1

The impact of employee share plans on productivity

Damian Carnell GEO Conference - Netherlands 22/23 April 2001 Towers Perrin

Agenda

1 The aims

2 The types of plan

3 Costing/NPV analysis

4 Academic and survey support

5 Optimising the result

6 The future

Aims

An Informed Board Decision

An Effective Share Plan

Multiple Intangible Benefits

Enhanced Shareholder Value

Culture

Employee ownership Profit sharing or incentive?

i.e backward or forward thinking?

Pay for performance? Defining performance

measured where? (corporate/BU)

measured how? (internal/ external)

Pay to play? Who gets what?

all in this together? or winner takes all?

Compensation

How much? How often? Remuneration in line with

market practice? local market telecoms companies multinationals

Recruitment Danger of “averaging up” Employee expectations Cost/affordability for

company how do we define

cost? recharge costs to

Business Units? Local country tax breaks -

economic distortion

Culture

Communication

Compensation

Communication

Demonstrating alignment of employee and company interests

Justifying differences of approach

Demonstrating fairness and consistency up, down and across

Culture

Share Plan Effects

Motivation

Communication

Opportunity

Compensation

Ability

Performance

Shareholder Value

TYPEOptions

Free shares

Share match/Discounted Purchases

Share Purchase

FOCUSGrowth focus ‘free ride’ = safeForced shareholding ‘free ride’ = safeExpensiveEncouraged shareholding ‘commitment’ = risk

Informed/easy investment choice ‘commitment’ = risk

Building the business case• Objectives• Design• Costs• Alignment with business and reward strategies• Employee Research• Academic Research• Implementation

communications administration timing

ManagementPresume

Approach Expected Result

Good thing

Present case for plan design- Support with the impact of prior

plans and academic evidence- Support by cost due diligence

Approval after some push back ondesign or cost

Agnostic

Focus on Expected Benefits andAcademic evidence- Support by cost due diligence

Approval after push back on cost- may seek more information

Sceptical

Focus on competitor practice andissues of competitiveness- Support by cost due diligence and

expected benefits

Unknown – depends on strengthof the case

Broad Approach

Objectives

• Examples replacement for obsolete/ineffective programs attraction and retention alter competitive positioning of benefits pay for performance (individual, team, business) encourage share ownership/improve line-of-

sight benefit diversification improve tax effectiveness of benefit spend for

employees equality

Costing/NPV Analysis

• Valid to make cost clear• New issue of shares - assess on a B/S

basis• Sensitivity analysis• NPV negative - as no benefits factored

in, but helps funding/share choice• Benefits fall outside cost/NPV analysis

and must be assessed separately

Benefit Costs

• For a given design, may vary according to participation rates

- contribution levels- performance- timing of share purchase

• Essential to understand potential variation in costs- projections under various scenarios- provide information on potential range as well as expected costs

Benefit costs

• Design and cost analysis go hand-in-hand a variety of design structures may be

provided for a given cost results of cost projections may impact

on design

Peoplestrategies

and the deal

Employer perspective:Employer perspective:Increasing shareholder Increasing shareholder

valuevalue

StrategyOrganisati

oncapabilitie

s

Organisation

values

Employee perspective:Employee perspective:Meaningful, rewarding workMeaningful, rewarding work

DemographicsCompetencie

s

Values

Aligned employee behaviours that yield improved business resultsAligned employee behaviours that yield improved business results

Externalinfluences

Internalinfluences

Total rewards strategy

Pay Benefits

Learning and Development

Work Environment

Alignment: Business Performance

FrameworkPeople

strategies and the

deal

Staffing and selection strategy

Change management and communication strategy

Academic Evidence

• Almost all positive• Various methodologies/performance

indicators• Mainly Anglo-Saxon• Recent studies available…...

Comments

Quarry & Rosen 87ESOP’s improve growth if management style isparticipartive

US General AccountingOffice

87 ESOP firms improve productivity if managementstyle is participative

-

Michigan Centre forEmployee Ownership

89Survey of views on several performance metrics,showed positive influence

-

Chong Park 89 Large ESOP leveraged buyouts focus xMichael Conte 89 Inconclusive – small sample (18) -

Patrick Rooney 90Views on effect on several performance metrics– and sample/findings positive

-

Benefits: Studies to 1990

Conte, Blasi & Kruse92 Focus on 10% or more employee owned firms

x

Gorm Winther92 Small sample (25)

-

Ohio Employee OwnershipCentre

93Focus on job connection not corporate financials

x

Winther, Kardas & Somers 93Survey on various performance metrics –confirms Quarry & Rosen need for participativemanagement style

-

Conte & J ampari 95Investment return of ESOP firms up (but not forsmall firms) when risk adjusted

Donald Collat 95 ESOP firms operating margins v industry norms

Benefits: Studies to 1995

Ducy, Igbal & Akhigbe96

Listed ESOP firms’ cash flow return on assetsRelative to industry norms down marginallyCallsen

