Why business owners should consider offering their employees a stake in their business

Dave Paterson, Partner in the Corporate team at Blacks Solicitors, discusses why business owners should consider offering their employees a stake in their business.

Why business owners should consider offering their employees a stake in their business

Dave Paterson, Partner in the Corporate team at Blacks Solicitors, discusses why business owners should consider offering their employees a stake in their business.

The COVID-19 pandemic has had a significant impact on businesses across the UK over the past year. With the current strict lockdown restrictions, the ongoing furlough scheme, and a significant rise in unemployment levels, it’s a crucial time for business owners to innovate. 

Business owners who invest in a fair and viable Share Scheme to give employees a stake in their business will not only incentivise their workforce, but also drive revenue. Numerous benefits will be returned which are particularly crucial during times of hardship, such as a global pandemic. 

Why a share scheme?

Employees owning shares in the company they work for isn’t a new concept. In fact, in 1950 the ownership of the John Lewis Partnership was passed to trustees to benefit those who worked for the business. 

Share Schemes offer numerous benefits to business owners and employers, from achieving targets that are profit or revenue driven, and giving key employees the opportunity to achieve certain benefits, to sharing profits. In fact, the whole business is likely to benefit.

Available share schemes

There are many Share Schemes that employers can create and implement. These include Enterprise Management Incentive Schemes, Share Incentive Plans, Employee Benefit Trusts, and Employee Ownership Trusts. 

However, every business should do its research before selecting a Scheme, and seek legal and tax advice on its implementation as each one has its own unique advantages and criteria. Business owners must make sure the Scheme they select is the right one for their business and employees. 

Attracting and retaining talent

Even though the COVID-19 pandemic has caused significant economic challenges, talented individuals continue to be in high demand across various industries. Business owners must offer compelling reasons to key and talented employees to either join, or stay at the company. It can otherwise be challenging to attract and retain the right people. 

Giving employees a stake in your business and offering them ownership opportunities will make them feel valued, encourage them to contribute to the company’s growth, and provide enhanced job security. 

Alternative benefits like employee ownership, that other businesses don’t offer, are also a great way to stand out from the crowd and attract new employees.

The Share Scheme chosen should offer flexibility and benefits which will work for the specific people that a business is trying to attract and retain. For example, Share Incentive Plans (SIPs) offer business owners and employees the chance to collaborate and decide which elements of the Scheme to implement in a given tax year and the level of awards to offer.

Increase organisational performance

Business owners should consider different methods of mitigating the ongoing impacts of COVID-19, and optimising the performance of their company if they are to survive the pandemic. 

Giving employees a stake in the business will automatically make them more invested in its profitability and success. Their interests and objectives will be aligned with those of the company and they’ll be incentivised to work hard and improve their performance, which will in turn allow everyone to reap greater rewards, including profitability.

Conserving funds

Offering employees compensation and benefits through stock and company ownership, rather than cash, will support a business in conserving funds for necessary expenses in other areas. This is particularly important when funds are tight, particularly as some businesses battle with the economic impacts or COVID-19, or if money is finite, for example with a startup company.

Many Share Schemes offer generous tax advantages which can help conserve funds. Employee Ownership Trusts (EOTs) offer Income Tax exemption of up to £3,600 per tax year on certain bonuses, while employers who select Enterprise Management Incentive Schemes (EMIs) should receive Corporation Tax Relief on the exercise of the share options.

Succession planning

An increasingly common exit route for business owners is by way of sale to management and/or employees, and Employee Share Schemes are an attractive way of helping facilitate such an exit. 

There can also be tax incentives associated with such succession routes, for example if a majority shareholding is sold to an EOT. If the relevant criteria are satisfied, business owners can benefit from a complete exemption from Capital Gains Tax (CGT) on any gains made. 

Employee gains

There are a huge range of benefits, not only for business owners, but for employees that come alongside being given a stake in the company. 

It becomes much easier to save for retirement, trust in management increases, and job security is greater, therefore reducing the impact of stressors, particularly when the future of the economy and job market remains uncertain. 

Certain Schemes such as EMIs and SIPs are really beneficial for employees. Individuals can hold unexercised EMI options over shares worth £250,000. If shares are left in a SIP until the company is sold, employees won’t have to pay any CGT on their disposal.

Dave Paterson
Dave Paterson

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