Friday 28 October 2016

Promoting employee stakes is a win-win for staff, bosses and State. So why the government inaction?

Conor Wall

Published 14/05/2015 | 02:30

deposit staff
deposit staff

Government economic policy wishes to make Ireland an even greater global IT hub. However, the country's success in attracting the Googles, Airbnbs and Twitters means that indigenous IT companies, particularly high potential startups that are being backed by State money through Enterprise Ireland, are often struggling to attract staff as they cannot match the healthy salaries paid by some of the world's most valuable companies.

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At Irish Pro-Share Association (IPSA) we advocate greater employee ownership - that employees (some or all) have a stake in the enterprise that they help make profitable.

In 2012 the UK government-commissioned Nuttall Report analysed the costs and benefits of sharing equity among employees. The benefits hugely outweighed any perceived costs (administration being one of the few).

At IPSA we used to summarise these benefits using the acronym GRA. But more recently we added a second 'A'. The G is for growth as Graham Nuttall's report showed that growth was consistently higher in companies where employees had a stake in the action.

R is for retention with almost all of the UK companies surveyed by Nuttall showing a much lower level of staff turnover.

A is for absenteeism - this was a major win for employee-owned enterprises where, not surprisingly, staff were much better at turning up for work at the business that they part owned.

The second A that we have added more recently is for 'attraction'. Giving an employee in an early stage company stock in that company, currently worth very little, but which could grow by a very considerable amount, is a very attractive incentive for them to accept the pain of a lower salary in the short term. It has the second advantage of being a non-cash item - it doesn't draw on the cash resources of an early stage company trying to bootstrap it.

Many, though not all, of the global companies have been through their exponential growth phase so owning shares in those companies, though attractive, has nothing like the possible upside in a company that is just starting out. Just think, in 1982, you could have bought a single share in Apple for $1.64. At the time of writing an Apple share is worth $127. That is one massive appreciation that was worth taking a risk on when Apple was only starting out.

But our Government continues to score an own goal in taxing the granting of these shares as if it were an income at the time they're granted.

The Revenue's own rules make the use of such a reward system useless. It doesn't take a genius to work out that half of $1.64 taken in income tax is derisorily smaller than the a third of $127 paid in capital gains tax.

Continue doing the maths and say a senior manager is granted 50,000 shares. Multiply that 50,000 or more (shares) and suddenly the sums the government could eventually get begins to look very large indeed.

But the company has to be a success in the first place and therefore they need to attract top staff.

Encouraging this incentive should be a government 'no-brainer'. It is a zero cost to the State to help indigenous start-ups and could also fit into the Government's latest plan, just announced, to try to attract young skilled people back from emigration. Bás in Éirinn and an attractive share scheme while you're still alive? - Why wouldn't you come home?

But, and there's always a 'but', despite the lobbying by ourselves at IPSA (a not for profit organisation run by people who understand share schemes and their administration) the Government has not delivered on the minimal legislative change that we have recommended to make this happen.

What we are looking for is that the perceived value of shares are not taxed as income as soon as they are given to an employee - as this is a tax on something that doesn't currently have a marketable value and nullifies the attraction of the shares. Instead leave the taxing until those shares have reached the many millions of euro in value that every entrepreneur hopes to make and then then Caesar can have his cut.

In life there are problems and there are solutions. We have the solution to a most pressing issue for early stage companies but we don't have the means to implement it. And that's a problem.

Conor Wall is chairman of the Employee Ownership committee at IPSA and is Principal at Golder Associates Ireland

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