-

Blasi & Kruse97

More than 10% employee owned firms – surveyresponse re: shareholder value/participation –inconclusive result

x

Blair, Kruse, Blasi 97More than 20% employee owned firms – lowerinsolvency/ takeover/downsizing/strife

x

Maxwell, Rosen andWeeden

98Sales and employment growth better at OpenBook management firms, enhanced by employeeownership

Benefits: Studies to 1998

Evidence Round-up

• Proshare 1998- explored how share ownership impacts

employee motivation & attitude (300 interviewed)- 66% employees check the share price once a week or

more- employees owning shares report:

• gain from success 73%• aware of company’s aims 55%• less willing to leave 43%• more involved 41%• improved job performance 32%

Evidence Round-up

• Mehran/Hewitt 1999- 382 publicly traded ESOP companies- TSR up 12% compared to peer group- ROA up 2.7% by contrast to control group (I.e. +

14% for 303 4-year survivors, but = 6.9% overall)- 230 companies reporting on ownership culture: • 82% of executives reported better corporate

performance • 18% of executives reported better employee

behaviours • 85% of companies improved information

access

Evidence Round-up

• Towers Perrin benefit index 1999- 13,000 managers and employees of larger UK firms- 86% of managers and 66% employees believe that when employees own shares, they are more committed to success- encouraging ownership of success is the second most

important people issue - after raising productivity- aside from pensions, employee share schemes are the area managers least want spending to be cut

Evidence Round-up

• Sofres 2000- 201 financial analysts in five European countries

interviewed- 33.3% overall (higher in UK and Netherlands) are likely to recommend ESOP companies as investments • seen as increasing worker motivation & loyalty- highlighted different perspectives across Europe: • F, D & B - improved social cohesion • UK & NL - improved economic performance

Evidence Round-up

• Conyon & Freeman 2000 299 LSE listed companies- companies with share ownership/profit sharing schemes more likely to engage in consultation & communication with employees- productivity improved after introduction of scheme: • approved profit sharing 17% • share option plans 12% • approved profit-related pay 4% • approved SAYE -3%- survey of 1,800 companies: productivity & financial performance

are positively related to number of systems linking business performance to modes of compensation

Optimising the Result

• Improved compensation• Align employee behaviour with company values• Attract and retain talent in a competitive

market• Be seen as a ‘good’ employer• Help to change the culture of the company• Tax efficiency

What is your main focus?

Cost-effectiveness

Focus on the level of investment in the share plan and the corresponding outcome effectivenessInput:• Cost of the planOutcomes:• Improved perception of compensation• Higher levels of engagement• Better attraction and retention• Changed culture• Enhanced shareholder value• You need to decide the relative importance of each

outcome

The Success of share plans can be Measured in these Five Key Areas

10

20

30

4050

60

70

80

90MPH

Culture

ILLUSRTRATIVE

Analyst perceptions Shareholder value Return on human capital

Employee commitment, and workplace perceptions Improved operational measures

CompensationAttraction and

Retention Engagement

10

20

30

4050

60

70

80

90MPH

10

20

30

4050

60

70

80

90MPH

10

20

30

4050

60

70

80

90MPH

10

20

30

4050

60

70

80

90MPH

Shareholder Value

Respect & Recognition

Values & Leadership behavior

Learning, Development, Growth

Improved quality and speed of decision making

Innovation

Turnover Staffing

efficiencies Critical skill

indices Retention

indices Employer of

choice

Perceived value of share plans

The Measurement Process

Two stages:

• design of an optimally effective share plan

• tracking its effectiveness

Benefits of pre-launch measurement

Pre-launch measurement and analysis provides a business case for the plan• accurate estimate of employee uptake of the scheme provides an

accurate costing for the scheme• perceptions of the scheme by different employee groups indicate

whether a ‘one scheme fits all’ approach is sensible• employee perceptions of the value of the scheme relative to other

aspects of their remuneration package indicates whether the money

will be well spent on the scheme • uptake estimates and retention estimates together provide an optimal

scheme investment amount: this gives a target level for the scheme

at launch or in future

and also provides• a baseline measures of engagement and culture show where gaps

between existing and desired states exist and indicate where

communications should be focused

Benefits of Measurement After Implementation of the Plan

The post launch measures provide a balanced scorecard of outcomes that enables management to:• know whether initial employee expectations of the plan have been met• quantify in £ terms the effect on attraction and retention• know whether engagement has increased as a result of the plan• know whether targeted culture changes have occurred• quantify in £ terms changes in shareholder value• know whether understanding and administration of the share plan is satisfactory or if further effort is required• know if special attention is needed for specific employee groups

The Future

• Equity Pay will grow - a function of: - the new economy

- new ways of working- retreat of paternalism

• in consequence, money dedicated to plans will increase overtime, perhaps dramatically

• because of heavier weight of money and because of its role in creating competitive advantage, the rigour with which proposals are tested will rise

• old basis for plan approval will change - there will be more reliance on measurement, academic input and cost/benefit analysis