Marks & Spencer (MKS) made no bones about it. “Sharesave is a risk-free savings plan,” it told its employees in 2020. “You will always get back the money you have saved.” And it rightly added that if the M&S share price goes up, you could get back much more. But it also said: “Remember shares can go down in value as well as up.”
That’s the problem with compliance. It can put people off. M&S managers evidently think they have to carry this warning to cover themselves, but they’re missing the point. Nobody participating in Sharesave risks losing if the share price goes down. Sharesave is entirely voluntary, and the opportunity only comes around once a year. It’s inclusive, and designed to encourage saving, with a share option tacked on that comes for free – at the end of three years, the amount saved can be used to buy M&S shares at a preferential rate. The decision is simple: if the share price is below the option price, take the cash; if the share price is higher, convert the cash into shares. Those risk-averse can sell immediately. (Nominal) downside risk zero; upside risk no limits. You could think of Sharesave as a one-way bet.
The price of the option was set at 20 per cent below the price at which the shares traded in the market during three days in November 2020. At this time, retailers were suffering due to the impact of lockdowns and the cost of the pandemic: the M&S share price had fallen almost to 100p, and the Sharesave option price was set at 82p. Participants had to decide how much to save – anything from £5 to £500 a month. The three-year saving period ran from January 2021 to December 2023. Participants now have six months (from February 2024) to decide whether or not to use these savings to buy M&S shares.
Those maxing out would have built up an £18,000 nest egg. The option enables them to use this to buy 21,951 shares. The share price last month ranged between 230p and 245p. Another no-brainer. That nest egg had become worth over £50,000. It’s only now that risk rears its head – and only if the shares are kept. That compliance warning should be confined to the maturity instructions.
The average amount M&S employees actually saved each month was £176, suggesting that the average tax-free gain was over £10,000. For many, that’s worth about two-thirds of their annual take-home pay. 9,200 M&S employees tripled their money. More had joined, but dropped out part-way through. They must be kicking themselves. And so must the other M&S employees (depending on eligibility, up to 50,000) who gave the 2020 offer a miss.
Gains on Sharesave are normally more modest, but they can still be significant, so why don’t more people take part? A while ago, a survey by Proshare, a body that champions employee share ownership in the UK, asked about this. The responses showed that 15 per cent failed to understand the plan properly. A sixth said they might not be with the company in three years’ time (perhaps not realising that if they left, they’d still get back their savings). Two-fifths said they couldn’t afford to commit to the monthly outlay. Research by one of the sponsors, YBS Share Plans, found that “millions of employees rely on debt to get by” and worried about unexpected bills. For many who participate, Sharesave is the only form of savings that they have.
Another sponsor, Wealth at Work, pointed out the crucial role that general financial education ought to play. It’s often lacking. M&S changed its marketing in 2020 by cutting back on its print and mail communications to employees. It relied more on micro-sites, bitesize educational videos and branded emails. This tuned in with millennials, who in general are more digital-savvy, and the message seemed to get across: participation, while still relatively low, substantially increased from the year before.
In years like 2020, when M&S was having a tough time, disenchantment can take hold. Employees feel worse off, and shares tend to fall off their radar. It’s when companies pick up that their people become more interested. Those joining Sharesave tend to listen more to what drives the business. A virtuous circle kicks in. They become more motivated, more engaged, more positive about their work and company performance improves. That’s why participation rates (which are rarely publicised) can be arguably a more accurate measure of employee engagement than the costly opinion surveys that companies normally rely on.
Some companies don’t offer all-employee share plans. You have to wonder whether they genuinely care about their staff. How well a company promotes the plans can speak volumes. On compliance, all that’s really needed is to advise employees to weigh up Sharesave against other saving and investment plans. They’ll struggle to find a better deal.
Are investors and companies missing a trick?
To understand why Sharesave is so misunderstood, we need to look back to 1979. That was when the Lib-Lab pact agreed to introduce “Save As You Earn” to help employees acquire shares in their employing company. A year later, the Conservative government passed the necessary Finance Act. Employee share ownership fitted within their aspirations for a share-owning democracy. Sharesave is that rare thing: something that the three major political parties all agree about, even if it’s for different reasons.
From time to time, the Treasury has suggested reining back the tax advantages. They soon realise that the economic benefits outweigh the lost tax revenues. First, the plans encourage people to save, when in general too little is saved by the UK population. Secondly, think what happens at the end of three years. Participants can convert the cash into shares, which is no bad thing – private share ownership in the UK has been declining. If they cash out, they might save or invest the cash elsewhere (which helps the economy), spend it (think of the multiplier effect) or pay off debt (so helping the 'squeezed middle' of society to become a little less squeezed).
Employers started offering the plans because of positive correlations between employee share ownership, productivity and company performance. Therein, though, lay the seeds of Sharesave’s decline. Senior executives became concerned that too few participants were keeping their shares. They failed to appreciate what really goes on, which is that, knowing that the gain at the end of three years will depend on the company share price, participants watch its fluctuations throughout the savings period and tend to engage themselves more in business strategies. That in itself can improve performance even though employees don’t actually own the shares. What the naysayers are missing is that the correlation holds for participation as well as for outright ownership.
The problem is that these benefits are intangible, which leaves Sharesave an easy target for cost-cutting. The costs include paying employees to manage the scheme and the cost of external consultants. The actual administration, including the marketing spend to promote the invitation and advise about maturity procedures, is often outsourced to dedicated share plan providers. For large volumes of savings, providers have been known to do this for free (their profits come from the margin between the bonus they pay on the lump-sum savings after three years, currently 2.13 per cent for new plans, and the lending rate). Those limited company costs are less than the intangible benefits, but that argument’s difficult to prove, and difficult to measure. Sceptical chief executives don’t get it, and that’s one reason why fewer companies now operate Sharesave than they used to.
More enlightened senior executives recognise another advantage: inclusion. Knowing that everyone eligible receives the same offer, regardless of how senior or junior they are, bolsters morale. When they’re told that chief executives will be joining, it encourages others to do so too. M&S is a good example of this. Both co-chief executives joined the 2020 plan and so did, on my calculations, more than 16,000 employees.
About 7,000 then dropped out before the end of the three years. Maybe they couldn’t afford the monthly deductions, but it could have also been because Sharesave’s rules haven’t kept up with modern working practices. People change employers more often and part-time employment is more common. A break from contributing is allowed for up to six months, but maternity leave now can often be for 12. Sharesave’s inflexibility affects people at every level of the organisation – at M&S, Katie Bickerstaffe, co-chief executive, will be leaving in July. Had she joined the 2021 Sharesave plan or later, she’d just get her savings back. Had she left last year before her 2020 plan finished, her savings similarly would have been returned to her – and she’d have walked away from a potential gain (because the share price had taken off) equivalent to a taxable bonus of over £60,000. Others in the group must have had a similarly narrow window of opportunity. For some, their potential gains would have acted like a retention tool.
To provide the shares for participants to buy at the discounted rate, new shares are normally created. Companies can offset this in various ways, but even if shareholders meet the full cost, should they worry? To put this into context, the M&S dilution for the 2020 plan could have been up to about £160mn. Over the same three years, the group’s market value grew by £2.3bn.
Sharesave is a clever concept, unique to the UK. It’s positive for the economy, individual companies, employees and shareholders. Yet how many include employee share plans in ESG assessments? The rules could do with updating and it could be key to greater productivity, yet it seems to pass by largely unnoticed. Are all these stakeholders really content to let it wither on the vine?
