Employee share schemes can boost productivity amid UK cost-of-living crisis

Employee share schemes can play an integral role in combating inflation and the enormous burden it is placing on individuals.

Increasing rates

The reasons for the current rising inflation are unique. Interest rate hikes which usually help reduce inflationary pressure are unlikely to be as effective at present, because of the nature of the inflationary pressures the UK economy currently faces.

These pressures include an unusual increase in the supply of money being paid directly to consumers, such as stay-at-home orders that paid people not to work during the pandemic. There is also pent-up demand as a result of Covid-19 lockdowns and a reduction in supply caused by both the pandemic and the war in Ukraine.

These combined factors, which have created demand-pull and cost-push inflation, have created the highest rate of inflation in the UK for over 40 years. To combat this, we need to keep demand at a high level while increasing productivity.

Employee share schemes

Employee share schemes can play a very important role in achieving this balance. Share schemes under which the benefits only crystallise on achievement of specified performance targets can facilitate business improvement by effectively offering increased pay in accordance with the level of productivity.

The key principle here is that the reward is gained after the actual productivity is achieved and the level of that reward is based on the actual productivity. This additional incentive to improve productivity can also help to restore levels of supply, easing the level of excess demand within the economy.

Effective communication between a company and its employees is an important element of the success of an employee share scheme in the long run, particularly if there is an initial downturn in share price as a result of economic conditions outside of the company’s or the employees’ control.

More open communication will improve employee confidence in the performance of the company and encourage employees to retain any shares they have in the company and continue to invest in relevant company share plans, even when the company experiences a short-term downturn. It should be noted, however, that a company cannot provide financial advice to employees and should be aware of the potential risks for employees of investing a large part of their available capital in company shares.

For employees to have the best opportunity of benefitting from the schemes offered by their employer, they should continue to contribute to their company share schemes if they are financially able to. Hopefully the hard work they put into the company will be rewarded.

Choosing an employee share scheme

In the current economic climate, a save-as-you-earn (SAYE) scheme may be the most effective type of all-employee share scheme for firms. SAYE schemes allow employees to pause their contributions into the scheme up to 12-months – a possible benefit given potential strains on household finances.

Alternatively, a share incentive plan (SIP) is another potential choice. Rising inflation creates additional demand for pay rises, but since the tax allowances are currently frozen, widespread pay increases – in line with, or even below, inflation – are pushing record numbers of employees into the additional and higher rate tax bands. SIPs are an efficient way to combat this, as employees required to pay these higher tax rates will achieve greater income tax savings as a result of contributing to an SIP rather than an SAYE scheme. The contributions they make into the SIP will come out of their gross pre-tax salary.

Employee share schemes will not fix the rise of inflation and cost-of-living crisis on their own. But their effective use and implementation can be used to help increase productivity levels in the economy, easing the current supply issues and addressing pent-up demand. This can help to reduce both the demand-pull and cost-push inflationary pressures the UK is currently battling.

Co-written by Owen Hay and Ross Mackenzie of Pinsent Masons.