Workers are finally getting a piece of the boss's pie. Employee profit-sharing schemes are becoming a popular benefit option thanks to changes in the tax and legislative system and wage inflation caused by skills shortages and privatisation.
For almost 30 years employee share-ownership schemes have proven an effective and popular way to reward US, and in later years, British employees. Some software employees, most notably in Microsoft, have become millionaires through such share purchases. US multinationals were among the first to present profit-sharing schemes to Irish employees. A recent US study found that companies with employee shareownership plans outperformed companies without plans. Between 1971 and 1991, 380 publicly-traded US companies adopted defined-contribution plans, investing in company shares which are available to all permanent employees.
Those with plans had total shareholder returns averaging 6.9 per cent higher than the returns of similar companies without the scheme in the four years after the scheme was initiated. The average asset return was also higher by 3 per cent over the same period.
Although there are many types of plans available here, the main purpose is to make employees company shareholders to link their interests with those of their employer. Six general types of plans are currently available: employee share-participation plans, share-option plans, share-purchase plans, save-as-you-earn share-option plans (SAYE), restricted-share plans and share-subscription plans. The Finance Bill introduced tax concessions for Revenue-approved SAYE schemes. Three institutions and 25 companies have applied for approval of newly developed SAYE schemes, according to Revenue. So far, one institution has been approved and one company is in the process of being approved.
SAYEs were introduced to complement existing tax reliefs for share ownership, and Approved Profit Sharing Schemes (APSS) in particular.
SAYE schemes grant employees an option to purchase company shares at a future date. The option price offered by companies to employees may be at a discount of up to 25 per cent of the market value. Employees contribute to a savings plan to accumulate a lump sum which may be used to purchase shares when they exercise their options. Monthly contributions between £10 (€12.70) and £250 may be made over 36 or 60 monthly instalments.
The contributions are from net income, or after tax and PRSI have been deducted, and any return on the contributions is tax-free. Options may be exercised within six months of the third, fifth or seventh anniversary date of the contract. Revenue-approved SAYE schemes penalise those who exercise their options before the specified date by making the shares liable to income tax.
If employees sell shares after the stated option date they are only liable to capital gains tax, which is the difference between the sale price and the option purchase price. The gain is taxable at the current rate of 20 per cent but the capital gains tax exemption of £1,000 per year may help to reduce the tax liability on the sale.
On August 13th, Norwich Union became the first company to launch this scheme for its staff and offered a 20 per cent discount on the share price. SAYE schemes in place before the Finance Bill changes must be reviewed before the new rules will apply.
What can employers and employees hope to gain from these ownership plans? As stakeholders in the company, employees benefit directly from the performance and profitability of the company. It is hoped that employees' financial interest in the firm will lead to enhanced company productivity, loyalty and profitability.
For employers, these plans offer a tax-efficient way to provide remuneration and employee incentives. A partnership approach tends to improve industrial relations and assists with the recruitment and retention of staff.
"The introduction of employee share schemes signals a new employment culture in Ireland," says Ms Fiona Thornton from the share schemes unit of A&L Goodbody Solicitors. "Increasingly, companies are moving away from traditional systems where length of service is rewarded, towards performance-related systems where individual effort and achievement is recognised," she said.
The firm recently released a booklet, Employee Share Owner- ship & Profit Sharing, to encourage companies to implement these schemes effectively. These schemes may also provide an alternative exit route for shareholders in family companies. In the early 1970s when the theory was first developed by US economist, Mr Louis Kelso, they were used as a way for company owners to transfer shares to employees and retire without dismantling the business or selling to competitors.
Despite the recent introduction of SAYEs, Approved Profit Sharing Schemes have proven popular since their birth in 1982. From their inception to August 5th of this year, 306 APSSs have benefited 288,469 employees, says the Revenue. This figure may include those participating more than once.
Under the less flexible APSS, a company pays into a trust and the trustees use this money to acquire shares in the company, or its holding company. The shares are then allocated to employees.
According to A&L Goodbody: "Employees may also forgo salary up to the lesser of the employer contribution and 7.5 per cent of the employee's basic salary to acquire additional shares under the scheme. The shares are retained by the trustees, usually for three years before they are distributed to the employees." Employees may be allocated shares to the value of £10,000 every tax year, tax-free.
Whether the benefits of these schemes will hold true for Irish employers and employees remains to be seen but in a society where ownership has long been an important goal, the plans are likely to prove immensely popular. Ongoing battles between various sectors and problematic wage control agreements show that employers need a new way to satisfy employees' demands.
