RE: Tr: EOnation: Share Retention by Employees

["Langley, Aidan (UK)" <alangley@deloitte.co.uk>]

     Marc
     
     It would be interesting to identify the reasons why employees choose 
     to hold onto their shares. Conventional wisdom says they should 
     diversify their portfolios, so, if that is true, they are acting 
     against their own best interests in purely economic terms. I suppose 
     there could be several reasons:
     
     1. A feeling that shares in their employer are a better investment 
     than the rest of the market, i.e. likely to outperform the rest of the 
     market.
     
     2. A feeling that shares in their employer are an investment which 
     they understand better than they understand the rest of the market
     
     3. A feeling of loyalty to the employer - that it would be disloyal to 
     sell the shares.
     
     4. A feeling that as part-owners they have more control over their 
     economic destiny.
     
     5. Unfamilarity with the market as a whole - i.e. the employee would 
     not know how to start the process of diversification
     
     6. Lack of access to investment in diversified instruments.
     
     7. Tax penalties on disposal of the employer shares, or other costs 
     associated with diversification.
     
     Of course there may be other reasons which I cannot think of at the 
     moment.
     
     If your proposed inquiry could identify what these reasons are, it 
     would be greatly helpful in designing plans and legislation to support 
     them.


______________________________ Reply Separator
_________________________________
Subject: Tr: EOnation: Share Retention by Employees
Author:  "Marc Mathieu" <SMTP:marc.mathieu@pi.be> at UK
Date:    22/04/2001 10:50


 Dear Aidan,
     
 My own experience and my information suggest that employees generally hold 
 their shares at the end of required holding periods and even for a long 
 term.
     
 1. My own experience in the biggest Belgian companies. My company, BBL was 
 the second Belgian bank. Since 1981 or 1982, Belgian companies had the 
 possibility, once a year, to sell shares to their employees with a maximum 
 discount of 20% and a required holding period of 5 years. Each employee had

 the possibility to buy these shares for a maximum of 20.000 Belgian francs 
 (500 EURO) a year. This is a low amount. We were about 12.000 employees,
and
 each year we bought about 0,50% of the capital of the firm, with this 
 legislation called "Monory-law". After 17 years of such operations, we know

 that the employee shareholders of BBL had 8% of the capital in their hands.

 This suggests that most employees held their shares at the end of the 
 required holding period. All major Belgian companies having made such 
 operations showed the same experience.
 2. There was an inquiry made in March 2000 in France in 9 main French 
 companies. The inquiry was piloted by ParisBourse, Hewitt Associates and
the
 French Federation of Associations of Employee Shareholders. 2.300 inquiry 
 forms were received.
 Question 11 was: "Do you expect to hold your shares after the required 
 holding period?"
 The answers were as following:
 - Yes: 50%
 - Yes, maybe: 36%
 - No: 9%
 - Don't know: 5%
 This is a very interesting indication about the meanings of employees. 
 Question 1 was: "Since how much time do you hold shares of your company?" 
 The answers were:
 - No more than 2 years: 13%
 - 2 to 5 years: 37%
 - More than 5 years: 50%
 These are facts.
 The complete results were published in the French "Guide de l'Actionnaire 
 Salarié" (Employee Shareholder's Guide" in October 2000 (186 pages, Edition

 Indice, 17 quai de Stalingrad, F-92100 Boulogne).
     
 We discussed the point some weeks ago in the Executive Office of EFES - the

 European Federation of Employee Share Ownership,  and our intention is to 
 organize such inquiry at European level in the next times.
 May I take the opportunity to call here for partners for such inquiry?
     
 With very best regards
     
 Marc Mathieu
     
 Marc Mathieu
 Secretary General
 EFES - EUROPEAN FEDERATION OF EMPLOYEE SHAREOWNERSHIP 
 FEAS - FEDERATION EUROPEENNE DE L'ACTIONNARIAT SALARIE 
 Avenue Voltaire 135, B-1030 Brussels
 Tel/fax: +32 (0)2 242 64 30
 E-mail: marc.mathieu@ping.be
 See our web site: http://www.efesonline.org
 EFES' objective is to act as the umbrella organization of employee owners 
 and all persons, companies, trade unions, experts, researchers,
institutions
 looking to promote employee ownership and participation in Europe.
     
