reform and intergovernmental cooperation, the future of employee share ownership in Australia looks uncertain. The article provides comprehensive coverage of the need for ESOP law and regulatory reform. The story is by Melissa Wilkinson. You can view the full article by clicking on the heading above.
AEOA “ESOP of the Year Award” Presentations to Fantastic Furniture and Gardner Smith
During April, the AEOA’s ESOP of the Year Awards for 2009 were presented to Fantastic Furniture Ltd (company with more than 200 employees) and Gardner Smith Pty Ltd (company with less than 200 employees) by John Day, representing the AEOA Management Committee. Photos of the presentations are available below.
Fantastic Holdings Limited is a leading Australian furniture retailer and manufacturer operating over 100 stores across five retail furniture chains including national retailers Fantastic Furniture, Plush and Dare Gallery as well as Le Cornu in South Australia and the Original Mattress Factory in NSW. Fantastic Holdings Limited is also Australia’s largest sofa manufacturer and one of the country’s leading mattress manufacturers. The company employs over 1400 people nationwide.
Gardner Smith (Holdings) Pty Ltd is a group of integrated businesses providing sourcing, storage, logistics and processing services to the food, energy, agriculture and personal care sectors. Gardner Smith has facilities in Australia, New Zealand and China. The company employs 200 people. It provides a suite of four employee share plans to cover all its employees in Australia and New Zealand.
The AEOA “ESOP of the Year” Awards recognise the best examples of ESOPs in Australia.
The AEOA congratulates the staff of both Fantastic Furniture and Gardner Smith as worthy winners of the 2009 ESOP of the Year Awards.
Ian Woods President Australian Employee Ownership Association
Fantastic Furniture Ltd receives its “ESOP of the Year” Award. From left to right is John Day (AEOA), Susan Caruso, Company Secretary, Fantastic Furniture and Mike Garwood, CEO, Retail and Supply, Fantastic Furniture.
Gardner Smith Pty Ltd receives its “ESOP of the Year” Award. On the right is Glen McMillan, Finance Director, Gardner Smith and on the left is John Day of the AEOA.
Lost Options in a Falling Share Market
With the introduction of the provisions of Division 13A ITAA 36 in the mid nineties, employees provided with options could elect to be taxed upfront under the provision of section 139E.
The upfront tax was based on a classic Black Scholes valuation methodology, now encapsulated in the accounting standard AASB2, but without the application of a volatility factor – which meant that the upfront tax was usually a concessional valuation.
The section 139E election and valuation also established the CGT cost based under Division 115 ITAA 97.
However, irrespective of how long employee had held the unexercised options, to access the tax concessional CGT provisions the exercised share had to be held by the employees for more than 12 months.
To meet this 12 month minimum shareholding period, employees undertaking a so-called “cashless” exercise of options, were often provided with margin loans to facilitate payment of the exercise price and the acquisition of the shares.
While this worked reasonably well up to October, 2008, the share market “crash” since that time has meant that the majority of options issued by ASX listed companies were well “underwater” and “out of the money”.
This meant that the employees’ margin loans were called in and employees had irretrievably pre-paid tax on worthless and lost shares which, if sold prior to October 2008, would have returned substantial profits.
As outlined in the article “Employee Share Options: The Taxing Uncertainty” (Thomson ATP Weekly Tax Bulletin, Issue 13, 3 April, 2009, with permission) by AEOA Vice-President, Gary Fitton, the unfortunate financial consequences for these employees is a testimony to poor employee share plan design, unintended taxation consequences and unforeseen economic circumstances.
Employee Ownership Drives Social Innovation: New Report –
With the Federal Government gearing up for a “Social Innovation” program, the new research presented in the report “Innovation included: why co-owned businesses are good for public services” will be important to consider.
Written by internationally acclaimed business writer Charlie Leadbeater for the Employee Ownership Association UK, “Innovation Included” makes the case for more public services to be provided by co-owned companies. The report introduces the idea that it is organisational innovation that is the key to service innovation – a notion that has been known in the world of employee ownership for decades.
