Should you swap your employment rights for shares in the company?
British Chancellor of the Exchequer (Finance minister) George Osborne has suggested a new scheme where staff could opt out of certain employment rights in exchange for shares in their company (between £2,000 and £50,000 worth). Even better these shares would not have to pay capital gains tax so if your shareholding goes through the roof... it's all profit for you.
So... if you get offered this deal by your employer... is it worth doing?
Like all these decisions it depends on your circumstances. If you could cope easily with losing your job because you have plenty of savings already and/or not much in the way of commitments, then the bribe of free tax-free shares could be very attractive.
On the other hand if losing your job would tip you and your family into poverty and you think it would be hard to find another job that would be as good, it's less likely to be worth taking the shares.
Why companies will like this but employees might not.
Giving employees shares gives them a stake in the company. It means they ought to take more interest in making it profitable because they'll end up sharing in those profits. In the jargon it creates "an alignment of interests". So it's good for the company.
It makes employees less like wage-earners and more like partners in a partnership - they take on some of the risk and take some of the reward of owning the company. And in return they take on more risk to their employment as well, just like partners do.
But the trouble for the employee is this: Share prices can go down as well as up. And however good you are, you will only be one part of the company and can't control its performance. And sometimes companies go belly-up without anyone doing anything wrong. Companies fail. That's the market economy. (See this article for more about investing in shares.)
But if the company does fail, and you have a lot of your savings tied up in the company then not only will you lose your job but your shares will be pretty much if not completely worthless. The tax break doesn't look so handy then. And if you have given away some of your employment rights, you might be one of the first out of the door.
So who might want to do this?
To repeat myself, it all depends on your circumstances. A deal like this might be very attractive to people who:
- are young and without many financial responsibilities; or
- are already financially secure; or
- work for a large company and judge that it is unlikely to go bust (but be careful, the unexpected can happen - think of Northern Rock).
On the other hand it is less likely to be suitable for those who:
- are close to the breadline; or
- have lots of financial commitments such as children and a mortgage; or
- would find it hard to find another comparable job
These are only proposals at the moment, but if and when they come in, make sure you think very hard about whether it is right for you before you sign away any of your employment rights in exchange for a shiny share certificate.