Having your stake and a voice in the company
Employee ownership is not a new concept in business organisation. However, it is becoming popular with companies who want to take advantage of the benefits that employee ownership can offer. In this article, we’ll outline what employee ownership is, the pros and cons, and how it can improve productivity, efficiency and innovation.
What is Employee Ownership?
Employee ownership is where employees own the whole or the majority of the shares in the company. Essentially, employee ownership enables employees to have a financial share in the business, and a voice in how it is run. It means a ‘significant and meaningful’ stake in a business for all of its employees. Employee ownership takes three main forms which we’ll cover in more detail below.
Is employee ownership only for large businesses?
You may be familiar with the John Lewis example of employee ownership. This high profile department store was founded on the employee ownership model in 1929. Since then, more and more business owners are considering some form of employee ownership, and for many different reasons.
Companies of any size can decide to distribute ownership among its workers. For example, employee ownership is most common in the professional services sector with manufacturing the next most represented. It is being used across all business sectors from large household names to SME’s and family run companies.
Is there momentum for employee ownership?
Employee ownership is reported to be the fasted growing form of business ownership in the UK. The government announced in 2013 that it would be providing £50 million annually from 2014-15 to support employee-ownership models and to incentivise growth of the sector. Since then, it’s use has increased 10% year on year since 2014. Moreover, research by Prof. Andrew Pendleton and Prof. Andrew Robinson for the White Rose Centre for Employee Ownership survey shows that the employee owned sector experienced growth of 17.2% in 2017 and 18.5% in 2018.
In addition, data from the White Rose Centre for Employee Ownership survey shows that as of October 2023 there are 1,650 employee owned businesses in the UK. It also reports 60% of conversions to employee ownership have happened since 2014.
The different forms of employee ownership
Employee ownership can be achieved in a few ways:
- Direct employee share ownership where individual employees own shares in the company.
- Indirect employee share ownership, which is a collective approach often through an Employee Ownership Trust.
- Combination of direct and indirect – this is the most common approach – a hybrid of the direct and indirect approaches which combines individual and collective ownership schemes.
Direct employee ownership
Direct employee ownership is normally arranged under an employee share ownership plan (ESOP). Individual employees hold shares in the company or have the option to purchase shares in the company at discounted or tax-efficient rates.
An ESOP will usually be either a share option scheme, a share-gifting scheme, a share purchase scheme, or a combination of these. Employee share schemes are used by companies to award shares directly to their employees or grant options to buy shares. In the UK there are four HMRC approved share schemes that have tax-advantages to both employers and their employees, in addition to the option of the Employee Ownership Trust. These are:
Company Share Option Plans (CSOPs)
In this type of scheme employees are given the option to purchase shares in the company on a future date but at their market value at the date of grant. The idea is that if the company does well and the share price increases, the employee has the opportunity to buy shares at a discount. If the share price goes down then the employee does not have to exercise the option.
Enterprise Management Incentives (EMIs
Companies with assets of £30 million or less can grant share options to employees to a maximum value of £250,000.00 in a 3 year period. This is usually aimed at offering shares to high-income employees and comes with certain Income Tax and National Insurance benefits for the employee. Companies in the banking, farming, property development, legal services and ship building are excluded from such schemes.
Save As You Earn (SAYE)
In this type of scheme, employees can save up to £500 per month on a 3 or 5 year plan and at the end use the money saved to buy shares in the company at a fixed price. The tax advantages are that the interest and any bonus at the end of the scheme is tax-free, and there is no Income Tax or National Insurance on the difference between the price employees pay for the shares and their real value. There may be Capital Gains Tax unless the shares are put into an Individual Savings Account (ISA) within 90 days of purchase or a pension as soon as acquired.
Share Incentive Plans (SIPs)
These schemes are for the benefit of all employees. Companies can provide either ‘free’ shares up to a maximum of £3600.00 per tax year, ‘partnership shares’ allowing employees to buy shares from their pre tax salary limited to £1800.00 per year, ‘matching shares’ of two free shares for each partnership share or ‘dividend shares’ purchased from the dividend of the other SIP shares. Again these can provide tax incentives to employees.
