The Return Triangle for employee shares impressively illustrates that high long-term returns are possible with employee shares. Nevertheless, too few employees in Germany make use of this form of employee share ownership. This makes the plan in the Future Financing Act, for which the draft bill is currently available, to raise the tax allowance from the current EUR 1,440 to EUR 5,000 all the more important. In our column, Dr. Norbert Kuhn, Head of Corporate Finance, gives an overview of the earnings benefits of employee shares and their prevalence in Germany. He also discusses the current political initiatives in this regard.
Employee shares are a win-win situation for employers and the workforce. With employee shares, companies increase employee loyalty and become more attractive as employers. Employees can achieve high returns with employee shares, as shown by our employee share return triangle based on a fictitious employee share plan of all DAX40 companies. Those who participated in this plan from 2006 to 2018 were able to achieve a return of 10.1 percent annually. After taxes, mind you - and against the backdrop that the stock markets were shaken up considerably by the financial and sovereign debt crisis during this period.
However, the DAX40 returns only have an illustrative effect. Employees cannot diversify their investment across all DAX40 companies, but are dependent on the returns of their own company's stock. To spread the risks, the urgent recommendation is therefore to consider equity funds or shares in other companies in addition to the stock of one's own company.
Raising the potential of employee shares in Germany, too
The advantages of employee shares are therefore obvious. Studies by the Aktieninstitut show that the number of employee shareholders in Germany is currently just over one million, which corresponds to only 1.6 percent of the total population over the age of 14. Overall, only one in seven employees of a listed company owns shares in their own employer. A look across the borders shows that Germany has some catching up to do. France has almost 2.8 million employee shareholders, the UK around 1.8 million - and this despite the fact that the number of people in work in both countries is significantly lower than in Germany. But how can this potential be leveraged?
Tax allowance without horsefeet
Policymakers must create an environment that adequately supports the introduction of employee shares. A major step in the right direction is the increase in the tax allowance from the current EUR 1,440 to EUR 5,000 proposed in the draft Future Financing Act of the Federal Ministries of Finance and Justice. This increase is also in line with the wishes of many companies. However, it is critical that deferred compensation, the tax-free purchase of employee shares from their own income, should no longer be possible in the future. This is counterproductive, because many companies already use deferred compensation or are planning to do so. The reason is quite simple: not every company can afford to fully utilize the maximum amount of 1,440 euros by offering a discount on the shares. It is therefore all the more important that the remaining tax allowance can be used by employees to purchase shares by way of deferred compensation. It is therefore essential that deferred compensation continues to be possible.
The potential of employee shares is great and unfortunately still too little recognized by companies. This makes the current efforts by policymakers to increase tax incentives for the introduction of employee shares all the more important. However, these efforts must not be thwarted by restrictions.
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Contact Dr. Norbert Kuhn Deputy Head of Capital Markets Department Head of Corporate Finance Tel.+49 69 92915-20 kuhn(at)dai.de