Enhancing Productivity & Reducing Inflation Through Employee Share Schemes

Monday, 24 October 2022
By David Craddock

The National Productivity Challenge

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In this article, David Craddock offers a prescription for UK companies and the British Government on how to address the challenge to improve the nation’s industrial productivity through the application of employee share ownership economics.

The current media focus in the UK is on combating inflation and understanding the trade-off between, on the one hand, reducing inflation by subduing economic activity and, on the other hand, generating prosperity through introducing measures that improve economic growth. This preoccupation in the debate, important as it is to the economic matrix, has the propensity to act as a distracting force from addressing the underlying challenge within the British economy, which is that, compared with the performance of other leading industrial nations, the British economy has a relatively low level of industrial productivity.

Studies show that American companies are over 20% more productive than UK companies and even compared with the UK’s European economic peers: France is around 20% higher than the UK in productivity while Germany is at least 10% higher than the UK. The decisions of the UK banks during the 2008 financial crisis to curtail lending has contributed significantly to this poor UK performance, resulting in lower investment in UK businesses, a factor that since 2008 has never been properly corrected. From 2009 to 2019, output per hour in the UK rose by 0.7% per annum, the second slowest rate in the G7, compared with an output per hour of 1.9% per annum in the period from 1997 to 2007 which represented the second fastest rate in the G7.

Post-2019, the problem has been compounded by the effects of added regulation for trade with Europe arising from Brexit, and the Covid-19 pandemic which has restricted supply on key raw materials and reduced the UK workforce, primarily through voluntary withdrawal of employees seeking a change in lifestyle. Although the UK unemployment rate in October 2022 at 3.5% is the lowest for 50 years, UK businesses face a serious recruitment problem with people leaving the workforce (the precise number is difficult to quantify as some take up self-employed or gig-working), a factor that has resulted in the number of job vacancies exceeding the number of job applicants. Although the UK unemployment rate may indicate an employment position that is approaching full employment, for that to be considered a sign of economic health, which in the annuls of economic history it usually is for an advanced economy, in the current circumstances of the UK economy it is an illusion. The reality is that the first port of call, even before calculating rates of productivity per employee, is to ensure that the motivations and incentives are in place for enough of the UK population to want to be employees and contribute to the collective pool of national productivity for national supply to be provided at levels that meet aggregate demand.

There is a case for contending that if the conundrum of productivity could be addressed then it would supply the required amounts of goods and services. It is the current absence of goods and services in the required amounts that contributes to inflation through causing supply not to be sufficient to meet demand. At the same time, enhanced productivity would generate higher levels of turnover and profitability and better cash flow, the precise elements that provide the basis for meeting the growth targets that are so essential to the creation of wealth, and the maintenance of the required levels of government expenditure to fund the public services. Predominant of course is the National Health Service, a touchstone issue in the UK’s political democracy in which voter dissatisfaction loses general elections through its contribution to the pendulum effect between the two major political parties.

The Search for Effective Competitive Productivity Solutions

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The imperative of a national exchequer in an advanced industrial economy must always be to exact the correct balance between: (1) the incentive to attract employees into the workforce and (2) the allocation of sufficient resources to provide social security benefits to the most vulnerable people in society. The damage of allowing this balance to be out of step is that where individuals with productivity potential fail to enter the workforce UK businesses cannot recruit, resulting in productivity challenges which, in turn, leads to a need to increase wages to attract workers, but without a corresponding increase in productivity. The inevitable consequence to the economy is cost-push inflation and a rise in prices to the consumer.

The motivation to enter the workforce asks what are the factors that make work attractive. Those factors are a combination of (1) “the financial motivation” – to raise the standard of living of the family and to accumulate the resources to meet life’s goals and objectives – and (2) “the emotional motivation” – the opportunity to express the inner instinct to be creative in meaningful activities, to form constructive relationships in a team environment, and to find identity with a corporate purpose. That “the financial motivation” is only a part should not underestimate the requirement for basic pay to be demonstrated as fair, and that means not only relative between the employees in any given business but also relative to the developing wealth of the company.

Fair pay is foundational and can be achieved by a combination of market pay benchmarking and progressive performance management techniques. For employment reward to be fair relative to the company’s growth and value development to which the employees have contributed, requires the involvement of the employees in employee share schemes and profit-sharing arrangements. Historically in the developed economies, corporate capital values have risen faster than employee reward which, when it is recognised that employees have contributed to that value, highlights the manifest unfairness of that position. However, the tragedy of employee relations lies in not recognising that the best approach to strengthening the levels of employee reward both for the betterment of the company and for the appeal to the inner self-enlightened instincts of the human spirit is to link employee reward to rises in productivity.

The genius of the employee share scheme and profit-sharing scheme models for reward is that the share rewards and profit-sharing follow the achievement of the developed value, which is a direct consequence of higher levels of productivity. In other words, the employee reward through shares and profit-sharing follows the achievement rather than the other way round – the analogy being the payment of an invoice only once the work targets have been accomplished.

The introduction of “the emotional motivation” is inextricably bound up with the discovery of personal identity in the opportunity for creativity and forming relationships. The foremost sister policy to employee share ownership and profit-sharing is training and development. Make no mistake that education is transformational and “close to magic” in its capacity to improve and change lives and reset a life’s course for achievement and fulfilment. When a company offers this, it is helping its employees to find their identity, and when an individual identifies with the company their productivity soars. Witness the results of the Cass Business survey conducted by Lampel et al during 2009 and 2010 in relation to employee-owned companies. Furthermore, the study conducted by Michie and Oughton in 2003 determined that when shares are held collectively in an employee trust, the company is enabled to develop “a culture of teamwork and a cooperative company spirit”. The conclusion of this study is that the collective shareholding approach in a culture of meaningful sister policies encourages collective effort in enhancing the productivity and overall corporate performance.

