24 September 2018

The trouble with Labour’s employee share plan


Today at Labour Party Conference, John McDonnell has unveiled radical plans to force every listed company to hand over 10 per cent of their shares to employees.

But there is more to the Shadow Chancellor’s proposal than the headline announcement. According to McDonnell’s plan:

1. Every UK-Listed company with more than 250 staff would be forced to set up an “Inclusive Ownership Fund” and transfer 1 per cent of their shares to the fund each year until the fund owns a tenth of the company.

2. The fund would be “asset-locked”. Employees couldn’t sell their stake. But they would get to benefit from any dividend payment up to £500 per worker. Any extra money would be paid out to the state as a “Social Dividend”, which is Labour newspeak for a tax.

3. The fund would be managed collectively by “workers” and they’d have the same vote as other shareholders in how the company is run.

The idea, based on proposals by the left-wing think tank the Institute for Public Policy Research, is meant to motivate workers into being more productive and promote long-term thinking. To say there’s problems with it is an understatement.

Employee share ownership might be common among Silicon Valley’s most successful companies, but there’s a fundamental bargain there that Labour’s plan misses.

At a start-up there’s an assumption that the company will grow quickly. It is a high-risk proposition too; after all, most things fail. But provided the worker is willing to accept the risk it can be an effective way of hiring talented staff while conserving cash. More established firms might also offer shares as a way of retaining staff by rewarding tenure. In a market where star coders are frequently poached and no-compete clauses are illegal, paying workers in stock that vests over say five years can cut staff turnover.

But McDonnell’s plan ignores this context. What works for Google might not work for Marks and Spencer. And even if what works for Amazon did work for Sainsbury’s, McDonnell isn’t offering what Google or Amazon offers. He’s offering stock that can’t be sold on and entitles employees to a maximum dividend of £500 each year. By the way, John Lewis, the firm that inspired McDonnell’s plan, isn’t exactly going gangbusters.

Indeed, if paying workers in stock rather than wages improved employee motivation and led to better decision-making then firms would already be doing it. Share Incentive Plans and Employee Ownership Trusts already benefit from tax breaks. Your boss can pay you £3,600 more a year tax-free if they choose to pay you in shares rather than cash.

The tax element of Labour’s plan will hit investment and probably wages too. The risk that the state will take 10 per cent of your stock (and potentially more in the future) will make firms wary of investing or locating in the UK. Workers might benefit from £500 a year in dividend payments, but employers will try to compensate by paying lower wages.

Of course, for the most successful firms who can pay out even bigger dividends the plan will amount to a relatively straightforward hike in taxes on profits. This will discourage investment and risk-taking.

It’s not clear either that employee-run firms are better managed either. One study found that co-determined German firms were less likely to make the tough decision to restructure and as a result were more likely to fail altogether.

The plan would be worth junking altogether if the above was all that was wrong with it but sadly it’s not. What is startling about Labour’s plan is just how easy it is to avoid.

The forced share transfers only apply to companies listed in the UK. They would have no power to do the same to companies listed in Germany or the US. They don’t have the power to force private companies to hand over shares either. Firms might even hold off on paying out dividends, holding out instead for a business-friendly government to come in. Businesses that are close to the magic 250 employee mark might put off hiring or outsource jobs to a subsidiary to avoid the measure.

Labour’s plan would make it tax-efficient to delist or list elsewhere. The only workers who would gain are lawyers and accountants. Worse still, it might discourage high-growth private companies from going public and accessing more capital. The result would be less innovation, slower growth, and greater volatility.

Labour’s plan is radical and would drastically change Britain’s model of capitalism. It would see innovation squashed and workers left out in the cold.

Sam Dumitriu is Head of Research at the Adam Smith Institute.