Discover why employee ownership schemes are useful motivational tools for staff members, and why should you make this change now, right here…
For small to midsize businesses (SMBs), employee ownership can be a wonderful tool. Not only can it help you to retain key staff members, it can also encourage them to help the company grow, amongst other positives.
If you’re running an SMB and you’re looking for ways to grow your business, becoming employee-owned could be the key. But, before you take the plunge and speak to anemployee ownership consultancy, you first need to decide if it’s the next step for your business.
In this post, we’re going to tell you what these schemes entail,and why they’re useful for SMBs. We’ll then be sharing ourinsights into how they might help your company through the COVID crisis. So, what are you waiting for?
Employee ownership schemes are where all the employees in a company have a significant stake in it. This includes both a financial stake and a say in how the company is run.
It’s easier for limited companies to dish their shares out amongst their employees because they’re already divided that way. However, for a sole trader or charity to do this they’ll need to change their legal structure.
There are various types of employee ownership models, but the most popular ones are the government approved schemes because they offer lucrative tax incentives. Here’s a quick rundown of those schemes:
Share Incentive Plans (SIPs)
You can give your employees £3,600 of free shares a year and they can buy additional partnership shares if they wish. In this case, they can only purchase up to a limit of 10 percent of their yearly income.
If they keep their money in the plan for five years, they won’t pay any Income Tax or National insurance on the value of them. They also won’t pay capital gains tax when they sell their shares, as long as they keep them in the plan until then.
Save As You Earn (SAYE)
This employee ownership scheme has employees save up to £500 a month which they can use to buy shares at the end of their agreed contract (three or five years). The employees don’t have to pay tax on any interest or bonus at the end of the scheme. They also don’t have to pay for the difference between what they paid for the shares and their new worth.
Company Share Option Plan
This type of employee ownership gives them the option to buy up to £30,000 worth of shares at a fixed price. Your employees won’t pay Income Tax or National Insurance on the difference between what they pay for the shares and what they’re worth.
Enterprise Management Incentives (EMIs)
These employee ownership schemes are used to give company management a large stake in your company. As long as your company earns £30 million or less a year, you can offer these employee share options up to the value of £250,000 in a three-year period.
The employee won’t have to pay Income Tax or NI if they buy the shares for at least the market value. If they’re given a discount on the market value, they’ll have to pay tax on the difference.
Enterprise Ownership Trusts (EOTs)
This type of scheme is different from the ‘direct’ schemes above. This is because it involves selling the majority of shares in your business to a trust who look after them on behalf of your employees.
EOTs are exempt from capital gains tax and have an income tax exemption of £3,600 per year on certain bonuses issued to all employees.
Now that we have a full picture of what employee ownershipschemes are, and the different models, it’s time to look at why they’re useful for SMBs. Other than it just being ‘the right thing to do’ the benefits of employee ownership schemes for SMBS are as follows:
1. Attracting and Retaining Good Employees
Lots of small to midsize businesses have trouble attracting and retaining valuable employees. But, employee ownership will give employees a stake in your business, which anchors them to it more than if they were just working there as an unattached worker.
Employee ownership will also attract new employees who want to have responsibility and a sense of ownership in the company they work for.
2. Buying Out an Owner
This is also a great idea if you’re looking to sell off your business in the future, and move on to other ventures. In fact, having an employee ownership scheme in place will allow you to hand it over to your employees. This might appeal to company owners who want to make sure the company falls in the right hands so that the company culture and values continue after they’ve gone.
This works especially if you go for an employee ownership trust system. This is where employees have the majority stake and you can either keep or sell your portion of shares when you decide to move on.
3. Shared Responsibility
Running an SMB by yourself can be quite challenging. By, with ESO, you’re not only distributing financial shares to your employees, you’re also giving them a say in how the company is run.
To add to this, the fact that the employees own a stake in the company means that their money is on the line if they don’t pitch in. There aren’t many motivators stronger than financial loss.
4. Raising Capital
Employees who own a stake in your SMB might contribute to the company to help it succeed. They may do this by buyingmore shares or taking lower wages in return for tax-free stock. All of this helps you raise capital.
5. Make Your Business Perform Better
This is one of the main reasons to have an employee ownership scheme for an SMB. If you want the full commitment and effort of your staff behind you as you try to grow your business, there’s no better reason than them literally being a part of the business.
Once you establish your ownership scheme, it’s a good idea to hold regular open forums for staff to discuss what needs to be done in each of their departments. Once they start to fully understand that they have a say in the way the business is run, the better information and advice you’ll receive from them.
Most of us have heard about the intention for economies to ‘build back better’ once we’ve made it through the coronavirus pandemic. Some people are now touting employee ownership as an integral part of this new world! Others have even suggested that it will help companies become crisis-proof in the future.
Employee Ownership in Wales
The Employee Ownership Wales team at Social Business Wales have said that employee ownership could revitalise and reinforce our economy. This would be the case particularly in Wales, where lots of small and mid-sized businesses operate.
The article makes it clear that businesses need to look to the future, making sure they’re equipped to be as resilient as possible for what’s to come. They need to start working as efficiently as possible, and an EO business model could provide just that.
Not only can this help businesses in the short-term, but it can also help to reset the wider economy. Experts in the field say they are expecting employee ownership to, therefore, increase over the coming months and years. It’s the smartest business model, for a number of reasons, which we’ve mentioned previously.
Employee Ownership in Scotland
This same sentiment was expressed in an article written by Scottish Financial News. This article agreed that the impact of COVID means that businesses need to hunker down and prioritise their financial resilience.
Employee ownership allows companies to do just that. This way, businesses can stabilise their current position whilst planning for future growth. They said:
“Holding a stake in the place you work creates a different mindset among staff – and I’ve heard throughout coronavirus how working to a common purpose has spurred innovation, performance and productivity.”
A recent survey asked employee-owned companies what their views were on the model, and 73 percent of them said they think it’ll ensure they see the COVID-19 crisis out. With EOs changing relationships between employees and employers for the better, it’s easy to see how this can have such a positive effect.
Obviously, these claims are predictions, and ones made by people who make their money in this sector, but their arguments are still convincing.
Today, we’ve discussed what employee ownership schemes are, and what benefits they can provide to SMBs. We’ve alsoshared some predictions on how this type of scheme could save businesses during crises like the coronavirus pandemic.
If you’re convinced that one of these employee ownershipschemes could benefit your business, then you could speak to a consultant and get the ball rolling. We hope this article spurs you to take action for the future of your business.
Thank you for reading, and no matter what you choose to do, we hope your business continues to succeed in these difficult times.
