Compensation Packages for Redundant Workers
Shares as an Incentive or Reward
Employee Share Ownership Plans
The use of share transfers or discounts as an incentive to workers is a common feature of infrastructure PPI through privatization (see box 5.28). In an analysis of 630 privatizations of infrastructure, energy, and other enterprises, conducted by initial share offer in more than 59 countries, more than 90 percent of the transactions transferred shares to workers. On average 7.6 percent of the shares were sold to employees, often on favorable terms (Jones and others 1999). Data for the individual enterprises is available at http://faculty-staff.ou.edu/M/William.L.Megginson-1/.
Shares transfers are not the best mechanism for primary compensation to transferred workers because of the risk implicit in share ownership.
Shares are common incentives in privatization plans.
Some countries have established the concept or principle of employee share transfers in privatization laws. For example, Article 14(4) of Nepal's Privatization Act 1994 states that "His Majesty's Government shall make available to the workers and employees of an establishment which is to be privatized some of its shares free of cost or at a subsidized price." In Malawi the government encourages employees in privatized companies to buy shares in the form of an employee or management buyout. In such cases the privatization commission may offer a discount of 20 percent. In addition employees may be allowed to pay for their shares by deferred payment terms or through a privatization fund managed by the Investment and Development Bank of Malawi, as part of a financing agreement between that bank and the European Investment Bank. (The fund was so popular that the money originally allocated was exhausted within a few months.)
Thailand power:
Privatization of the Ratchaburi Electricity Generating Holding Public Company Ltd. provided for 45 percent of shares retained by Electricity Generating Authority of Thailand (EGAT), 40 percent of shares offered to the public through an initial public offering (IPO), and 15 percent offered to employees through an ESOP. The employees received shares at par value (10 baht/share) compared with the IPO price of 13 baht/share. The aggregate value of the shares offered to the EGAT employees was no greater than three times the monthly wage bill for all EGAT employees (Bhoocha-oom 2001).
Bolivia rail:
In the concessioning of Bolivia's rail networks, the ministry decided to use share options as a means to minimize risk and promote share ownership among workers. To access the option, workers had to purchase one share at a preestablished book value share price of US$20. The option contract gave workers the right to buy shares owned by the state or by public shareholders at book value, up to a total of their social benefits (one monthly wage per year of work). The option could be exercised anytime during a period of one or two years after the closing of the transaction with the private operator (it varied among companies as a result of negotiations). However, after the opening of the economic envelopes (financial tenders), the offer for the newly issued shares in the case of the eastern network was only 4.6 percent above book value and for the Andean network it was 54.3 percent below book value. Therefore, most of the workers decided not to exercise their options to buy additional shares (Valdez 2001).
Italy's Enel:
he first stage of privatization of Enel Spa, the publicly owned Italian electricity sector operator, took place in November 1999. Approximately one-third of the capital stock of the company was floated on the Milan and New York stock exchanges. The offer was well subscribed and included share requests to 70,302 of the company's employees (85 percent of the total group work force as of June 1999). In addition, the three main sectoral unions had promoted establishment of an association of employee shareholders (European Industrial Relations Observatory On-line [EIROnline]). Available at http://www.eiro.eurofound.ie/).
Chile airline and power:
The second phase of Chile's privatization program included a program that offered low-risk share ownership. As a general rule, workers were offered 5 to 10 percent of the company's shares at a discounted price. To pay for the shares workers were allowed to borrow up to 50 percent of their severance pay, with the company promising to repurchase the shares at retirement at a value at least equal to the forgone severance payments. Therefore, employees could buy shares below market price with no cash outlay, with no risk of loss, and a potential for gain if the shares increased in value. The resulting enthusiasm among workers led, in some cases, to workers becoming the largest single shareholder group via personal borrowings used to expand their stake. This was the case in the privatization of LAN Chile (the airline), Metropolitan Chilectra, and the Steel Company of the Pacific (Gates and Saghir 1995). In privatizing ENDESA, the electricity holding company, broader-based share ownership was encouraged, and the government not only placed 30 percent of the shares on the local stock market for the general public but also reserved shares for the work force.
Mexico telecommunications:
To win over employees to the privatization of Telmex, the government offered them eight-year loans on favorable terms from a government bank to enable them to purchase 4.4 percent of its class A shares for a total of US$324 million. The bank held the shares in trust to ensure payment of the loan. The strategy was beneficial for workers: by 1995 employees had gained some US$1 billion in increased share value (Tandon 1995, Wellenius and Stern 1994).
Ireland telecommunications and post:
In July 1998, 11,000 employees were given a 14.9 percent stake in Telecom Eirann-Ireland's stateowned telecommunications company, through an ESOP, as part of an agreement that included 2,000 voluntary redundancies and changes to long-established working practices, and that was meant to help prepare the company for its subsequent privatization in 1999. Previous ESOPs in state enterprises (airline and electricity) had been limited to about 5 percent of the shareholding, but the 14.9 percent Telecom Eirann model set a precedent that was adopted for other infrastructure and utility firms, including the postal service, An Post EIROnline. Available at http://www.eiro.eurofound.ie/.
Argentina water:
The Argentine government built workers' support for the Buenos Aires water concession by pledging to transfer to them 10 percent of shares in the new water company when the dividends paid to the government for these shares covered their book value (US$12 million) (Alcázar, Abdala, and Shirley 2000). Similar programs were adopted in other Argentine enterprises. In the case of Argentina Gas (GdE), however, given the size of GdE relative to the number of total employees, the government decided to give less than 10 percent of the shares; employees were offered 3 to 5 percent because of the large size of the company relative to the number of the employees (Shaikh 1996, p. 4).
Manila water:
In the concessioning of MWSS the concession contract required that the concessionaire grant every regular employee an annual stock (share equity) purchase bonus equal to not less than the last basic monthly salary due that year until all of a block of 6 percent of shares set aside for employee share ownership was fully subscribed (Lazaro n.d.; Cruz 2001)
Senegal electricity:
In 1999 10 percent of the shares were offered for sale to workers.
Kenya Airways:
In the 1996 privatization of Kenya Airways, the Dutch airline KLM became the largest single strategic investor with a shareholding of 26 percent, but 3 percent of the airline was also reserved for staff at the float on the Nairobi Stock Exchange.