If your corporate goal is to increase shareholder value then it’s no good just tying the interests of senior executives to the value of your stock, you’ve got to extend that link to all employees. And it’s no good just giving your domestic workforce an interest in what happens to your share price. If yours is an international company then the concept of share ownership should include employees across the globe.
That’s the message from Jim Kappel, a spokesman for US pharmaceutical company Eli Lilly. The Indiana-based company has been running a stock option plan for its employees in over 80 countries since 1993 and, according to Kappel, it’s been a great success. ‘The program has successfully linked employees to the concept of shareholder value. It gets them to appreciate their actions have an effect on the value of the company,’ he says. ‘It was important for essentially all employees of Lilly to have a chance to participate in the plan.’
Rewards on Offer
Eli Lilly is by no means alone. A growing number of multinational companies are introducing some form of employee share ownership into their compensation plans. Many claim to be reaping rewards in terms of increased productivity; others say the rewards come from helping employees in far-flung subsidiaries feel part of a larger global operation.
‘We’ve noticed an increasing number of multinational corporations trying to extend a uniform plan to all foreign employees,’ says Veronica Manson, director for international projects at the National Center for Employee Ownership in California. ‘For some companies it’s a question of image. They put a lot on their image as an employee-owned company and think that if they do it for their domestic employees, why shouldn’t they extend it to all their employees across the globe?’
Manson points to the growing number of leading US companies which have chosen the global ownership route in recent years – PepsiCo, IBM, Sara Lee and HB Fuller, to name just a few.
Now switch over to the other side of the Atlantic and the trend is just as evident. Many leading European companies – ABB and Alcatel Alsthom, to name just two – have already established global employee ownership plans of some form or another; others are itching to get in on the act.
Julian Gibbs, senior consultant at London-based New Bridge Street Consultants, says that it is becoming easier to extend employee ownership schemes across the globe as regulations in various jurisdictions are becoming more ‘friendly’ towards the concept. However, he adds that certain obstacles do remain which companies should consider when planning to set up a scheme.
Gibbs divides the key areas of difficulty into the broad areas of securities law, exchange controls and taxation. For example, securities legislation may require a company to issue a prospectus in order to bring its employees in that particular jurisdiction into the scheme; exchange controls can prevent employees from obtaining the currency to invest in the parent company; and taxation may place a burden on employees even before they have derived any benefit from the plan.
‘The lead time needed to establish a plan tends to get dictated by these problems in various countries,’ says Gibbs. ‘The outstanding example in terms of difficulty would probably be Malaysia. It is possible to get the necessary exemptions but the company has to gather a huge amount of information so it can be quite time consuming. You then have a lot of to-ing and fro-ing with the authorities. Some clients see how onerous it is and just decide to skip that particular country.’
Whatever the obstacle, Gibbs stresses that most difficulties can usually be bypassed – although it may require the universal nature of a global plan to be adapted to account for some jurisdictions. He points out that where exchange controls conflict with a global option scheme it is possible to use a ‘phantom’ option mechanism. ‘That’s basically a glorified cash scheme where you say to employees, unfortunately we can’t actually let you have these shares because of the regulations, but what we will do is pretend that you’ve got an option to buy these shares and that you can exercise this in, say, three years time. We will then simply pay you a cash sum which is equal to the profit you would have made if you’d bought the shares at this price and sold them immediately.’
So why don’t all companies go down that route? ‘Companies perceive – and I think probably correctly – that whatever it is they’re trying to get out of a share scheme it seems more tangible if it involves real shares,’ says Gibbs.
Kevin Gregson, a principal at New York-based Buck Consultants, agrees that there are often conflicts between the desire to have a universal employee share scheme in place around the world and difficulties in implementing it in each jurisdiction. He suggests that there can be a trade-off between the two objectives, yet stresses the need to keep things as simple as possible. ‘Simplicity in design is always something we recommend,’ says Gregson. ‘It’s often the first time people have become share owners. You don’t want to complicate that any more than necessary.’
Indeed, by and large companies want to keep things as simple as possible, too. For one thing it tends to mean that employee ownership plans are cheaper to establish and administer; for another, it leaves the company free to focus its attention on the goals of the plan and the need to communicate those goals to employees.
Art of Communication
And communication is really what it’s all about. Gregson reckons that in the programs he’s worked on to date, communication details account for half of the work. It’s no good trying to make employees feel part of a wider global group if they’re not receiving any information input from the center. For employee ownership schemes, the communication aspect may emanate from several departments – often involving investor relations – and part of the challenge of the process is ensuring that the multi-disciplined approach gels together.
‘The whole definition and concept of being a global organization has changed,’ concludes Gregson. ‘Companies are looking for ways to create some form of universality and asking themselves: What are some of the medians we can use to bring this organization together?’
The answer’s simple, according to Jim Kappel at Eli Lilly. Bring the global company together by getting all of your employees to think like owners.
Creative Choice
WPP had two main goals when it established a global option scheme for its employees earlier this year: giving everyone a share in the success of the wider company; and helping employees understand that they are part of a wider group.
Brian Brooks, group director of human resources, says that when you’re a global group of individual brands – some of which compete against each other for business – the need to form a common bond is paramount. ‘Employees don’t necessarily think of themselves together with the other employees in the group. We were looking for a fairly powerful vehicle to create one common brand. Now they can all think of themselves as shareholders. It’s an investment in building the company.’
The WPP scheme made its first award of options in May of this year. It covers 12,000 employees out of the group total of 22,000 – the restriction being that an employee must have worked for the company for at least two years in order to participate. Brooks stresses that the idea behind the scheme was not for it to be a golden handcuff – it’s not of large enough benefit to an employee for that to be the case.
‘It’s not going to change anyone’s life, it’s just a nice little perk,’ he says. ‘But over ten years, if the company does well, it could really add up to something.’
Like other companies which have adopted global employee share ownership schemes, WPP was keen to ensure there was a perception of equality in its plans. Indeed, it has taken that concept further than most. ‘We decided to hold one objective above all others when establishing the scheme,’ says Brooks. ‘Simplicity and the ability to do the same thing everywhere were very important. We created a very simple share option arrangement and gave exactly the same reward to everyone. It doesn’t matter what country you’re in or what level you’re at.’
Well, not quite, anyway. Brooks admits that there were two locations – one in Asia, one in eastern Europe – out of about 65 where it proved impossible to implement the scheme. ‘Our chief executive is extremely bothered that we haven’t been able to do it everywhere,’ says Brooks. ‘All we’ve been able to do is say we’d love to be able to do this but we can’t at this point in time.’ The company still hopes to be able to bring those locations into the scheme in the future; in the meantime, it’s not going to jeopardise its chances of doing so – for instance by naming the countries in question.
Aside from the two exceptions, Brooks is convinced that the scheme will help bring employees closer together and understand the workings of the group. He notes the importance of those bonds in a highly collaborative, people-based business. Every employee gets a letter from Martin Sorrell, WPP’s chief executive each year and Brooks says that it will be important to extend this communication to give people an update on the program.
‘I’d love to see and hear in a few years time that people acknowledge this is a benefit which actually enriches their professional life,’ he says.
