Employee Share Owner Scheme: briefing

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Public Enterprises

19 June 2002
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Meeting Summary

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Meeting report


19 June 2002

Chairperson: Mr B A D Martins

Documents handed out
Employee Share Ownership Programmes

The Department of Public Enterprises briefed the Committee on employee share ownership programmes. The rationale behind it, together with the advantages and benefits of programmes were outlined to the Committee. Members enquired about the efficiency of the programme and how it was empowering the ordinary employee in particular.

Ms Nompucuko Nontombana (Deputy Director: Strategy Analysis) made the presentation to the committee. She said the Employee Share Ownership Programme (ESOP) is a mechanism used to facilitate employee ownership in a corporation. It is a way of assisting the employees to buy shares in the company and in the long run to benefit from the growth of the company. An ESOP provides a set of rules governing the acquisition, allocation and management of shares held on behalf of the employees.

The rationale for establishing ESOPs is that it forms part of government's empowerment and transformation agenda. It also broadens the ownership of Historically Disadvantaged Individuals (HDIs) by giving them equal access to economic opportunities and ensuring wider participation in the economy. As such the government, through the Department of Public Enterprises, has allocated shares for the establishment of ESOPs in various state-owned enterprises (SOEs), notably ACSA, SAA and Telkom.

The benefits include the promotion of equity and economic empowerment of HDIs thus addressing the social goals of government. Also ESOPs can transform enterprise performance through employee buy-in and raised levels of commitment to enterprise success. It also fosters employee participation and involvement at an operational level. The advantage of establishing ESOPs are that the goals of government, employees and the company are thus aligned.

The Department's team then looked at ESOPs in various State Owned Enterprises (SOEs).

The ESOPs have been operating since 1999. It has 9% of government shares allocated. The beneficiaries to this ESOP are the Management (2.45%) and the other employees (6.55%)

This ESOP has been operating since April 1999. 58.168060 million shares have been allocated. It is housed within the SAA employee share incentive trust with two other schemes for pilots and management. It is valued at 116 Million Rands. The beneficiaries are the pilots and all other employees excluding management. The management has a separate incentive scheme.

The problem that is encountered with this ESOP is that the pilots benefit more than the other employees do. When the department took over SAA in 1998, the pilots were on strike. The conditions were stringent. They had to sign separate deals to buy the enterprise and the pilots. At the time the pilots who were mainly white were earning huge amount of money. This ESOP does not fall within the normal ambit of ESOP.

This ESOP is to be finalised. 2% shares are allocated. The beneficiaries are Telkom employees in employment from 1 October 1999 to date, excluding voluntary resignations and fraud related dismissals. In 1997, there was an agreement to set aside 10% of the shares. 5% for black empowerment, 3 % for UCINGO and 2 % for mployees. The problem that this programme has encountered is the cost of tracing retrenched workers as many employees have been retrenched at Telkom.

This ESOP is not implemented yet. The structure has been agreed upon, however, 9% of each package, in each province will be allocated to an ESOP.

Ms Nontombana looked at the key ESOP problems that have been identified:
- there are disputes over allocation of ESOP shares between workers and managers.
- there is a lack of consistent policy in pricing ESOP shares.
- there also is a lack of liquidity for ESOP shares and a limited convertibility of shares.

The Department of Public Enterprise has drafted a policy document that will provide an overarching framework for a more coherent implementation of ESOPs in the restructured SOEs. This framework will address the problems identified and the policy issues arising from the ESOPs implemented in various SOEs to date. The Minister will make an announcement in this regard after the document goes through the Cabinet cycle.

Ms Nontombana concluded that the SOE sector accounts for approximately 5% of SA GDP but only 3 % of total employment. The government promotes ESOPs as a business-friendly means of economic empowerment.

Mr Andile Nkuhlu (Chief Director: State Owned Enterprises Restructuring division) added that the government wants to move away from the framework of self-enrichment. They want the people to benefit as a whole team. One of the things they will do in the new framework is to teach employees about the benefits and the risks that are involved with shares. They also want to raise funding in order to empower employees. The government does not discriminate between management and other employees, as was the case in the past. The aim is to treat all employees equally.

Mr Heine (DP) asked who decides as to which shares go to the management or to the other employees. He also asked about the percentage of SAA ESOP and who will decide the allocation of ESOPs.

Mr Nkuhlu replied that the percentage for SAA ESOP is 5%. There is a policy guide by the government. The minimum amount of shares to be owned by employees should be 10 000 shares. The number of employees is also looked at when deciding on allocation of shares. Some employees, however, have even more shares such as ACSA employees. But the government re-visits the guidelines from time to time to make sure if they are in compliance with the present times.

Mr Sibiya (IFP) asked what is the department doing to address the disparities that exist with these ESOPs.

A committee member asked for how long would the discrimination between the pilots and other workers in SAA be allowed to continue and what framework has the government come up with in order to solve the problem.

Mr Nkosi (ANC) thanked the department for the good presentation. He asked whether there are share certificates that are given to the employees when they buy the shares.

Mr Nkuhlu replied that the shares for Telkom are owned by a trust. If people leave, they have to sell back the shares to the trust. The issue of SAA could not be dealt with at the time of acquiring the enterprise because at that time there were burning issues regarding the pilots. Pilots will continue to get special benefits because of the agreement that was entered into by government with the pilots. The pilots have a special or exclusive skill and the government used the incentives as a tool to buy them. This has created tension at SAA and will take a long period to change.

With regard to disputes between the management and the employees, the problem is that these ESOPs had been used in the past as incentives only for management. The government, however, has decided that all employees should be treated equally. The government tries to offer shares to ordinary employees at a discounted price to empower them. With regard to share certificates, the employees are not given share certificates at the present moment but in the future the certificates can be given to the employees.

A committee member asked whether the people are not mistaking the ESOPs for pension benefits and whether there are any conflicts between the two funds. He also asked how the department deals with the decisions of the board and whether these decisions are not adversarial to the ordinary employees.

Another member suggested that a meeting between SAA, pilots and unions should be called to try to find a solution to this problem. Secondly, the government should be in control and ensure that no extra shares be given to certain individuals over others.

Mr Nkuhlu said that the government is the main shareholder and is the one in control of share distribution. Board members know that they are employed to work to the advantage of shareholders but in the process they may act independently and apply their minds freely.

Mr Kgauwe (ANC) asked whether the buying of shares is optional or compulsory.

Mr Nkuhlu replied that buying of shares is optional.

Mr Kgauwe asked what is the government doing to encourage employees to buy the shares.

Mr Nkuhlu replied that the government tries to encourage the employees to buy the shares but cannot force them. The government teaches people about both the benefits and risks that are associated with shares. They look at ways the trust must come up to make the shares cheaper so as to encourage the employees to buy the shares. They do not have any incentives that they are using in order to attract the employees into buying the shares.

Ms Nontombana said the ESOPs do educate people about the shares and acquiring of shares and how they can make a success of the enterprise in the process.

A committee member commented that policies that work against employees should be looked at and dealt with. Those policies should be revisited by the committee.

The Chairperson thanked the team from the Department saying that the Committee acknowledge both the challenges and successes of the programme and hope that the programmes will succeed.

The meeting was adjourned.


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