Share incentives are not enough to boost employee performance

Tax reliefs offered on shares, share options and various other employee incentive schemes cost the taxman £800m in tax and national insurance takings every year, a cost that the government absorbs on the basis that these schemes boost employee productivity, which ultimately grows the economy and overall tax takings.

The new study into the area, conducted by Oxera, however, found that the tax breaks offered on such remuneration schemes, on their own, were not enough to stimulate productivity.

Using HMRC data and financial information on thousands of companies, Oxera looked into whether incentive plans with tax reliefs boosted productivity and found that other benefits were required to make employee participation worthwhile.

'Tax-advantaged share schemes on their own do not appear to be sufficient to improve performance. And companies that only have a tax-advantaged scheme do not appear to have significantly higher productivity,' Oxera said in the report.

When such schemes are run together with similar schemes that do not offer tax breaks, however, Oxera found that productivity increased by 5.2%.

The use of schemes with tax benefits mainly appeared to boost productivity in listed companies and companies with a turnover in excess of £36m.

'For tax-advantaged schemes to be effective in increasing productivity, other factors such as schemes that are not tax advantaged, company size, and being a listed company are required for a significant productivity effect to be identified,' the report said.

The report also looked into the benefits of tax-advantaged schemes across different sectors, with utilities, manufacturing and financial services the most likely to see productivity increases.

Real estate, transport, retail, wholesale and hospitality were least likely to benefit.

The consultancy did not go so far as to suggest a total reform of the tax incentives available for employee share and profit sharing schemes, but did question the importance of the tax reliefs in the package of incentives made available to business by the government.

'Whether it would be necessary for the government to provide tax incentives to improve performance is not clear, since there is some evidence indicating that productivity is enhanced in companies with both types of scheme (those with and without tax benefits) and not those with tax advantaged schemes only,' the Oxera study said.

The study added that HMRC could be well served by targeting the tax incentives at companies in the sectors and of the scale where tax-advantaged schemes appeared to provide the biggest boost to productivity.