Employee ownership - where's the evidence?
In recent years we have been delighted to see increased momentum driving the growth of employee ownership within UK organisations. Whilst it is not always possible to predict the future in terms of legislation, particularly with a General Election looming in 2015, we are pleased to have witnessed cross-party support for the expansion of employee ownership.
Most recently, announcements in the 2013 Autumn Statement indicate that more positive changes to the legislation are to come. These have been summarised in brief below.
From April 2014, in instances where an Employee Benefit Trust (EBT) is used as a mechanism for indirect employee ownership, there will be the possibility of a capital gains tax exemption on the disposal of a controlling interest of shares into the trust.
- Providing certain conditions are met, the transfer of shares and other assets to employee ownership trusts will also be exempt from inheritance tax.
- In organisations that are indirectly employee-owned, there will be an income tax exemption on up to £3,600 per year in bonuses (or equivalent payments) for employees. This is due to be implemented in October 2014 and there is a need for some strict criteria to be met.
- The annual limits associated with the all-employee Share Incentive Plan (SIP) and Save-As-You-Earn (SAYE) schemes are due to increase from April 2014.
- Proponents of employee ownership have indicated that implementing an equity awards arrangement can act to greatly improve business performance and growth by aligning the interests of employees with those of the major shareholders.
The psychological impact of ownership has been argued to greatly enhance employee engagement in a number of ways. Introducing target based vesting conditions can help to focus employee behaviour in such a manner as to identify more readily with longer-term corporate objectives and seek to directly impact share value.
Additionally, providing the opportunity to benefit from a share based incentive arrangement, in addition to basic salary, can act as a powerful recruitment tool by differentiating the organisation from its competitors and offering potential candidates the chance to have a real stake in the success of the company. By attracting talented employees, companies with an employee share plan in place can potentially experience significant competitive advantage.
The Nuttall Review, carried out by Graeme Nuttall and published in July 2012, highlighted a requirement to diversify remuneration and reward mechanisms in order to better engage with the workforce and in turn drive growth in the UK economy. The recommendations that came out of this review were based on the results of substantial research into the performance, both in financial terms and in relation to employee engagement, of a range of employee-owned organisations.
In short, evidence suggests that employee share plans can have a positive impact on overall company performance. These benefits include
- Better financial performance;
- Higher productivity;
- Higher employee commitment;
- Lower absenteeism;
- Greater resistance to volatile market fluctuations; and
- Lower staff turnover.
This article seeks to summarise some of the statistical evidence available in relation to employee ownership. Resource links to any studies cited have been included at the bottom of this article.
In reviewing the evidence surrounding the impact of employee ownership, it is often useful to consider the results in comparison with businesses that are not employee owned.
A study entitled Model Growth: Do Employee Owned Businesses Deliver Sustainable Performance, carried out in 2010, draws a comparison between the successes of employee-owned businesses (EOBs) and their non-employee-owned counterparts (non-EOBs) both prior to and following the economic crisis which began in 2008 and caused markets around the world to grind to a halt.
Examples of the measures included in this study relate to:
- Increase in employee numbers;
- Increase in sales turnover; and
- Increase in profits (before interest and taxes).
This very insightful resource provides evidence that, in the years prior to the downturn (2005-2008), the annual mean increase in employee numbers (arguably representative of company growth) for employee-owned businesses and non-employee-owned businesses was 7.46% and 3.87% respectively. The most significant disparity, however, appears after the economic crash, with average increases of 12.91% for EOBs, compared with only 2.70% for non-EOBs in 2008/09. The most recent figures from 2010/11, found in a follow-up study entitled Does Employee Ownership Confer Long Term Resilience?, indicate that, although average growth in employee numbers dropped for EOBs (0.65%), they still outperformed non-EOBs, which actually experienced negative growth rates during the same period (-2.68%).
