Management: Employee schemes need to talk louder: The success of wider share ownership by the workers may rest on consultation as well as motivation

EMPLOYEE share ownership can have a significant effect on profit and motivation.

But - as the management of United Airlines, the US carrier that last month announced one of the largest schemes of its kind, may discover - this is not automatic. Companies have to 'sell' the benefits to their workers, and share ownership works best in a culture committed to improving employee involvement.

A survey conducted by the Employee Share Ownership Plan (Esop) Centre, which promotes a share-distribution scheme it designed, found that the share price of the average firm with an Esop had grown by 43 per cent since it was established. In addition, half outperformed similar non-Esop companies in terms of profit, and four-fifths said employees were better motivated because of the Esop.

The best-performing Esop companies were those that made an effort to communicate closely with staff and involve them. There was a direct correlation between share price improvement and levels of employee participation.

An Esop is a debt-based mechanism for distributing shares to employees, particularly in private companies. Shares are bought by the company via a loan and placed in trust. They can be new shares, in which case the Esop becomes a means of raising capital - for example, in a management buyout - or they can be existing shares which make the Esop a mechanism, say, for buying out a partner.

The shares secure the loan, and the company pays the loan back via profits and via the trust. This repayment is eligible for corporation tax relief, according to case law. As the loan is repaid, shares are released and either given or sold to employees. An internal market in shares can then be created.

In addition to this case-law Esop, there is a statutory-law version that guarantees the corporation tax deduction and allows capital gains tax rollover relief for anyone selling shares into an Esop trust. Less flexible than the case-law Esop, the statutory version was updated last month and is likely to become more popular.

But while there are clear financial incentives for the company, the decision to install an Esop should ultimately be about a desire to share capital more evenly. Eighty six per cent of firms said it was this that attracted them to the Esop scheme. Their commitment is perhaps reflected in the decision by two-thirds of companies to give employees full voting rights. The message is clear: any potential advantages in terms of productivity and motivation depend on such a fundamental commitment.

Latterly, Esops have proved popular with the privatised bus companies, which have tended to put substantially more share capital into the hands of the workforce than the average Esop, which holds 42 per cent of the firm's equity.

Cleveland Transit was established in 1991 via a buyout of the bus services in Langbaurgh, Middlesbrough and Stockton- on-Tees, adding Kingston upon Hull in 1993. Using an Esop, 49 per cent of shares were placed in a trust. These are passed on free to employees as they are released - the trust is designed on a 10-year cycle. The initial value of the shares was 10p. By March 1993 it had risen to 52p.

Malcolm Howitt, managing director, was committed to Esop and has also tried to enhance the role of employees in running the company - additional worker control is not implicit in the concept. Changes have included workers on the board, regular meetings with trade unions and a traditional profit share.

'If you're going to go along this path, you have to be at one with the concept and enhance it,' he said.

He retains his initial commitment, but admits the anticipated benefits have been slow in arriving. 'One of my beliefs was that ownership would lead to immediate changes. But you buy a company, use an Esop and nothing changes the next day. It is a big let-down and you have to work hard to overcome the anti-climax. If you are going to get the benefits, you must work at getting the culture.

'It will happen, but it takes longer than you expect, partly because people don't have the shares. As the number and value of those distributed increases, they become a more significant issue. Now, this far along the track, they are getting a greater realisation of their significance.'

Other Esop companies clearly agreed. The difficulties of explaining the benefits to employees was the most common problem cited in the Esop Centre's research.

Also of concern was the company's repurchase liability, especially in the case of employees blocking together to sell shares. Sixty per cent of Esop companies are committed to providing funds to repurchase shares out of current earnings. Despite this, more than half of companies saw the internal market for shares as one of the major benefits.

Administrative complexity and the difficulties of share valuation were also cited as problems.

(Photograph omitted)