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Last Updated: Thursday, 11 January 2007, 18:03 GMT
UK rejects Royal Mail share plan
Robert Peston
By Robert Peston
BBC business editor

Postal worker in London
Royal Mail has lost an important contract
The UK government is to reject a demand from Royal Mail's management that 20% of its shares be handed to employees.

The share transfer was widely seen as a partial privatisation and was strongly opposed by the postal workers union, the CWU, and left-wing Labour MPs.

Instead, ministers will agree a plan that links staff pay to changes in the value of Royal Mail's business.

Royal Mail wants such a scheme to be worth up to 5,000 over five years for each of Royal Mail's employees.

Tough sell

The Department of Trade and Industry (DTI) and Royal Mail said last night that no final decision has been taken on the best way to incentivise Royal Mail's 200,000 staff.

However, the BBC has learned that ministers have taken one important decision of principle.

They have decided to reject the demand from Royal Mail's management for real shares in the business to be transferred to staff.

The postal union, the CWU, and the left of the Labour party both hated this idea, seeing it as an irreversible step towards privatisation.

It would have required legislation - and ministers feared this would be messy and difficult to get through parliament.

An added complication is that Royal Mail would be bust if it were not owned by the government, because of the enormous hole in its pension fund. So valuing the shares is impossible.

But Royal Mail feels it needs to offer staff generous incentives so as to keep morale up as the business embarks on a new round of changes to working practices, which may involve job losses.

Other plan

Ministers are instead likely to approve the award of so-called "phantom shares" to staff. These would behave like shares, except they would confer no ownership rights.

The big point is that the remuneration of staff would be more closely linked to the value of the business, and that could be seen as a precursor to future privatisation.

However ministers have been warned that members of Royal Mail's board may be livid at the rejection of the real shares scheme and might quit in protest.

"There is a risk of resignations," said a government source. "None of these people are irreplaceable but we would prefer to placate them."

Allan Leighton
Allan Leighton hoped shares would help staff morale

Royal Mail bosses are insisting that any phantom share scheme must give all 200,000 of its employees the opportunity to pocket 5000 each over five years, if the business hits its financial targets.

That would mean handing 1bn in aggregate to Royal Mail posties.

Any less than that could hamper Royal Mail's attempt to push on with a painful reorganisation of its business, according to the company's executives.

Technical difficulties

The management of Royal Mail - led by the chairman Allan Leighton and the chief executive Adam Crozier - are determined to reform working practices and cut thousands from the headcount over the coming few years.

They fear such an efficiency drive would be blocked by recalcitrant employees in the absence of a strong financial incentive to increase the value of Royal Mail.

The Treasury is concerned that the scale of rewards demanded by Mr Leighton and Mr Crozier may be too generous.

Final financial details are still being negotiated between Royal Mail and Whitehall officials and no announcement is expected until later this month.

Government sources say that a transfer of real shares was ultimately rejected because they were impossible to value.

The valuation difficulty stems from the horrendous state of Royal Mail's balance sheet. A 5.6bn hole in its pension fund means that the company would be bust if it were not owned and ultimately underwritten by the Government.

"There was an insuperable technical difficulty in valuing a business that is bust," said a government insider.

Mr Leighton wants Royal Mail employees to identify with their business in the way that John Lewis staff identify with their company. John Lewis's 63,500 staff collectively own the department store group.

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