At the Tory Party conference, the Chancellor, George Osborne proposes legislation that will allow employers to “buy” employment protection rights in exchange for shares.

Better read and experienced economists than I are writing about how the threat of dismissal will lead to talent leaving; it’s always the confident and good that go first. The Trade Unions are also quick to comment. I just want to mention four points which might otherwise be missed.

Will the difference in treatment between the very highly paid and those less well paid remain? At the moment, senior staff required to leave, sign a compromise agreement and walk into their next job laughing all the way to bank? I can’t see Osborne having made life more difficult for these people, and the preferential treatment of senior staff is an act of collusion between the Boards, the CxO and the remuneration committees. Empowering management is not going to change any of that. The fact is that one company’s board of directors, is another company’s remuneration committee is part of the problem of massive overpayment to CEOs.

I can’t see a small company wanting to dilute its shareholding, and most small companies are not quoted on an exchange i.e. they have no value! Furthermore, where small, particularly patron run companies pay significant dividend payments for tax efficiency purposes, they’ll now have to share these dividend payments with their workers. Those companies whose initial and second stage growth are funded by venture capitalists will also not want their ownership stakes diluted in this way.  Large companies don’t on the whole want to behave unfairly, its the redundancy commitments they don’t want to meet, although it seems that redundancy rights are included in what’s being “bought”. However, large companies have other strategies for the avoidance of paying for employment rights. Large companies avoid redundancy and other rights by outsourcing and employing contractors.

The attitude of both sides of this deal will depend upon if the employer is a succeeding or failing company. As suggested above a succeeding or growing company is unlikely to want to dilute its shareholding or share the dividend payments and needs to be a quoted company or will need a public offering plan to make their shares of interest to employees; but a succeeding company may be able to make this work. A failing or even a stagnant company which may be more likely to want such a deal will be much less attractive to the employees. If a stagnant or failing company is quoted, the risk on the value of the shares is high. i.e the sale price of the employee rights is uncertain, because the likely direction of the share price is downwards. In a failing company, this is a deeply unattractive deal. Also it is in the case of failing companies, that the opportunity to dismiss people for individual performance related causes, rather than undertake redundancy programmes becomes more likely; although on reading the speech, Osborne also plans to allow companies to shirk their redundancy commitments, so there’s no need.

In the Guardian article, John Cridland, director general of the Confederation of British Industry, is quoted as saying,

“In some of Britain’s cutting-edge entrepreneurial companies, the option of share ownership may be attractive to workers, rather than some of their employment rights. But I think this is a niche idea and not relevant to all businesses.”

We are fortunate however in that we have a prototype for this policy.

Companies today can contract wholesale business functions from other companies, such as security, catering and/or cleaning. Some companies outsource large parts of their HR function to specialist companies, although in the UK, this is often poor value. Basically, management theory suggests that you should outsource non core competency work where the transaction cost is less than the internal management cost. In addition, we permit individuals to incorporate themselves and sub-contract in competition with wage earners. There has been some controversy about how the public sector is using these contracts, but in the public sector the primary purpose at the moment is to avoid their grading commitments in their collective bargaining agreements. These contracts allow them to pay more than they have agreed the job is worth. In both the private and public sector, these contracts do not attract employer’s national insurance, although they do attract VAT, if the quarterly fees are above the VAT threshold. Both sides use the NI relief to fund the enhanced pay rates. Contractors, with limited terms, and no accrued rights are invariably paid more than staff with rights. They are paid more for each day worked. These rights are not bought on the market for a risible option price of £2,000 worth of scrip. Bottom line, employers that offer only ‘rights free’ jobs for less than the going rate may find it very hard to fill them.

For most small companies this isn’t an issue, if they want to get rid of someone, they just bully them into leaving, or fire them on notice. NB No one with under two years service has rights anyway and it takes two years to earn minimum redundancy rights greater than 1 month’s notice pay.

This is the “Same Old Tories, reprising the nasty party!”, and it was a Tory that first called them that!

The Daily Mash and News Thump have also now commented,

Your boss doesn’t see ‘what the problem is’

Nation’s workers excited to retain financial ties to companies that sacked them

I’d be interested in comments from others on the balance sheet effects of this proposal, and the impact on an IPO of having an outstanding share grant liability.

The Right to Work
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