     
     
 ----- Original Message -----
> From: Langley, Aidan (UK) <alangley@deloitte.co.uk> 
> To: <EOnation@cog.kent.edu>
> Sent: Thursday, April 19, 2001 9:13 AM
> Subject: EOnation: Share Retention by Employees 
>
>
> >      Jacquelyn Yates asked me to comment on whether employees tend to 
> >      retain their shares at the end of required holding periods.
> >
> >      I am not aware of any recent research on this topic. My experience 
> >      suggests that employees generally cash in their shares sooner 
rather
> >      than later. They do this either to diversify their portfolios or 
> >      because they need the cash.
> >
> >      It is difficult to see how government policy can change this, given

> >      that government only has the blunt weapon of fiscal incentives. 
There
> >      is very little government can do to encourage someone who has an 
> >      urgent need for cash to hold onto his shares. Ad as for the 
employee
> >      who wishes to diversify his portfolio, he is doing what 
conventional
> >      wisdom, and any independent financial adviser, would tell him. 
> >
> >      The UK now has what I consider to be the most generous fiscal
> >      incentives in the world for employee share ownership, following the

> >      2000 legislative changes. But the UK government will not achieve 
its
> >      stated objective with the changes it has made. The stated objective

> is
> >      to double the number of employees who participate in share 
ownership
> >      plans.
> >
> >      There are lots of things to talk about in the new UK legislation, 
but
> >      the two things which are most relevant to this topic of employee 
> share
> >      retention are: the new All Employee Share Ownership Plan ("AESOP") 
> and
> >      the enhanced taper relief for employee shareholders. 
> >
> >      The AESOP is somewhat like the US ESOP, except that it is not 
> designed
> >      as a retirement benefits plan, and the tax reliefs are more 
generous.
> >      Employees who hold shares in an AESOP for at least five years can 
> then
> >      withdraw them without any tax consequences at all. 
> >
> >      The Government is trying to encourage employees to retain their 
> shares
> >      in the AESOP following the end of the five-year period. The way it 
is
> >      doing this is by making the "base cost" for capital gains tax the 
> >      value of the shares on the date of withdrawal from the AESOP. In 
> other
> >      words, the employee will only pay capital gains tax in relation to 
> any
> >      growth in value of the shares following their removal from the 
AESOP.
> >
> >      The employee is obliged to remove the shares from the AESOP if he 
> >      terminates employment, but otherwise he can keep the shares in the
> >      AESOP until retirement. In principle, therefore, this makes it more

> >      attractive to retain an investment in an AESOP than in almost any
> >      other investment vehicle. It is even more attractive than a pension

> >      plan - because you will eventually have to pay tax on the pension. 
> >
> >      But the attractions are only superficial because very few people 
> >      actually pay capital gains tax anyway. There are other reliefs
> >      available from capital gains tax. These mean that it is a tax paid 
> >      only by wealthy investors with substantial private investment
> >      portfolios.
> >
> >      Therefore this apparently generous relief, although aimed at all 
> >      employees, is really only going to benefit a few individuals in 
each
> >      company, who are probably already highly compensated. 
> >
> >      Similar comments apply to the enhanced taper relief for employee 
> >      shareholders. This is a general relief available to any employee 
who
> >      acquires shares in his employing company - whether or not through a

> >      tax-qualified plan. It operates by reducing the effective top rate 
of
> >      capital gains tax from 40% down to 10% for any employee who holds 
the
> >      shares for four years or more. This should be contrasted with the 
> >      position of a non-employee investing in the same company. The
> >      non-employee can reduce his effective tax rate down to 26%, but to 
do
> >      so he must retain the shares for ten years or more. 
> >
> >      Clearly, this does provide a reason for not diversifying your
> >      portfolio. But only if you actually pay capital gains tax anyway, 
and
> >      most people do not.
> >
> >      So the effect of the changes will be to encourage 
highly-compensated
> >      individuals with substantial investment portfolios to be 
"overweight"
> >      in shares in their employer. I don't think that will achieve the 
> >      Government's objectives. But on the other hand, I don't believe 
those
> >      objectives are achievable without a fundamental change in the tax 
> >      system.
> > --------------------------------------------------------------------- 
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It is for the exclusive use of the intended recipient(s).
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Authorised by the Institute of Chartered Accountants in England
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