Five reasons why you should consider employee share ownership

The idea that employees should own shares in the company they work for is nothing new.

Employee share ownership as we know it today came to the UK when I introduced Esops from the USA 30 years ago. Now over 10,000 companies operate employee share schemes and some two million employees hold shares in the company they work for. This is encouraging but there are thousands of SMEs yet to embrace employee share ownership – here are just five reasons why it could be right for you and your company.

1. Increased company performance

Numerous studies have shown that companies which embrace all-employee share ownership perform better than those which don’t. This is because it aligns the interests of the employees with those of the owners. Productivity levels increase since employees have a vested interest in ensuring the company succeeds. This is especially true when a share scheme is designed to support your company’s particular aims and objectives. It is no coincidence that companies with employee share schemes fared better during the last recession.

2. Makes your company a more attractive employer

Employee share schemes can serve to attract and retain key personnel. Remuneration is no longer just about pay and job seekers now favour employers who offer a range of benefits, especially the opportunity to participate in a share scheme. Share option schemes are especially useful for young and fast-growing companies looking to attract top talent but which can’t yet afford the full salary to go with it.

3. Employees are more motivated and committed

Share schemes create a more loyal and driven workforce. Employees who hold shares in their employer tend to work smarter because they benefit directly from the growth of their company. This link between the factors of production of capital and labour is known as ‘the wages of capital’. In addition to increased productivity, companies with share schemes enjoy reduced absenteeism and better staff retention.

4. Provides significant tax advantages

Successive UK governments have used tax breaks to support employee share ownership for over 30 years. The statutory employee share schemes – Save As You Earn, Company Share Option Plan, Enterprise Management Incentive and Share Incentive Plan – all offer significant tax exemptions or reliefs to both employers and employees. Although tax advantages should not be your primary motivation for introducing a share scheme (your commercial objectives should always come first), the additional funds could be used to boost other employee benefits such as salaries and pensions (making you an even more attractive employer). The tax advantages benefit employees too since share schemes can be part of their long-term retirement savings.

5. Preserves your company’s culture after your exit

All company owners should consider employee ownership when planning their exit. By selling your business to the employees you have hired and nurtured, you can ensure that your company’s unique culture and identity outlasts your ownership and management. As I wrote last month, the Employee Ownership Trust introduced in 2014 provides an extremely tax efficient route for succession planning and could serve you and your business better than a trade sale or merger. Share schemes can also be used in the run up to your exit, allowing staff gradually to take control as they build up their stake in the company.

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