Share Schemes and the Impact of Inflation
June 29, 2022
On the 23rd June, The ESOP Centre hosted a webinar titled ‘Share Schemes and the Impact of Inflation’. The comprehensive presentation covered a number of topics including the dangers of stagflation, the cost-of-living crisis and how employee share schemes may be used to combat this issue, with a particular focus on the economics of the situation.
Employee share schemes are a way of linking employee incentive remuneration with growth in a company’s share price by investing a proportion in their employer’s shares. Within the scheme, employees are able to benefit from capital gains, dividends and profit share.
So how exactly can these schemes offer a remedy to the current cost-of-living crisis in the UK? The webinar addressed a number of causes of the crisis, including how lockdowns and orders for people to stay at home, whilst paying them not to work, reduced the supply of labour and contributed to demand-pull inflation at low levels of productivity. By offering employee share schemes, companies can encourage people into greater levels of productivity, simply because the work they put in and the amount they are rewarded reflect the performance of the scheme and ultimately, the company’s share price. Furthermore, variable employee rewards through share ownership, combined with profit-sharing can help to mitigate fluctuating company wage levels over a given business cycle.
One of the reasons for this is that share schemes are paid for by the market. They do not involve a (significant) cash cost to the company. The idea is to prevent the Government from needing to introduce heavy stimulus through fiscal and monetary policy, leading to further inflationary pressures. As the name suggests, profit-sharing schemes only pay out if justified by the level of profits achieved but profits are not (necessarily) cash, so companies with a low profit to cash conversion rate will still need to take care.
There are risks associated with using share schemes as a driver of productivity. The amount of any reward may be only indirectly linked to productivity improvements. Reward is linked directly to the company’s share price, which is influenced by many other factors. So, depending on the type of share scheme adopted, if the share price falls, employees may feel that the amount of their reward does not reflect the level of productivity achieved. That said, share schemes have a role to play in employees’ total remuneration and can save cash.
There are many factors to take into account when considering the type of employees’ share scheme best suited to a company. MM&K specialises in advising on this topic. For more information, please contact George Edwards.