So Chris Thompson went for it. He committed himself to saving the maximum amount for five years. And it was quite a commitment - if he'd resigned or given up part way, he'd have got back what he'd saved but would have lost the option to buy the shares.
Many companies offer all-employee share plans. Some are Save-As-You-Earn share option plans, like Whitbread's; some are share purchase plans; some companies offer both. In good plans, about half of the workforce joins each year and it's hardly surprising that most people save smaller amounts. For those earning the national average of £25,000 a year, saving the maximum £250 a month takes about a seventh of their taxed income - it's a lot, but some people manage it and companies have recently been allowed to double this maximum if they wish.
Investor protection guidelines prevent companies from advising their employees so if you're offered a share option plan, here's what they can't tell you: just do it. Win or lose (except you can't lose), this sort of plan is one of the best employee benefits - and one of the best investment opportunities - you can have.
For those not used to investing, what happened next is the stuff of fairy tales because, to be honest, gains are normally more modest. Whitbread's shares soared; Chris Thompson's savings of £15,000 became worth almost £100,000. For him, and others in companies like BT and Next whose shares have also gone up fourfold or more, people have had life-changing gains worth several times their annual salary.
So share plans are great for employees; what about shareholders?
This is where it gets interesting because it's all about inclusion. The deal is the same for everyone, wherever they are in the organisation. The message is: "here's something extra - we're giving you this great opportunity because we value you". Marketed properly, the launch creates a buzz, is spread by word-of-mouth and involves everyone internally.
Participation breeds loyalty and commitment because, quite simply, those in share plans have more at stake in their company. They listen more to internal communications; they watch the share price, ask what makes it move, and wonder how realistic external perceptions are of business strategies. They relate this to their own role and attitudes change. The company becomes 'us', not 'them'; they become more like owners and unpaid ambassadors and less like agents.
Does inclusion matter? Well, Whitbread thinks it does. Theirs is a people business and they've recognised that engaged employees work harder and, if managed effectively, this converts into greater productivity. Engagement is a big part of their "customer heartbeat" initiative - which makes sense, because intuitively, if you look after your employees, they'll look after your customers.
And it doesn't cost much. In fact, it's cash positive: when the plans mature, the company creates new shares in return for their employees' savings, like a mini-rights issue. True, there's a dilution for shareholders, but not much. Then there's the paper cost. It's hard to value options but if we take as a rule of thumb that the accounting cost is one-third of the exercise price, Chris Thompson's would have reduced Whitbread's profits by just £6,000 in 2009-10. In 2013, the total cost for all their people would have been £2.5m, hardly a dent in Whitbread's total annual employee costs of over £500m. This looks low.
Finance people get hung up over these costs, but they can't tell you - and so don't count - how much of the revenue gains are due to the more engaged workforce. So they can't say how share plans translate into profits.
How do you measure engagement? Like most companies, Whitbread relies on employee opinion polls - they claim a suspiciously high 93 per cent response rate. But these surveys are open to coercion, especially if managers are assessed on how engaged their employees are. People are persuaded to respond and when the results come back down the line, managers can see what groups of employees said. Share plans are a more objective measure - compliance blocks coercion and those who choose to join pay to do so.
So not only do share plans foster engagement, they also validate engagement scores, yet nowhere in its annual report section on "customer heartbeat" does Whitbread say how many are in its employee share plans. In fairness, they are not alone - few companies do. Yet if they have low participation rates and high engagement scores, executive directors are probably kidding themselves about how committed their people really are.
Some say that those on low pay won't participate - try telling that to ASDA, which has run a successful plans for years. Or that a poor share price puts people off - you could try that one on Sainsbury's whose share plans cemented their people into their 10-year recovery strategy. Back in its glory days, Lloyds Banking even claimed that it could hold down salaries because employees were making so much out of their share plans. Some worry that people sell the shares at the end - it doesn't matter: what's important is the increased stake during the savings period.
For employees, share plans can open new horizons. They have funded dream holidays, kick-started pension savings and introduced people to the joys of investments - and capital gains tax. They help to involve people and their level of popularity can provide management with an insight into how well the company is really operating internally. This goes for shareholders, too - all-employee share plans are a way of checking whether their company is really getting the best out of its employees.
Employee share ownership and share price performance
Trying to work out who owns a company’s shares is notoriously difficult. If you own a share through an ISA, for example, you won’t appear on the company’s share register – the nominee company of the ISA provider will instead. So companies struggle to know exactly how many of their shares are owned by employees.
An organisation that has had some success pinning this down is Capital Strategies. They identify employee ownership by checking annual reports, shareholder circulars, company disclosures and press coverage; and estimate that employees own 1 per cent to 2 per cent of half of UK companies. They’ve identified 69 with more than 3 per cent ownership and from these compile the Employee Ownership Index. Constituents include Next, Aberdeen Asset Management, Mitie, Admiral, Atkins and Royal Mail: about half are Aim, with the rest evenly spread between FTSE 100, FTSE 250 and Small Cap companies. Collectively, these 69 companies delivered total returns of 53 per cent (that’s share price plus reinvested dividends) compared with 21 per cent from the other 623 companies in the All-Share index. In the first quarter of 2014, EOI returns were 12 per cent; the FTSE All-Share fell by about 2 per cent (see graph below).
EOI versus FTSE All-Share
Source: Capital Strategies
Critics argue that the EOI is biased towards smaller companies and there could be cyclical reasons why they outperform; the pattern is similar, though, if you go back for ten years. There is also a sector bias - the EOI is heavy in support services, financials and technical stocks and light on oils, banks, pharma and telecom majors. Even so, the facts speak for themselves: anyone investing in these 69 stocks a year ago would be substantially better off than if they’d tracked the All-Share Index.
But this Index only looks at actual ownership; participation in employee share plans has similar effects in terms of engagement and profitability. The net involving those companies would be larger – and the betting is that on average, they too would outperform.
