Tesco, UK: Make work pay – make work attractive
Tesco is the UK’s largest private sector employer. It has been running employee share schemes since 1981 and has continued to adapt these as new opportunities have arisen through government legislation. Tesco now has three share schemes in operation and large numbers of employees are benefiting from the company’s performance, as reflected in a steadily increasing share price.
Tesco is the UK’s largest supermarket chain. With 260,000 employees it is also the UK’s largest private sector employer. It has expanded overseas and now operates in 13 countries, with a total worldwide workforce of 366,000. In 2005, the company’s income was £41.8 billion and it earned pre-tax profits of £2.2 billion.
Trade union membership in the company is at 46%, which is significantly higher than the 29% for the UK as a whole. The shop workers’ union, USDAW, accounts for the vast majority of membership, with 115,000 members in the company and 2,300 workplace representatives. The TGWU general union has around 4,000 members, particularly on the distribution side.
USDAW is recognised for collective bargaining, and since 1998 the company and union have had a partnership agreement that USDAW regards as a model for the retail sector. The union also believes that Tesco offers the best employment package in the sector.
The Labour government has been keen to promote wider share ownership among employees. The government believes that such schemes increase employee commitment and can help boost productivity. In 2000, the government introduced legislation that allowed schemes, set up in line with the regulations, to offer employees savings on tax and national insurance contributions when buying and selling shares in the employing company.
Description of the initiative
Tesco has had some form of employee share ownership in place since 1981 and, since the new legislation came into effect in 2000, it has been developing the options available to its employees. The company now runs three share schemes: ‘Save As You Earn,’ ‘Buy As You Earn’ and ‘Shares in Success.’
The ‘Save As You Earn’ scheme is the longest-running scheme within Tesco. A total of 942 employees enrolled in the first version when it was launched in 1981. Some 104,000 employees now take advantage of the current scheme.
The scheme follows the standard format set out in the legislation. Employees can set aside between £10 and £250 a month from their salary to save for a period of three, five or seven years. This gives them a right at the end of the period to buy shares at the price set at the beginning of the period. Companies can also discount that original price by up to 20% and, so far, Tesco has applied the maximum discount. Tesco also pays a bonus amount when the schemes mature, so those in the three-year scheme got an extra amount equivalent to 1.8 months’ normal payment and those in the five-year scheme got a 7.5-month bonus.
At the end of the period, employees can decide what to do with the money in their share save account. If the share price has increased, they have the option of using their account to buy shares at the original discounted price and then selling them for a profit. Alternatively, they could still take advantage of the lower price and buy shares to keep as a long-term investment and stake in their company.
A key element of these types of share save schemes is the lack of risk for the employee. If the share price falls, there is no obligation on employees to buy any shares at all. They can withdraw the money from their share save account that has paid them interest. The level of interest is set by the Treasury and is in line with that paid on normal savings accounts by banks and building societies.
The ‘Buy As You Earn’ scheme is more flexible but does not have the same guarantees as the ‘Save As You Earn’ scheme. With ‘Buy As You Earn,’ employees can use between £5 and £110 of their gross earnings each month to buy Tesco shares at the current market price. As the money comes out of gross earnings, this means that employees save on tax and national insurance contributions.
There is no commitment to purchase regularly and employees can use the scheme at any time to buy within the set monthly limits. If employees keep the shares in trust for five years, when they sell them they will be exempt from paying capital gains tax on any profits.
The third scheme, ‘Shares in Success’ simply involves an allocation of free shares. The basic rules for this kind of scheme allow companies to give employees up to £3,000 worth of shares, free of tax and national insurance contributions. The shares can be awarded on the basis of individual, team, divisional or corporate performance. Again, an important element involves keeping the shares in trust for a certain period before employees can take advantage of the tax exemption.
The most recent results of Tesco’s ‘Save As You Earn’ scheme were announced by Tesco earlier this year, when employees who began saving in 2000 and 2002 were able to benefit from the scheme.
An employee saving £25 in the three-year scheme would have accumulated £945. This includes the bonus of 1.8 months’ pay, which would buy 594 shares at the discounted price of £1.59. These shares were worth £3.15 on the day the scheme matured, giving the employee the chance to make an immediate £926 profit if they sold the shares. An employee saving £25 in the five-year scheme would have received the extra bonus payments and so would have £1,687.50 available to buy 852 shares at the five-year option price of £1.98. These 852 shares were worth £2,683.80 at the maturity date, providing a £996.30 profit.
Employees are invited to join the scheme each October and over 60,000 have joined in each of the last two years.
The most recent payout from the free shares scheme was in May 2006. The ‘Shares in Success’ scheme distributed £78 million to over 180,000 of Tesco’s 260,000 UK employees. This amount was equivalent to 3.6% of the earnings over the previous year. Tesco was commended in 2003 by the employee share ownership advocates, IFS Proshare, for the way it boosted involvement in ‘Shares in Success.’ IFS Proshare described enrolment of 148,000 employees as a ‘staggering’ enrolment.
In 2006, Tesco conducted a major campaign among staff, enrolling 45,000 to reach the 180,000 total. This is well ahead of the average enrolment of similar schemes in other companies. IFS Proshare’s 2004 survey found that, on average, only 31% of employees signed up to similar schemes.
The ‘Buy As You Earn’ scheme is on a much smaller scale as it does not provide the same guarantees as the other two schemes. When Tesco launched the scheme in October 2001, it only set an initial target of attracting 10,000 employees but reached 15,000 within two years.
Exemplary and contextual factors
Tesco has used the basic legal framework, provided by the Labour government, to set up its three share schemes. Considerable resources have been used to get employees involved. The schemes provide employees with the opportunity to make considerable profits on buying and selling Tesco shares. With 100,000 employees currently owning shares in the company, Tesco has had considerable success in retaining employees as shareholders and potentially reaping the benefits from their increased commitment to the company.