Sponsored by eaga plc, the report claims that employee owned companies offer public services a level of employee commitment and innovation that can transform the experience of service users. The author calls for a political initiative to build capacity, demand and awareness for more co-owned public service provision.
The following is an extract from the report (page 6):
“The public sector would benefit enormously from having more co-owned businesses to add to the diversity of organisations providing public service. The public sector is searching for a new story of modernisation and renewal. Centralised and target driven approaches to public service improvement can create significant downsides in terms of low morale, limited initiative and innovation. That is why politicians and policy-makers are searching for less bureaucratic, more localised, and customer-centric forms of organisation, that are able to respond more directly and creatively to people’s needs. Most proposals have focussed on schemes to decentralise and localise services, giving communities greater say in how services are designed and delivered, and parallel plans to personalise services, for example, through the spread of individual budgets and self-directed services.
Co-owned public service organisations can provide the missing ingredient in this process of renewal: to motivate staff to improve customer service by giving them a clear stake in the process of transformation.
Staff in co-owned public service organisations frequently say they are willing and able to “go the extra mile” to deliver a better service for people. The public sector will need more of that spirit. That is why promoting greater co-ownership should be a strategic priority for the next phase of public service renewal.”
To access the full report, go to: http://www.employeeownership.co.uk/publications.asp
See also the news item “Social Enterprise Discovers Employee Ownership” under September, 2009 News above.
March, 209
Employee Shares in Volatile Markets
Historically, companies have issued options to executives and other employees with an exercise or “strike” price at the prevailing market price of the share being the subject of the option.
This produces a “growth only” share benefit for the participating employees.
It is similar to a traditional loan plan, which after repayment of the loan, also produces a growth only share benefit.
These growth only plans produce optimal results in protracted growth or “bull” market conditions, which have existed for the past 15 year period leading up to October 2008.
The antithesis of these growth only share plans are the full value share plans which have a nil “strike” or acquisition price and provide a full value share plans which have a nil “strike” or acquisition price and provide a full share benefit – even if there is no growth in the share market (i.e. “bear” market conditions)
Of course, Australian and worldwide share market conditions have altered dramatically and experienced a general and substantial fall in ASX listed company share prices.
This has meant that the vast majority of growth only share plans that have issued equity up to October 2008 are now “out of the money”, “underwater” and are worthless to the participating employees. They are also worthless to the company, its shareholders and other stakeholders as a means of retaining and rewarding valuable human capital assets.
This is of particular importance where the share plan is fulfilling the role of the long term incentive component of the companies total reward strategy. With this in mind many companies are currently reviewing their employee equity programs with view to reassessing and redesigning those programs to suit the more restrained “bear” market conditions which currently prevail in Australian and world wide share markets.
The article “Employee Shares in Volatile Markets” (from Thomson ATP Weekly Tax Bulletin, Issue 8, February, 2009, with permission) outlines a typical review of a company’s employee share option based, long term incentive program and the determination of a new course of equity allocations to suit the changed general market conditions in that environment and the challenges and opportunities opening up to companies.
ESOPs: Increased Resilience and Likelihood of Firm Survival
The excellent research report “Effects of ESOP Adoption and Employee Ownership: Thirty years of Research and Experience” by Steven F. Freeman, University of Pennsylvania, January, 2007, indicates that not only are employee-owned firms more profitable and productive, but that they also survive longer – even when times are tough.
Several large-scale studies show that employee-owned firms are significantly less likely than their counterparts to go bankrupt or disappear for any reason at all.
