The Midas Touch of Employee Share Schemes: The Australian Context

What magic formula can give a company lower employee churn, higher sales, higher value added, higher labour productivity and higher value added growth?

Last year, Australia’s Department of Industry, Innovation and Science published a study that gave an answer to exactly this question. I chatted to author Dr Luke Hendrickson about what he found.

“I’d been working on a task force for innovation and science leading in to the 2015 National Science and Innovation Agenda, and people there were working on an agenda around Employee Share Schemes,” says Luke. “I became interested in how people were measuring the benefits of these – it was often implied and stated, especially by advocacy groups, but I couldn’t find much local evidence about the benefits to Australian firms.”

Luke was doing other work at the time but his interest in the topic remained, and was piqued further when he found a survey from the Australian Bureau of Statistics that referenced employee share schemes.

“I was exploring the Australian Bureau of Statistics’ Economic Activity Survey form, in which someone had had the foresight to include a question about employee share schemes seven years earlier. I thought ‘fantastic!’ – here was the vehicle to test whether there are any benefits for Australian firms, financial or otherwise, associated with having an employee share scheme.

Having got the green light from the Department’s policy area to do the research project, Luke discovered more information from the Australian Taxation Office and began the task of drawing the various strings together.

“There was some serendipity involved in finding the data we needed to do the project at all,” he said. “Things can be buried inside questionnaires that are collected for a different purpose, so if you just look at the standard output you won’t see it. We were lucky to find two separate data sets that were strategically important but unconnected, that together painted a picture of what employee share schemes really look like in this country.”

So what did he and his team find? “It’s a very positive story,” he said. “Employee share schemes appear to deliver firms that have them economic, human capital and CSR benefits. Interestingly, it was very clear from the data that the firms that appear to benefit the most from having these schemes are younger and smaller, for example, startup firms. These firms show a very large value add per employee, wages per employee and reduction in churn. Yet this type of firm is least likely to have an employee share scheme. The benefits were there for large corporates too – I think based on the evidence I’ve seen and the literature I’ve reviewed I’d encourage any firm who doesn’t have one to closely look at it.”

The resulting report, The Performance and Characteristics of Australian Firms with Employee Share Schemes, comes to several conclusions.

Key findings on Australian Employee Share Schemes

• On the rise – The proportion of Australian firms with Employee Share Schemes (ESS) grew from 0.23 per cent to 0.57 per cent from 2006–07 to 2014–15.
• Size & age – Estimated annual ESS payments were $2 billion in 2014–15 accounting for approximately 0.4 per cent of total wages and salaries in Australia. Mature firms (86 per cent in 2014–15), particularly large, mature firms (65 per cent in 2014–15) account for the majority of ESS spending.
• Industry – Use of ESS is most common in large, mature, mining, professional, scientific and technical services and finance and insurance services firms.
• Higher compensation – Firms with ESS were found to have higher wages per employee. This result is generally consistent across all size, industry and age groups with the exception of young, large firms.
• Total compensation – Small firms with ESS have a significantly higher proportion of their total wages and salaries being paid as ESS compared with larger firms. For every dollar spent on wages and salaries, small ESS firms paid approximately 25 to 53 cents to employees in the form of share based payments, depending on age. Large ESS firms paid 3 cents in the form of share based payments for every dollar of wages and salaries paid.
• Economic ripples – A significant decrease in the ESS intensity of small firms using ESS occurred in 2008–09 and 2009–10. This most likely represents a sharp decline in employee risk appetites and attitude towards accepting equity during the global financial crisis.
• Value – Compared with their non-ESS, firms with ESS have lower employee churn, higher sales, higher value added, higher labour productivity and higher value added growth. The positive relationship between ESS and firm performance weakens as firms get larger and older indicating that, if a causal relationship exists, the benefits of ESS (and sensitivity to ESS policy incentives) are greatest for small businesses.

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Interested in how share ownership could benefit your organisation? Drop me a line and let’s talk!

Disclaimer
The views expressed in this report are those of the author(s) and do not necessarily reflect those of the Australian Government or the Department of Industry, Innovation and Science.