Inside Business: Put it there, partner

NEXT MONTH'S Budget is widely expected to contain further details of how the Government proposes to encourage more employees to own shares in their companies.

Although various commentators will debate the practicalities of how best to achieve this, there is plenty of evidence to support the notion that it is a battle worth fighting. Employee-owned organisations are often small enterprises where the idea of everybody sharing the spoils - and the risks - fits with the structure. In other instances they are born of adversity, as with management buyouts where executives are given powerful incentives in the hope of reviving the fortunes of ailing companies.

The John Lewis Partnership started out like this. Back in the early 1900s, Spedan Lewis, son of the firm's founder, had grown disillusioned with conventional approaches to business. In particular, he was unhappy with the way the company's returns were unequally spread among staff.

Though Spedan's views found little support from his father, he was eventually given the chance to try out his ideas at Peter Jones, the struggling Chelsea department store that the company had recently bought.

He promised the staff a share in profits if they could turn its fortunes around. Moreover, he gave them discretion over the hours the shop opened, what holidays they should have, and what should be done with the profits.

He was considered to be pursuing a ruinous path, but six years later, the store made a pounds 20,000 profit and staff were paid "partnership benefit" equal to seven weeks' pay.

When Spedan acquired control of the whole business, after his father's death in 1928, he set about applying the principles that he had tested at Peter Jones. Moreover, he built the foundation for the current position by transferring his shares in the organisation to a partnership trust.

Now, of course, John Lewis is a huge business, with 37,500 partners and sales of pounds 3.5bn. If it were quoted, it would be in the FT-SE 100. And last year the partners shared - as participants in a single bonus scheme - a partnership bonus of pounds 98m. Each one of them received 22 per cent of their annual earnings, roughly equivalent to 12 weeks' extra pay.

As Sir Stuart Hampson, only the third successor to Spedan as chairman of the partnership, said in a lecture earlier this year: "Industrial democracy has been proved to be more than a rich man's whim and more than an exercise in philanthropy - it is a formula for producing strong and sustainable businesses."

Sir Stuart is in a good position to spread the word. Not only does the company continue to trade very successfully but he has become chairman of the Centre for Tomorrow's Company, a think-tank devoted to encouraging the development of an inclusive approach to business.

In his lecture in January, Sir Stuart said that the approach adopted by his company was especially relevant to the service sector and high technology, "where the element of physical assets needed to run the business is relatively small and where success hinges on the creative talent of the employees".

This is certainly appreciated by the senior executives in the management consultancy PA Consulting. Jon Moynihan, the chairman, and Jeremy Asher, the chief executive, believe that making sure that "everybody's incentives are properly aligned" has been key to getting the firm out of its financial trough of a few years back and on to a growth path that saw revenues of nearly pounds 300m last year.

Professional firms tend to see partnership as a motivator for their employees. But there is often little in the way of bonuses for their junior staff.

Mr Asher says: "The rewards of being a partner are very good. On the other hand, I think what's really important is a compensation structure, even for non-partners, geared towards performance."

At a time when all professional firms claim to be embroiled in a "talent war" for the best people, PA feels this approach has been instrumental in helping it attract both fresh recruits and those from rival firms. And attracting the best people helps start off a "virtuous circle", Mr Asher adds. In such a situation a firm does good work for clients, which gives it an improved position in the market, which makes it more profitable, which in turn makes it more attractive.

But for Sir Stuart Hampson, the central issue is ensuring that organisations like his and PA do not remain isolated examples of a curious form of social experiment. In the past, such ventures have turned out to be short-lived, largely because they could not avoid the problems of people wanting to cash in the paper wealth created for them in the form of shares. National Freight Corporation is perhaps the starkest instance of employee share ownership evaporating like this.

But Sir Stuart fears that others might go this way if employee ownership is not seen as an end in itself rather than as a means of getting out of supposedly irrecoverable positions.

His view that employee ownership needs to be seen as appealing to the businesses of tomorrow is presumably not lost on a Government that appears to be putting greater emphasis on productivity and fairness at work.