Indirect Employee Ownership
In this situation a company is owned (in full or in part) by a Trust on behalf of its employees known as an Employee Ownership Trust (EOT). Such EOTs are administered by Trustees, often drawn from the pool of employees, combined with the directors of the business and sometimes with an independent Chair. Assets are held in the EOT for the benefit of the employees. The Trust owns a controlling stake in the company and provides bonuses on an equal basis to all eligible employees. The EOT has its constitution and rules outlined in a Trust Deed.
One significant change in culture is that the board of directors of the company become answerable to the Trustee Board. This shift usually also results in one of the key aims of employee ownership which is greater transparency and employee involvement.
The benefits of employee ownership
A number of significant potential benefits have been identified by those who have gone down the road of distributing ownership amongst employees.
Business Continuity
Succession planning for business owners to ensure the business carries on in the event of retirement or other events is a key factor in considering employee ownership. It can sometimes be difficult for business founders to plan for a time when they are no longer involved and having a pool of employee owners provides a sustainable basis for the business to carry on. This can be particularly important for small family owned small companies with no obvious route to business succession.
Employee owned trusts are not only a useful tool in exit planning. Companies that are at risk of failing can be prevented from falling into insolvency by selling a stake in the business to employees. In addition to raising investment, companies can harness the positive effects of a more involved workforce who have a greater participation and a vested interest in the process of turning the business around.
Expansion
Employee Ownership Trusts can be used as a way of enabling a company to grow. Instead of seeking mergers or being at risk of takeover a company can broaden the ownership base to allow it to take on new challenges without sacrificing identity.
Employee Engagement
A vital ingredient of employee ownership is real and effective employee engagement. Employee owned companies have been shown to increase employee contentment. Often companies controlled by an EOT will have an Employee Council to represent the voices of workers. In return companies can achieve a key benefit from more motivated and engaged workers, sharing a common purpose and who feel more involved by being given a voice. Employees who feel valued and listened to are likely to be more productive, perform better, be absent less and feel that have a contribution to make to the success of the company.
Collaborative and transparent decision making can lead to more widely accepted outcomes. Fostering a team ethic in employees through shared aspirations can benefit overall company performance. It can also assist companies in recruiting the right talent attracted to the notion of being employee owners. Staff retention rates can be kept high not only by providing an attractive workplace where employees are happy but also by properly rewarding employee performance and keeping a longer term focus on the success of the business.
Innovation
An employee owned business can arise from the sale of an existing business to employees or at start up. Being able to offer an ownership interest to employees at the outset can result not only in attracting investment, but a wider participation pool of talent drawn in by the idea of having a significant role to play in the growth of the business. Companies drawn to the employee owned model are more likely to be innovative in terms of flexible working and less traditional in approach.
Financial Benefits
Employee ownership models offer tax benefits for business owners transferring ownership and for employees. The Finance Act 2014 introduced two tax reliefs designed to incentivise the creation and growth of employee-owned companies. These relate to Capital Gains Tax relief for those selling into a Trust and Income Tax benefits for employees.
Capital Gains Tax
Selling more than 50% of the shares in a business to an Employee Ownership Trust (EOT) attracts a full 100% relief from Capital Gains Tax (CGT) so long as the Trust meets certain conditions. A key legal requirement of an EOT is that it meets the requirements of ‘participation and equality’: that is, all eligible employees should benefit from it, and they must do so on equal terms.
Income Tax
Tax free bonuses up to a maximum of £3,600.00 per employee, per tax year, may be paid to employees of companies controlled by an EOT, again provided certain conditions are met. To qualify for tax relief, under the participation and equality criteria, such bonuses must be paid to all employees on similar terms and must not substitute for regular salaries or wages.
Is employee ownership right for you?
Naturally, there are challenges in engaging businesses and their employees in employee ownership schemes. Despite the number of employee owned businesses increasing year on year, the take up is still relatively small.
Despite this, it seems clear that the Employee Ownership sector will continue to expand. Those companies that are open to the idea of devolving ownership can achieve significant overall benefits. These are not limited to purely financial benefits. Employee ownership models provide an innovative way of incentivising and engaging happier and more productive employees. That can only lead to positive outcomes for companies willing to take the leap.
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