motivation in practice - case study - sharesave schemes
Profit-share and sharesave schemes have provided good returns for the staff of retailers and other large groups.
In 2002, Tesco paid out £50 million to just over 100,000 of its workers after holding £38 million-worth of shares on their behalf for three years in its profit-share scheme.
Since 1999, when the shares were placed in trust for the employees, Tesco's share price had risen by more than 30 per cent, from 188p to 258p when the scheme matured. Employees were able to keep the shares or cash them in.
Staff can join Tesco's profit-share scheme after two years' service. The number of shares allocated to each employee depends on the number of hours they work each week.
During 2002, Tesco, which has 195,000 staff, distributed more than £200 million through sharesave and bonus schemes.
In February 2002, two Save As You Earn share schemes matured and released £116 million to 37,000 staff who had been saving into the schemes for either three or five years.
Savers who had started the scheme three years before could buy Tesco shares at the 1998 option price of £1.36, while savers in the five-year scheme could buy at 83p per share. The shares they bought at these prices were actually worth about £2.35 each.
Those who had saved the maximum £250 per month saw an investment over five years turn into a maturity value of £49,000, a return of almost three times what they put in.
Savers who put away as little as £10 per month saw the value of their investment soar from £600 to £1,953 once the savings had been used to buy shares at the end of the five-year term.
By contrast, if these employees had saved the same £10 per month into a savings account paying the building society average of 4.8 per cent gross per year, each would have £695.96 before tax after five years.
Terry Leahy, chief executive of Tesco, said: "The popularity of SAYE has increased dramatically in 21 years as staff recognise the value of the benefit. The most recent three and five-year schemes to be offered to Tesco staff in October 2001 attracted more than 63,000 applications. This equates to over one in four staff - more than 66 times the 1981 figure when 942 employees signed up for the scheme."
Most large companies operate share-save schemes for their staff. Under government rules, employees can save between £5 and £250 per month into a scheme, which can run for three, five or seven years with an option to buy shares in the company at a price determined at the outset. This price is often the market price at outset, but companies have the right to discount the market price by up to 20 per cent - which Tesco did.
Contributions are paid into a bank or building society account nominated by the employer and interest is paid at a rate set universally by the Treasury. This year, the rates were 3.67 per cent gross per annum for three-year schemes, 3.99 per cent for five-year schemes, and 4.07 per cent for seven-year schemes.
Staff make 36 payments into the three-year scheme, and 60 payments into the five and seven-year schemes. Their savings are left in the deposit account for an extra two years under the seven-year scheme.
At the end of the period, the employee has the right to choose whether to buy the shares at the pre-determined option price with the savings they have made; or, if the current market price has dipped below the price at outset, to take the savings in cash, free of tax, instead.
Source: Extracted from articles in the Daily Telegraph, Independent and Guardian.
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