Park, Kruse and Sesil (2004) tracked data on all U.S. public companies as of 1988, following them through 2001. Companies with employee ownership stakes of 5% or more were only 76% as likely as firms without employee ownership to disappear in this period. Out of 245 firms in which employees owned 5% or more of the company in 1988, 124 (50.6%) were still in business in 2001; only 97 (41.8%) out of a matched sample of 232 non-employee-owned firms were still in business in 2001. (The entire 1988 population of non-employee owned public firms consisted of 5432, of which 2301, 42.4%, had survived.) In every category tracked (Merger or Acquisition, Bankruptcy, Liquidation, Reverse Acquisition, Leveraged Buyout, Privatization, Other, and Missing) non-employee owned firms disappeared at a greater rate than employee-owned firms.
These findings were congruent with those of Blair et al. (2000). Their study tracking U.S. public companies from 1983, found that those with substantial employee ownership stakes were 20% more likely than their industry counterparts to survive through 1995.
In a current project reported on the NCEO (US) website (www.nceo.org), Blasi and Kruse (2007) track all privately held companies with ESOPs in 1988, and found they had similarly higher survival rates than closely matched firms without ESOPs. Among 1176 private companies with ESOPs in 1988, 69.6% survived through 1999, compared to only 54.8% of non-ESOP companies in the same industry and of the same size.
February, 2009
Ownership, Involvement and Trust: A Virtuous Cycle
(The following article has been provided by Associate Professor John Shields, Discipline of Work and Organisational Studies, Faculty of Business and Economics, University of Sydney. It summarises the theme of his major presentation “From Bull to Bear: Equity Based Incentives in Turbulent Times” , to the AEOA AGM on 11th December, 2008. The AEOA gratefully acknowledges the contribution that Prof. Shields has made here to the study of employee share ownership in Australia).
Broadly-based employee share ownership plans (ESOPS) can encourage greater employee interest in company success, closer integration of individual and company goals, stronger employee engagement and retention, higher discretionary effort and a high trust work climate. Not surprisingly, then, such plans have been shown to have a positive impact on organisational productivity and profitability. However, as with many other reward plans, the positive outcomes to which ESOPS may give rise are essentially contingent rather than assured. The available research evidence suggests that two of the key contingencies are, firstly, the presence of genuine employee involvement practices and, secondly, a high-trust work climate. In combination, equity ownership, involvement and trust can engender and sustain a virtuous cycle of high performance.
One of the clearest findings in the extant research evidence on ESOP efficacy relates to the extent to which the plan is accompanied by opportunity for genuine employee involvement and voice. There is strong evidence of positive outcomes when share plans are introduced in conjunction with employee participation programs which give employees more voice in organisational decision-making. A study by Rosen and Quarrey (1997) compared the performance of number of firms before and after they introduced employee share ownership with a matched sample of non-share-plan firms and found no significant difference between the two sets of firms. However, when they compared non-share-plan firms with those that had introduced both share-ownership and employee involvement practices, they found a major difference. The latter grew 11%-17% faster than the former.
By itself, then, an ESOP is unlikely to provide sufficient impetus for transforming traditional low-trust firms into high-trust, high-performance firms. Something more is needed to affect a lasting change in organisational climate and culture: genuine employee voice. Research by Long (1981, 1982) suggests that the chief benefits in terms of employee motivation derives more from the presence of a participative management style than from employee ownership alone. Long’s longitudinal case study of declining motivation and satisfaction under a share plan introduced by a Canadian electronics firm in the late 1970s seems to bear this out. Employee-owners felt increasingly disaffected because they were not given adequate opportunity to participate in day-to-day decision-making.
ESOPs can certainly support workplace transformation from low-trust, low-performance to high-trust, high-performance, but eliciting the full benefits of an ‘ownership mentality’ requires supporting policies and practices, especially ‘open book’ management, employee consultation and involvement programs. Moreover, the underlying causal relationship here also appears to be cyclical rather than unidirectional in that a well-designed, well-communicated and well-maintained ESOP can also reinforce participative management practices.
As a stand-along organisational change initiative, an ESOP is very likely to disappoint; as a key element in a bundle of change enablers, it has every prospect of exceeding the long-run expectations of both the organisation and its employees.
