Make employees owners and most likely they will act like owners. That’s the pretext for broad based share schemes in some of the most successful businesses in the world.
Those businesses owe much of their success to their strong ownership cultures and high employee engagement. Names like Microsoft, Google and Starbucks from the United States and, closer to home, the John Lewis Partnership, Arup and Unipart in the UK are all outstanding examples of businesses which have embedded all-employee ownership into their way of doing business. When you shop in a John Lewis store or a Waitrose supermarket, you deal directly with the owners and you can see the difference that makes. The partners act as if they own the place.
There is also growing evidence that, properly structured, all employee share schemes can improve company performance. The UK Employee Ownership Index, a portfolio of UK public companies with significant levels of non-director employee ownership, has out-performed the FTSE All Share index in nine of the last twelve years. In 2017, the 50 largest private companies with significant broad based employee ownership increased productivity (defined as value added per employee) by 6.2% year-on-year, twice the rate of growth productivity in the UK economy as a whole.
The UK now has one of the most favourable legal and tax frameworks for employee share ownership in the world. Closely controlled private companies can no longer afford to overlook this. The performance and motivational benefits are clear.
In a quoted company, where there is a public market in the shares, a clear market-based value to the shares and plenty of willing buyers and sellers, installing an all-employee share scheme has become a routine task. Popular schemes like the Share Incentive Plan ("SIP") are common place in most quoted companies.
In a private company, where there is no public market in the shares and no immediately available share value, care needs to be taken with the design of the scheme:
The simplest scheme will allow employees to exercise share options and thereby hold shares only momentarily before the company is sold. This gives employees an economic stake without full ownership rights.
For companies that do not intend to sell or want to make employees shareholders in the future, care needs to be taken with share rights and restrictions, voting rights and rights to dividends.
With no no public market in the company's shares, there is no independent press commentary or analysts' reports on the company. So the directors are the sole source of information about company performance.
Experience shows that it pays to take time to brief employees about the key drivers of company performance, company profit and share value. Openness and disclosure is invariably rewarded with strong commitment and full engagement from employee owners.
It is not practical to arrange share trades in a private company too frequently. Quarterly, six monthly or even annual dealing days usually suffice. Share trades are normally performed at the last calculated share value, though some companies encourage a more permissive trading culture and invite employee sellers and buyers to set their own price, though this is not common. Most companies insist that shares are sold back to the company or to an Employee Benefit Trust as a first option. This keeps ownership under tight company control.
Most companies like to distinguish between "good leaver" (employees who die or who have to leave through illness, disability or redundancy) and "bad leavers" (everyone else). This distinction determines whether the leaver gets any value for their shares and, if so, at what level. Usually, companies like to reserve some discretion for directors to decide who is a good leaver, to allow for exceptional circumstances.
This is where RM2’s long experience in private company share schemes comes in. We have more experience than any other team in the UK in designing, implementing and operating employee share schemes. We’ve worked with hundreds of private companies and established more than a 1,300 private company share plans.
To unlock the power of employee ownership in your company, and for a free consultation with one of our technical experts without commitment, call 020 8949 5522 or email firstname.lastname@example.org.
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Over 12 years' experience in the employee share plan sector. Caroline and her team oversee the administration of our client's share plans.