The annual increase in sales turnover for EOBs was considerably higher than non-EOBs in the years following the economic downturn, with an average (mean) growth rate of 11.08% and 0.61% respectively in 2008/09. Similarly to growth in employee numbers, the average had fallen for both in 2010/11 to 4.68% for EOBs, however non-EOBs had again experienced negative growth (-6.74%). This highlights high levels of resilience in EOBs in the face of incredibly difficult market conditions.
One area in which non-employee-owned businesses have outperformed those practising employee ownership has been the annual increase in profits before income and taxes. In 2005-08, the figures showed that EOBs had an average increase of 10.91%, compared with 14.88% for non-EOBs. As with the figures cited above, growth rates had slowed considerably in both cases, with the 2010/11 figures indicating an average increase of 1.07% for EOBs and 1.15% for non-EOBs. It should be noted, however, that the authors of the study have stated that these differences were not statistically significant.
Plan specific statistics
There are a wide range of available share plans that may be suitable for achieving your organisation's end goals. With such a variety of possibilities, it soon becomes clear that one size does not, and indeed cannot, fit all. Below, we have summarised some of the statistics available from HMRC for three approved share plans.
Enterprise Management Incentive (EMI)
One of the most popular share plans currently available in the UK is the highly flexible and tax efficient Enterprise Management Incentive (EMI) share option plan.
The latest results from HMRC show us that, between its introduction in 2000 and 2011/12 (the latest available statistics), the number of companies with this scheme in place has increased by over 250%, from 870 to 2,400, and the total value of gains on options exercised by employees in 2011/12 amounted to £140 million. This rise is popularity reflects the improvements that have been made to this highly tax advantageous scheme since its inception. We would expect to see a further marked increase when future statistics are published due to the relaxation of the qualifying criteria for Entrepreneurs' Relief for gains made on shares acquired under an EMI.
Share Incentive Plan (SIP)
SIPs have also experienced a huge surge in popularity between 2000/01 and 2011/12, with the number of companies operating such an arrangement in the UK increasing from 90 to 840. The total value of shares acquired by employees via a SIP amounting to £840 million in 2011/12. Under these arrangements, which must be offered to all employees (an 18 month qualifying period can apply), the benefits for employees are soon set to increase with the annual limits placed on both the free shares mode of transfer and the partnership mode of transfer rising to £3,600 and £1,800 respectively.
SIP can also confer significant benefits for the companies in which they operate. With the shadow of auto-enrolment looming, the FDs of many organisations have been considering the implementation of an all-employee SIP in order to make payroll savings and thus aid in funding of auto-enrolment.
Company Share Option Plan (CSOP)
The Company Share Option Plan (CSOP) offers an alternative arrangement in situations where a company does not qualify to issue tax advantaged awards under an EMI.
In 2011/12,, HMRC reports that 310 companies granted CSOP options to employees, and 45,000 employees exercised options amounting to a total gain of £130 million, saving a total of £40 million as a result of individual tax relief.
Making employee ownership work for you
The information summarised above helps to paint a picture of some of the merits of adopting one of the many models of employee-ownership, be it at an all-employee level (such as the SIP), or on a more targeted basis (for example, the EMI and the CSOP).
However, it is important to remember that any employee share plan will only be truly effective when the organisations that implement them communicate the plan and its potential benefits thoroughly in a manner that is both accessible and understandable for employees. Equally, it is vital that any share scheme that has been established is not simply put in place and forgotten about until such time as awards are due to be made. Care should be taken to ensure share schemes are properly maintained in order to safe-guard any tax advantaged position employees are expecting to benefit from.
The most suitable model for your business will depend largely on what you hope to achieve in terms of your overall corporate vision. To find out more about the different opportunities that are available for your company, please contact a member of the RM2 team on 020 8949 5522.
Lampel, J., Bhalla, A., & Jha, P., (2014). Model Growth: Do Employee Owned Businesses Deliver Sustainable Performance? , Cass Business School.
Lampel, J., Bhalla, A., Chordia, M., & Jha, P., (2011). Does Employee Ownership Confer Long Term Resilience?, Cass Business School.
HMRC Statistics available here