In this chapter, we examine collective long-term incentives in the form of broadly based employee share plans. Employees may acquire equity in their company by two distinct means: either by being granted shares in lieu of a cash bonus, or by purchasing the shares over time using their own funds or funds provided by the company itself. Although there has been considerable innovation in equity plans for salaried executives in recent years (discussed further in chapter 20), plans for other employees generally fall into one of three main plan types: (1) share grants, (2) share purchase plans and (3) share option plans.

We begin with an overview of the general nature and extent of employee share ownership in developed countries. Next we consider the potential and possible pitfalls of equity-based rewards in general and major theoretical perspectives on how share plans might influence employee attitudes and behaviour. We then turn our attention to the nature and incidence of each of the three main share plan types, as well as considering the strengths and weaknesses of each. Finally, we consider the best fit options for employee share plans.

Overview of employee share ownership

An employee share plan is any type of plan that allows some or all employees to acquire shares in the organisation that employs them. Such plans have a number of key features in common. First, rewards accrue in the form of share dividends and share price appreciation rather than in the form of a direct cash payment.