Employee Ownership: Getting Started
‘I first became interested in EO as a mechanism for everyone in my business to share in the success and wealth they make. In my mind staff are more important than capital. As an owner, I consider myself a custodian of the business for the next generation. There is no better way to exercise that role than to implement some form of employee ownership.’
-Hugh D. Facey MBE, Chairman of Gripple and Loadhog
It’s no secret that the Employee Ownership model works. Over the last couple of years the UK Employee Owned sector has grown by 18%. The businesses that have adopted Employee Ownership exist in virtually every sector of the UK economy, throughout all stages of business, and vary in size: from start-ups seeking employee commitment to established businesses looking towards succession. It’s safe to say that the benefits of Employee Ownership are drawing in a diverse crowd and the EO sectors don’t plan on slowing down anytime soon.
You’ll find that Employee Ownership exists when those who work in a business also have a meaningful stake in it, meaning they care and that the success of the business matters directly to them- not just their paychecks. This ‘meaningful stake’ is generally found in the business through significant or total ownership, combined with high levels of employee engagement and participation.
Similar to many things in the business world, what works for one business may not be what works for you, but that doesn’t mean that you should avoid EO completely. Employee Ownership can be incorporated in three main ways, making it a model that works for a majority of diverse businesses.
3 Main Types of Employee Ownership
1. Direct Employee Ownership
Through Direct Employee Ownership, employees become individual owners of shares in the company, often using one or more of the companies tax advantage share plans that are available. A main feature of this approach is that the employees will have their own personal shares, meaning that their financial rewards are directly linked to the success of the company. In short, it’s the most tangible expression of EO since employees can actually benefit financially as the company grows. Direct Employee Ownership is also a simple structure to communicate, as many employees are generally already familiar with the idea of share ownership.
A few questions to reflect on while considering Direct Employee Ownership:
- Do all staff have sufficient funds to purchase shares? If so, would they want to?
- Would the company be willing to make a repayable loan for staff to buy the shares?
- How would the shares be purchased from the owner? Over what time period? and at what value could they be purchased?
- Will employees have to meet an eligibility criteria before they can become shareholders?
2. Indirect Employee Ownership
Through Indirect Employee Ownership, all or a certain percentage of the shares of a company are held collectively on behalf of the employees provided through an Employee Benefit Trust, which is drawn from the employees, directors of the businesses, and an external independent chair. It’s important to note that the EBT does not normally require a payment of dividend on its shareholding and that many companies generally use an EBT to hold all of the shares- purchasing them from the existing owners over the years. This structure provides qualifying employees with the same rights and benefits without the commitment to purchase shares directly from their own capital.
A few questions to reflect on while considering Indirect Employee Ownership:
- Over what period of time do current owners want to sell/gift their shares to the EBT?
- What percentage of those shares will ultimately be sold?
- How will the business fund the purchase of shares from the current owners?
- Will the employees feel a real sense of ownership of the business through this model in comparison with direct ownership?
3. Combined Direct and Indirect Ownership
A lot of companies find it difficult to find the perfect fit for their business in just one of the models above. Instead, many of them have adopted a hybrid model combining direct and indirect ownership as a solution. In this model, the EBT often holds a majority of the shares to create secure and stable ownership within the company and then a Share Incentive Plan or a different tax share scheme is used to distribute the remaining shares to the employees. The individuals who are involved in direct share ownership are then able to make capital gains through their ownership, while at the same time, the EBT ensures that there is a clear focus on the long term. To sum up this hybrid model, all employees are able to share in the success regardless of their personal ability to purchase shares and can still be eligible to receive a direct monetary reward.
While considering Combined Direct and Indirect Ownership it’s important to look at the previous questions stated pertaining to each of the models. It’s also important to consider the complexity of the hybrid model and additional administration fits with the scale and capacity of your organization and the proportions of ownership to be held by the EBT vs the proportion to be held by the employees.
Employee Ownership is an extremely effective and established model that has been proven to work across the globe. It has a track record for boosting profitability, increasing productivity, raising job security, and enhancing employee wellbeing. Furthermore, employee owned businesses are seen to be at the forefront of innovation. Implementing EO does not have to be a frustrating and complicated road. With the right quality of thought and effort, EO implementation can be simple and easily tailored to the circumstances of your personal business.
If you would like to learn more about EO and how it can be applied to your business, feel free to get in touch with us.