References
Long, R. (1981), ‘The Effects of Formal Employee Participation in Ownership and Decision Making on Perceived and Desired Patterns of Organizational Influence: A Longitudinal Study’, Human Relations, 34(10), 847-876.
Long, R. (1982), ‘Worker Ownership and Job Attitudes: A Field Study’, Industrial Relations, 21(2), 196-215.
Rosen, C. & Quarrey, M. (1997), ‘How Well is Employee Ownership Working?’, in Kerr, S. (ed.), Ultimate Rewards, Harvard Business School Press, ch.4 (43-50).
For the AEOA policy on these matters, see our “Employee Participation and Involvement” page.
New President for the AEOA
Ian Woods, QANTAS pilot, has just been elected President of the AEOA.
Ian is the immediate past president of the Australian and International Pilots Association (AIPA) having served on its committee of management since 1999. During his time as the pilots’ President, he agreed the introduction of an Employee Share Ownership Plan (ESOP) for Qantas flight crew which is expected to be implemented when enterprise negotiations on-foot between Qantas and AIPA are certified in 2009.
The previous President, Gary Fitton has stepped own to become one of the Vice Presidents, along with Shann Turnbull.
For profiles on the AEOA leadership, see our “Management Committee” page.
January, 2009
Regulatory reform and employee share ownership in unlisted entities: New research report released.
The report ‘Employee Share Ownership in Unlisted Entities: Objectives, Current Practices and Regulatory Reform’ by Ann O’Connell from the Employee Share Ownership Research Project at the Melbourne Law School, University of Melbourne, was published in December, 2008.
This research report provides a further valuable contribution to the development of employee share ownership in Australia. The report’s conclusions provide important guidance to the Federal Government in its forthcoming deliberations on the legal and regulatory impediments to the growth of employee ownership in Australia.
The report agrees with the AEOA view that the corporate perspective on ESOPs is that they are about investment while the tax perspective is that ESOPs are only about employment and remuneration. The report concludes that “this policy divergence may be part of the reason why it is difficult to achieve significant reform in relation to employee share ownership” (see page 33). Perhaps as a result, the report also states that “it is a well recognised fact that the take-up rate of employee share ownership since its introduction in Australia in the 1970s in the unlisted sector is significantly lower than in the listed sector” (page 9).
The report concludes with the clearest statement possible about the need for ESOP tax and corporate law reform – and very much in line with what the AEOA has been stating for a decade:
“The conclusion that can be drawn about the current regulation of ESOPs is that it fails to meet the requirements of equity, efficiency and simplicity. First, the
regulation fails to achieve equity because it treats unlisted entities and their
employees differently from their listed counterparts. This arises in corporate law
because the relief from disclosure is only available where the entity is listed and
in tax law because the rules favour listed entities. Secondly, it fails to achieve
efficiency because it does not encourage the use of ESOPs in accordance with
government policy to do so. In fact it would appear that many entities structure
arrangements with employees to avoid the operation of the regulation or
alternatively decide not to take advantage of the concessions because of the
onerous legislative requirements. Finally, the regulation is highly complex,
especially the tax legislation so that entities require professional advice to set up
the ESOP and ongoing advice to ensure that the arrangements comply with the
legislative requirements.
In order to achieve equity, efficiency and simplicity it is necessary to make
significant changes to the regulation of ESOPs. It is important to recognise that
the legislation has become so complex and difficult that nothing less than a
complete rewrite will suffice” (pages 39 and 40).
This important report may be accessed at “ESOP Research Project Publications”.
For the Australian Government web-sites providing ESOP tax and other advice and information, please see our “Links” page.
For more information on ESOP policy for SMEs, see our “AEOA Policy” and “Future Directions” pages, the discussion paper “Developing an ESOP Policy – The Major Questions” and our policy manifesto “Sharing in Growth”. See also our “Private Company ESOPs” page for implementation issues.