The creative contribution to productivity is evidenced in the study conducted by Burns in 2006 in which 44% of respondents believed that employee ownership leads to greater commitment to company success and that innovation happens more effectively and spontaneously. The study conducted by Lampel et al in 2010 identified the ability of employee-owned companies to recruit and retain talented employees and benefit from their innovation. The study conducted by Lampel et al in 2012 determined that employee-owned companies tend to give longer-term focus to their business development through encouraging “pioneering innovations” and “innovative ideas from staff”.

As well as bringing productive individuals into the workforce, once they are employed, the objective must be to keep them in good health with a sense of well-being and reduced absenteeism. The study conducted by Davies in 2011, citing research undertaken by The Napier University Research School, determined that more employees in employee-owned companies are satisfied in their jobs than employees working in non-employee-owned companies. The view proffered by Davies in the study is that the sense of employee health and well-being follows from enhanced engagement with company management and involvement in long-term collaborative goals.

On the reduction of absenteeism, the study conducted by Peel and Wilson in 1991 that evaluated data collected from manufacturing employment in the UK concluded the following: (1) companies that operated profit-sharing schemes reduced the average rate of absenteeism by about 8%, (2) rates of absenteeism in companies that operated share option schemes were about 13% lower on average, (3) companies that operated profit-sharing schemes reduced leavers by 1% to 2%, and (4) companies that operated share option schemes reduced leavers by between 2% and 2.5%.

The Productivity Policies that Work with the Market

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Indeed, the empirical evidence is in place to support the status of employee share schemes and profit-sharing schemes to facilitate enhanced employee productivity and, therefore, improved company profitability. Furthermore, both employee share schemes and profit-sharing schemes represent market solutions in a form that both rewards employees, based on company market performance, and unites all involved in the development of the company – shareholders, managers, and employees – around the totem of the developing share value. In the 1980s and early 1990s, during my time working with Wedgwood, the famous pottery company, I was able to secure the support of the trade unions by persuading them of the merits of being associated with the internal marketing of the schemes to the workforce. That association diffused any reflex reaction of a class-based opposition to regard employee share schemes and profit-sharing schemes as only favouring one part of society. In other words, these schemes are truly designed to benefit existing shareholders and new employee shareholders alike.

The empirical evidence indicates that by fostering good and improved industrial relations, productivity improves, employees enter into a deeper understanding of how businesses work through their employee share scheme involvement and, most importantly, they reap personal rewards – “The Wages of Capital” – through dividend payments and capital gains, the cash from which contributes to enabling payment for goods and services at prices that are commensurate with their productivity and pay outcomes.

Margaret Thatcher once stated that “you cannot buck the market”. Based on that premise, and on the assumption that working with the market is the natural and most productive way to organise business economics, the recoupling of employee reward policy with productivity represents a dovetailing of employee relations with the wider market system in which the company is competing for trade and continually refining its products and services together with its advertising and marketing to win contracts. The market approach to the formulation of employee reward policy is to determine fair pay in line with the market and then to enable employees to benefit from share awards and profit-sharing in line with the company’s market performance.

To emphasise the point, let us look as an example at the effects of a policy that does not work with the market, namely the failed prices and incomes policies of the Labour Governments of the 1960s and 1970s. Price controls by suppressing price rises increase demand but, at the same time, reduce supply, ultimately leading to more inflation when they are removed and also creating black markets. In contrast, working with the market rather than against it allows the free-flowing of ideas and energy from the whole of the workforce, as well as the free-flowing of goods and services to the market. The secret for the British Government and UK companies is not to impede the market flow through self-imposed obstacles that have damaging consequences. Focusing on the company productivity issue, the obstacle to avoid is the decoupling of employee reward from productivity both at the micro-economic level in the decisions of individual companies and at the macro-economic level as governments should seek to develop policies that support incentives that are designed to enhance productivity.

In conclusion, inflation is the most aggressive symptom of the deeper underlying malaise of deficiencies in productivity. The credible and meaningful approach to recovery that is consistent with how both the market economy and the human spirit work is to combine the following: (1) to lower taxes over a responsible time-period and in a way that for the British Government’s financial planning does not compromise a balanced budget, with the effect of increasing private investment and releasing the growth potential in the economy, and (2) to deliver employee reward but only in line with productivity, i.e., share rewards, profit-sharing and pay rises only after productivity has been achieved and not before. The summary of the underlying economic thesis is this: (1) once paid, employee reward creates the demand in the economy while (2) the productivity creates the supply, and that, properly executed, the matching occurs in a seamless, non-inflationary form.

David Craddock is a recognised authority in the UK and worldwide on employee share schemes and cash profit-sharing schemes and is the author of Tolley’s Guide to Employee Share Schemes. He is the Founder and CEO of David Craddock Consultancy Services and David Craddock International, and has been advising on employee share schemes and cash profit-sharing arrangements for over 35 years. He advises on every aspect of the implementation process, working personally with every client at each stage, and offering solutions and expertise on all the technical questions that require clarification during the entire consultation. David is also a member of the Steering Committee of The ESOP Centre, the Educational Director and Fellow of The ESOP Institute, and Technical Secretary of the LEADS Valuation Team that meets with HMRC to address the interaction between employee share schemes and share valuation.

David Craddock welcomes an opportunity to discuss your Employee Share Schemes Initiative with you.

Please feel free to contact David at:

T: 01782 519925 ★ M: 07831 572615

E-mail: D.Craddock@dcconsultancyservices.com

Visit: www.davidcraddock.com

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