The idea of swapping employment rights for shares in a company may sound like a great deal to some people; in particular those without dependents, or who feel completely secure in their jobs.
The unions say that this is some kind of devil’s pact – and that no amount of equity is worth trading your right to work. George Osborne, who announced this yesterday, would obviously disagree.
But the idea raises some other, more technical, questions.
Firstly, public understanding of shares is not – in general – very deep.
Those who do understand equity markets are familiar with large, listed companies where (bar a few exotic overseas listings) there is both a] liquidity and b] transparency.
If you are given shares in, say, Marks & Spencer, you can see what the dividend yield (income) will be for the current year. You can sell those shares during any working day. And there is a clear system for telling you what price you will get for the stock.
So too for even the most piddling listed company.
But for a small, unlisted company – your typical start-up enterprise – none of this applies.
There is no liquidity and next to no transparency. In the government’s hypothetical situation, you receive from £2,000 to £50,000 of shares in your company. In return you give up the rights on unfair dismissal, redundancy, flexible working, time off for training. Women would have to provide 16 week’s notice of a firm return from maternity leave, instead of the usual eight.
What could an unscrupulous entrepreneur do to limit the value of those shares, rendering them next to worthless? Professional accountants with greater tax knowledge than myself would be able to structure companies in that sort of way.
But here are a few thoughts.
1] The founder could double or triple his salary and perks. That would push down the company’s profitability, meaning that the shares may pay little or no dividend.
2] The founder could lend the company money (perhaps from his own offshore entity) at an exorbitant rate, say 12 or 15 per cent. That would again push down profitability so that the shares would have no yield.
3] The founder could make large profits in the company but insist on re-committing them to capital investment rather than distributing them to shareholders. Again, no yield.
Aha – you might say. Shares are not just about income. They are also about capital growth. (More so, arguably). When the company is sold, or floated, there would be a bonanza for the employee-owners.
But how many companies end up on the stock market? A tiny, tiny minority. Others may be bought by private equity or a bigger rival; then there could also be a windfall for shareholders. If your little company is the next Google or Facebook then this perk would change your life forever.
That will not be the case for many, probably the majority, of companies, however; in which case there may be little or no way for shareholders to sell out.
Theoretically they could sell their shares to colleagues. More likely the only buyer would be the founder; in which case he would be able to offer whatever price he liked.
(A Treasury aide tells me that there are already official rules governing the pricing of shares in unlisted companies: but that doesn’t mean there will always be a buyer at any price.)
In the case of someone being fired (without warning of course) they would not be in a position to argue that their shares are worth more than they are being given for them.
The Tory right would argue that this is grossly cynical and that this is the perfect tool to align the interests of both workers and management: but the proof will be in the pudding.
Jim Pickard
Kiran Stacey