Give Up Your Employment Rights for Equity Compensation

The UK recently unveiled a controversial “share for rights” scheme (plan) that would allow employees to receive tax-exempt company shares in return for giving up common employee rights such as unfair dismissal, the right to request flexible working, redundancy pay and time off to obtain additional job training. Female employees would also be required to give the company at least 16 weeks notice of return to work following maternity leave (rather than the standard 8 weeks). I understand that some employees in the US would simply love to have some of these rights, much less being able to voluntarily give them up for a tax benefit. Think of the employment rights that your employees have. Which of them would they be willing to give up (and for how long) in return for equity in your company, even with a tax benefit?

This proposed scheme has received mostly negative comments from the UK business community. It has been communicated that the purpose of the program is to help relieve the stress on entrepreneurs of dealing with both start-up capital and employee law issues. The initial questions are: 1) Will any company actually roll this out to their employees? 2) Will employees be willing to give up their rights for a stake in the company? The longer-term questions are a bit more interesting.

Let’s start with what happens when people leave. The company can create the right to repurchase the shares at a fair value, but will this actually end up costing more than the rights given away? Do companies want to create a “contractor culture” for their entire company? Can they afford it in cost, alignment, motivation and attraction? It would pit your company’s stock price against another companies’ total compensation and rights package. Imagine the complexities in communication.

How would this sort of program impact other more traditional forms of equity compensation? If your company was already giving up significant chunks of equity through a program like this, would you still feel motivated to offer stock options, restricted stock or an employee stock purchase plan?

Lastly, what is the price of employee rights? The UK scheme would allow the exchange of these rights for a minimum of £2,000 and allow a maximum tax exemption on £50,000 of gain. The value of these shares would, of course, move with the underlying stock price. If the company fails, the employee has neither rights nor compensation.

If a program like this was introduced in the US, what rights should it include and what value would you attach to them?  More importantly, would you be, like only 5 of the 209 companies that responded to the UK government when consulted on this scheme, in support of this idea or would you be in the 98% who did not express direct support (or expressed negative opinions)?

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

Comments

[Jacque Vilet]

Well ---- what a mess. If I were an employee I would not give up my rights for company stock. Too risky. Wonder why companies aren't interested though? Unless I'm missing something I would think they would be happy to reduce cost while letting the employees take the risk with stock.

[E. James (Jim) Brennan]

If companies are not interested, perhaps the dilution of shareholder equity is seen as a negative to employers. Class-conscious societies may also be more sensitive to the implications of the definitive second-class status this scheme would assign to takers who gave up valuable rights in order to become owners.

On this side of the pond, individuals can buy stock without eschewing any of their constitutional or State-guaranteed rights, not to mention collective bargaining protections. Here in the States, this program could be problematic and might be potentially unenforceable because American law frowns upon waivers of basic legal rights. Of course, lawyers can argue that either way.

Plus, US employers are not so burdened by those extraordinary (to us) rights as their British peers and therefore lack those particular anvils around their necks. Yank companies don't routinely grant those perks, so there is nothing equivalent to "buy back."

[Colin Kendon]

I am not necessarily in favour of these proposals but the point which seems to be missed is that the last Government increased worker protections by lowering the qualifying period from 2 years to 1. It had the opposite effect to that intended. There was a large increase in the number of consultants because employers feared the extra costs of a more protected workforce. These proposals might also have the opposite effect of that intended - an increase in the employees (with some protection) and a decrease in the number of consultants (with no protection).

[austxjr]

No, I wouldn't give up those rights in exchange for a tax break on shares. Here in Texas we don't have any "unfair dismissal" unless you can prove unstated discrimination. Any company can dismiss anyone for no reason at all and do so regularly. I think it is in most company's interest to give shares and compensation and wonder why they don't do so more often. It made a big difference in several startups I worked for. My last company made a mockery of it by offering so little and it made little difference.

[Dan Walter]

First I must thank Colin Kendon for his insight. Colin is one of the premier remuneration attorneys in the UK, working at Bird & Bird.

The law of unintended consequences is alive and well it seems. I think one of the big issues here is that we have managed ourselves into a corner is what is a zero sum end game. Companies on either side of the Atlantic do not feel confident that they can contradict market data with their compensation programs. Because of these we often cannot create effective solutions because we must rob one area to afford another. Perhaps a more holistic approach would make more sense.

In the US employee have so few rights, it is hard to imagine what we would ask them to give up. The only employee with contractual rights seem to mainly be those in unions and those rights seem to be quickly deteriorating, WITHOUT any offsetting compensation.

I can see someone trying to push an idea like this through this coming summer. The question is how we will react if this becomes true.