If you’re worried about your business model crumbling under the weight of an economic struggle, such as COVID-19, it might be time to consider employee ownership.
There are a bunch of different business plans out there, but few of them are as game-changing as employee ownership. It truly flips the traditional model on its head.
If you want to learn more, you can swot up on some employee ownership and employee share scheme resources. In this post, we’re going to do the hard work for you, by explaining what employee ownership is, why it’s a good business model, and why it works especially well during an economic crisis like COVID-19. Let’s dive in…
Table of Contents
What is Employee Ownership?
To give you an idea of what employee ownership is before we get into why it’s a good model that works well in a crisis, here’s a little synopsis.
Employee ownershipis a scheme where every employee in a business has a stake in it. The employees get both a financial stake and a say in how the company is run. It involves changing the whole legal structure of your business so that employees can own a controlling stake in it. Limited companies tend to find this easier because it’s not too dissimilar to the way they’re already divided.
Employee Ownership Models
There’s a whole list of different employee ownership models, but the most popular ones tend to be those that receive significant tax breaks from the government. In the UK, the five schemes that are given tax breaks are:
- Share Incentive Plans (SIPs): employees get £3,600 of free shares every year and, if they keep them for five years, they pay no Income Tax or National Insurance on them. They also don’t pay capital gains tax when they sell them.
- Save As You Earn (SAYE): employees save £500 a month that they can use to buy shares at the end of their agreed contract (three or five years).
- Company Share Option Plan: employees can buy up to £30,000 of shares at a fixed price, and pay no National Insurance or Income Tax on the difference between what they paid and what they end up being worth.
- Enterprise Management Incentives (EMIs): these schemes give management a large stake in the company, offering shares up to £250,000. They don’t have to pay Income Tax or NI if they buy the shares at market value.
- Enterprise Ownership Trusts (EOTs): this is the only ‘indirect’ ownership scheme on this list, as it involves selling shares to a trust who look after them on the employee’s behalf. They are exempt from Capital Gains Tax and have an Income Tax exemption of £3,600 a year on certain employee bonuses.
So, those are all the types you need to know about for now. Ultimately, employees own a stake in the business, enjoy tax breaks, and are rewarded.
Pros and Cons of an Employee Ownership Business Plan
As much as we’d love to only sing the praises of employee ownership, there are always positives and negatives to any business plan. So, here’s a quick rundown of the main ones:
Pros of Employee Ownership
Tax breaks
In the UK, George Osbourne believed in the power of employee ownership, and introduced major tax reforms to make them more desirable.
We won’t get into what these tax breaks are, because we’ve mentioned them in the above section, but they are definitely a positive for using employee ownership. You’re more able to incentivise your employees with bonuses and shares, and it makes those incentives cheaper for you as a busines owner.
You don’t have to give up a controlling stake
If you’re worried about handing over a huge proportion of your business to your employees, don’t be. You can still keep a large proportion of shares for yourself, and relinquish a certain proportion to your employees. You can also make sure that your top-level managers are able to keep more shares equal to their level of input in the business.
Employees work harder
This is one of the key positives of setting up employee ownership. You always hear from people who use this model that their employees work harder, and they’re not wrong.
If your employees are just collecting a payslip every day, and have no monetary stake in how well the business performs, they will not work to their full potential. Being part of something bigger than themselves, and the business’ success personally affecting their take-home salary, will light a fire under any employee.
Staff involvement
Not only will your staff work harder, they’ll be given the chance to share their thoughts on how the business is being run. Creating an open forum for staff will give you access to all their ideas and issues, making you a more open and effective company.
Retain employees and attract new talent
There are people out there who want to be part of something bigger than themselves and would kill for the opportunity to be part of an employee ownership company. These employees will choose your business over others, will want to contribute to the business, and will become loyal staff members.
Cons of Employee Ownership
Share prices might not increase
In a situation where your business isn’t increasing its value, share prices will stay stagnant and all the incentives for employees will start to fall flat. This could demotivate your staff, you might lose some members, and you could start to struggle.
Expensive
There are certain legal, administration and establishment costs that come with changing your business’ entire structure. If you want to adopt employee ownership, you need to have some cash to invest in this change before you jump headfirst into it.
Shares can be diluted
If you start dishing shares out quicker than their value increases, you might start to dilute what they’re worth. Because every staff member is entitled to own shares, the more people you take on, the less the current employees’ shares are worth.
Why Employee Ownership is the Perfect Business Plan for COVID-19
We know these employee ownership models aren’t perfect and that if things aren’t going well it could make them less desirable. One thing they can do, however, is make it so your employees fight for your business.
If your employees have lots of money tied up in the success of your business, they’ll definitely fight harder for it. If employees only receive a pay cheque, they can get that anywhere and, if your business fails, they’re out of a job but the money they have is safe.
Of course, this is speculation, so it’s time to turn to a study conducted by Rutgers University and SSRS. It states that, compared to other businesses, employee owned firms were:
- 3-4 times more likely to retain non-manager and manager employees.
- 3 times more likely to retain staff, even when other businesses received funding through furlough and other payment protection schemes, and the employee owned firms did not.
- Much less likely to reduce employees’ hours or pay.
The study concluded that, from an economic perspective, businesses with an employee ownership model “kept considerably more money in employees’ hands—and in the economy”.
This study coincides perfectly with a survey from earlier on in the lockdown. It found that 73 percent of employee owned businesses believed their employee ownership model would help them through the coronavirus crisis because of its many benefits. These benefits include everything we discussed in the above section:
- Employees giving it their all to keep the business they are invested in afloat.
- Staff forums opening channels of communication that allow all issues the pandemic will have caused to be addressed.
- Employees will be less likely to book time off sick, citing the coronavirus as an excuse, than in other businesses.
- Money will be squirrelled away from all the tax breaks, and the staff will still get their bonuses regardless of how the economy is doing.
Basically, having a dedicated workforce that wants the best for their business is a game changer in any crisis. This is something that only switching to an employee ownership model can give you.
So, Will Adopting Employee Ownership Save me From Economic Turmoil?
In this post we’ve covered what employee ownership is, what the benefits are, and how those benefits have helped employee owned businesses survive the COVID-19 pandemic.
Setting up an employee ownership model, from creating a business plan to actually adopting one legally, takes time. Now might not be the best time to set one up, especially if your business won’t be able to grow and you don’t have the spare capital for the legal fees.
The best plan, for now, would be to keep employee ownership in mind for when the economy regains its composure. Once your business is back on level ground, set up an employee ownership model in preparation for any more economic crises that might come our way.
About Carson Derrow
