Employee ownership may just be the next step for your business. Discover the benefits and drawbacks of this scheme, right here…
Employee ownership is becoming more and more of a hot topic these days. Especially with businesses struggling to make ends meet, perhaps this could be a call for a change in share options?
Here, we’re going to discuss what an employee ownership share scheme is, and dive into the three types. We’ll then go into detail about the benefits and drawbacks of starting these schemes up, so you can make a more informed decision about whether this is the next step for you.
The Three Types of Employee Ownership
Employee share ownership (ESOP) is in the name, really. It means that either some or all of the company is owned by employees through company shares. This can be a really great way to build a brilliant company culture, and create a fantastic team with a huge array of expertise.
Now that we know a little more about what exactly an employee owned business is, there are three types we need to discuss. These are:
Individual Share Ownership
Individual ownership is when an employee individually owns shares in the company for themselves. This could be because they’ve been given shares, usually subject to income tax and National Insurance, based on their value to the company. Or, they may be able to buy shares in the company, like any other shareholder would do.
Alternatively, they may have the option to obtain shares in the future. For each of these cases, employees become owners of major shares in the company, through one or more share plans which are all tax advantaged.
These sorts of shares are usually taken up by employees who have worked for a company for a longer time. Then, when they leave the company and wish to sell their shares, these will often be sold to someone else internally within the business.
Trust Ownership
Shares can also be acquired through a trust, and the process is simple. The company owner needs to set up an Employee Ownership Trust (EOT), and the company shareholders must sell between 51 and 100 percent of the company to this EOT. Once done, employees are qualified to get involved based on their hours worked and their length of service, amongst other criteria.
The be all and end all of this structure is that shares are held internally, on behalf of employees, as a sort of benefit. A contract will be drawn up stating who is in charge of the trust, and any constraints and terms on what the trust may do with the shares. The shares may then be rewarded, as a sort of bonus.
A Mixture of the Two
Alternatively, some companies may choose to do a mixture of both of the above to distribute their company shares to employees. In these cases, the EOT will normally keep at least 50 percent of the shares so as to maintain most of the control.
The Benefits of Employee Ownership
Now that we’ve got all the complicated stuff over with, you’re probably wondering why a company owner should even bother setting this up for their employees. The benefits of doing that are pretty extensive, as you’ll find out here…
Creates a Team Culture
Having a shared goal and purpose is one of the ultimate aims of any business, as this helps to harness a real team atmosphere. Employee ownership does just that; everyone has a common goal to work towards.
What’s more, this sort of structure also promotes an open working environment, so everyone knows what’s happening within the company. Not only does this improve the sense of teamwork, it also creates a culture of trust. Trust in the leadership and the business goals is paramount to any business succeeding in the long-term, so this provides just that.
Reduces the Need for Other Expensive Bonuses
Most businesses can say that they provide bonuses, commission, a good pension, and the like. However, there’s no denying that these sorts of incentives cost money. Well, employee ownerships provide these incentives without the company actually having to spend a penny.
Like any company shares, the money remains within the business in some way, shape, or form. This compares to the other monetary incentives described above, where money leaves the business indefinitely.
Tax Benefits
Shares being sold through an EOT require no capital gains tax for the business owners to pay. What’s more, those benefitting from the trust can receive a bonus of up to £3,600 tax free, unlike other commission and bonuses they may receive.
Enhances Employee Engagement and Commitment
We keep mentioning the word “incentive”, but that’s exactly what employee shares provide. After all, if you’ve a vested interest in the outcome of a company, you’re much more likely to remain committed to the end goal. By getting employees on board with the goals of the business, you each have a shared interest in profit margins, and may choose to work harder.
Brings in Fresh Talent
Because of the monetary and cultural incentives this business structure provides, it can definitely be used as a sales pitch to attract top talent. It’s certainly a unique selling point, and something that not everyone provides. The added draw of greater control in what happens in the company might be that cherry on the cake to persuade them to join your team.
Helps Retain Old Talent
Similarly, maintaining these monetary incentives, without having to dig into your profits directly, will work to keep your current talent on board. After all, creating a good culture and providing motivation are all key players in ensuring people stick around for the long-haul.
Provides an Exit Strategy for Business Owners
For business owners who are looking to leave, or perhaps even retire, maintaining a share in the business might not be in your best interest. That said, you don’t want to sell your share to any old Joe off the street.
Through the employee share scheme, you can have greater control over where your share goes after you leave. Essentially, there’s a succession of ownership to follow, so you can leave with peace of mind.
Preserves Business Ownership and Culture
Because of this, you can ensure that the company maintains the ongoing culture and team environment. Company share owners don’t just earn profits, after all, they actually have a say in how the company is run. So, you’ll always have someone who understands the business on the panel for any big business decision, preserving the integrity and message.
The Drawbacks of Employee Ownership
That’s a lot of benefits, for sure, but we can’t avoid the drawbacks that come with employee ownership too. Some of these include…
Monetary Focus
As we’ve seen, the main focus of employee share schemes is to provide monetary incentives to employees. But, this might end up shooting you in the foot, as it could harvest a culture purely motivated by profits, and nothing else. Money can only go so far and, over time, productivity and culture may suffer because of this.
Potentially Unwanted Ties to the Business
If the business starts to fail, and employees feel they are tied to it through these schemes, they may start to lose interest. It may even foster a culture of anxiety, a lack of morale and productivity, and may even lead to loss of staff.
Costly in the Short and Long Term
In both the short term and the long term, costs for these sorts of schemes can be quite tricky to cover. Firstly, administration costs when setting this all up can be quite large so, for a small business, it may be tricky to even begin.
What’s more, once it’s set up, the long-term money required to keep it going may put you out of pocket. Although it certainly alleviates the pressure of future cashflow problems, you end up sharing the profits with your workers.
High Risk
On top of that, if workers decide to contribute a small part of their ESOP in order to maintain their share, you may only end up breaking even in terms of the gains. Then, if the company performance starts to slide, you may have to pay into the scheme just to keep it running.
Less Liquidity
A certain amount of cash Is required to keep an ESOP running. However, without this cash in other areas of the business, it can reduce liquidity throughout. Therefore, other departments within the organisation won’t have access to potential funds they may need. This can lead to a restriction in creativity and innovation throughout the business.
Potential Disagreements and Loss Control
By adding more and more employees to the mix, this can dilute the shares but increase the number of voices to make decisions. With so many voices in the mix, it might get tricky to make any decisions within the company.
Of course, it opens up a democratic environment, which can be really beneficia, granted decisions are made smoothly. But, this won’t always be the case, and it may lead to certain people becoming upset, and becoming less productive and motivated. Ultimately, handing a large chunk of the company over to employees can lead to a loss of control.
Why Struggling Businesses During COVID-19 Should Consider Employee Ownership
As you can see, there are a fair few advantages and disadvantages to making your business employee owned. That said, the huge number of benefits certainly makes this a viable business direction to take. After all, what’s better than a fantastic company culture, a team environment, and a trustworthy workforce?
With many small businesses struggling during this time, it’s no surprise that some are choosing this route. Providing these sorts of cash incentives during a time where cash isn’t necessarily freely available is what people need right now. Employee ownership provides just that, so perhaps it’s something to look into.
Have you gone employee owned recently? How has it gone for you? Or, perhaps you’re thinking about it, and this post has provided some insight? Whatever it may be, leave your thoughts and any further advice in the comments down below!
