Planning for wider employee ownership

Posted by admin at 15:52 on 13 Feb 2017

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A diverse group of employees

Business owners are attracted to employee share ownership for a variety of reasons – sometimes through altruism, sometimes for solid commercial reasons (see our blog here).

Offering share ownership to all employees can help foster a very positive culture, enabling all staff to work together to achieve growth and profitability.  In certain cases, it can be the first step on the road to a wholly employee owned business as founders transfer their ownership to the next layer or management and/or all employees.

There are plenty of ways to structure wider employee share ownership to meet the owners’ commercial and personal objectives, and the type of business.  It’s worth considering some of the following points, which will help guide you towards the share plan that is right for you.

  • What is your long term objective?  Do you want to maintain a long term, stable, independent business? Are you looking for a gradual exit of the business with, say, a transfer to senior management team? Are you looking for a sale or external investment?
  • Do you want all employees to benefit equally or would you prefer to differentiate between senior and junior staff?
  • Do you want employees to acquire shares immediately, over time, or only on a certain event such as a sale of the business?
  • Do you want employees to receive dividend payments or vote their shares?
  • How much equity do you want to give away?
  • Do you want employees to buy and sell shares in the future?
  • What do you want to happen if employees leave the business?
  • How important is tax efficiency?

Plan

Pros

Cons

In a nutshell

Share Incentive Plan (SIP)

  • Extremely tax efficient

  • All employee so can foster strong sense of ownership

  • Flexible structure (employees can be given free shares and/or buy shares out of pre-tax salary)

  • Long term

  • Must be offered to all employees

  • Subject to annual limits

  • Complex and can be expensive

For those committed to wider share ownership

Employee Ownership Trust (EOT)

  • Long term share ownership route

  • Tax efficient exit route for vendor (CGT exemption on transfer of controlling interest)

  • Annual tax free cash bonuses for employees (up to £3,600)

  • Promotes long term stable independent businesses

  • Must be offered to all employees

  • Requires change of control in the company

  • As for all corporate transactions can be complex and expensive

The John Lewis method

Enterprise Management Incentive (EMI)

  • Tax efficient

  • Flexible - for all employees or some only

  • Can differentiate between employees

  • Relatively simple and cheap

  • Only open to smaller independent companies

  • Employees must ultimately pay to acquire shares

  • Subject to overall company limits

Excellent way to reward employees on sale of a business - may take a while to achieve wider ownership

Thinking about these questions will help identify the best route for you.  Here’s a quick summary of some of the plans that might be used to put in place wider share ownership in your business:

If you are considering introducing wider employee share ownership, one of our experienced advisers would be happy to have an initial discussion with you, without charge or commitment, to help you choose the best route.