- Interest in employee ownership and share schemes is increasing from employees.
- These schemes can be a great motivation and engagement tool by giving employees greater involvement in the business.
- The risk of demotivating employees can be mitigated by granting options in most share schemes, so if the value goes down they incur no loss.
The popularity of employee ownership in business is steadily increasing; statistics from the White Rose Centre for Employee Ownership found that as at June 2022 there were 1,030 employee-owned businesses in the UK. This was an increase of more than double the 2020 figures. HM Revenue and Customs’ (HMRC) annual report on share schemes, published in June 2022, found that the total number of organisations operating a scheme in the tax year ending 2021 was 16,330. This was an increase of 6% on the previous year.
But do employee ownership and share schemes bring benefits to the employer in the form of increased employee engagement and motivation? And how much value do employees place in holding a stake in their organisation?
Employees can hold equity through direct employee ownership, where they become individual share owners or through indirect employee ownership where shares are held collectively on their behalf, usually through an employee ownership trust (EOT).
Provided certain criteria, such as having a majority stake, are met and maintained, an EOT can provide an income tax exemption on bonus payments. This can provide value to employees, as they are motivated by the idea of receiving a bonus if they work hard to meet targets.
James de le Vingne, chief executive of the Employee Ownership Association, says: “Up to £3,600 can be paid without incurring any income tax and all employees with at least 12 months’ service are entitled to benefit. When employees buy or are gifted shares via the model, they can benefit from a dividend.”
One of the most well-known fully-owned by staff EOTs is the John Lewis Partnership. Earlier this year, reports implied that chair Sharon White was considering changing the employee ownership structure after 70 years, however, she has since ruled this out. This resulted in a vote of confidence from employees, suggesting they value the current ownership structure and continue to be motivated to boost profits through hard work, which benefits the business.
Returns and value
Share schemes can hold value for employees as they can provide a financial reward for their hard work and dedication through any rise in the shares’ value. They can increase a person’s financial wellbeing and resilience, and also provide a sense of ownership and involvement in an organisation’s success.
Schemes can also benefit employers as they can increase employee engagement, loyalty and motivation, and help to retain talented staff, as employees are more likely to be invested in the success of the organisation if they have a financial stake, says Murray Tompsett, head of ProShare.
Where arrangements such as share incentive plans (Sips) and sharesave schemes are available within an organisation, these must be offered to all staff equally, whereas share option plans and enterprise management incentives are discretionary and participants are chosen by the business.
Sips allow employees to buy shares of up to £150 per month through their salary, which the employer can match and give two shares for each one purchased, explains Tompsett.
The aim of a Sip is that shares purchased on employees’ behalf will increase in value and after five years, they can opt to sell these free from tax or national insurance (NI) deductions.
“Given that the shares are purchased from gross pre-tax salary and employees’ contributions are often matched by the employer, there are opportunities for healthy returns,” he explains. “However, staff cannot request a cash return,” says Tompsett.
Employees can also invest in shares via a sharesave scheme with a 20% discount on the share price as at the invitation date, and after three or five years can buy shares at the discounted price, says Jennifer Rudman, industry director of employee share plans at Equiniti.
“A [sharesave scheme] allows participants to save up to £500 a month from their net salary,” explains Tompsett. “This will then be used to purchase shares at a price set at the start of either three or five years. The aim is that the price will rise, allowing participants to buy at the cheaper amount and either hold them until a later date or sell them at the higher price.”
Rudman adds: “If the share price doesn’t move, employees make 20% at the end of the contract. If it rises during the savings period, the return will be greater. If it falls below the option price, employees do not lose as they will receive their savings back.”
After shares are released, employees who wish to continue holding these can do so through employer or employee-sponsored nominees, share certificates, stocks, an individual savings account (Isa), investment and trading accounts, and self-invested personal pensions.
Owning a share in a business can be a great motivation to help its value rise. Employees should be able to see any growth linked to their performance and the financial rewards bring a further tangible motivational tool.
“Aligning employee and shareholder goals provide motivation and boost employee engagement, financial wellbeing and staff retention,” Rudman says. “As sharesave schemes continue to mature and provide gains, there will be renewed focus on informative maturity communications as well as financial education.”
The ownership stake at employee-owned orgaisations may drive staff to put in more individual effort, which will be seen in productivity levels and the bottom line.
“This then results in higher levels of financial performance by staff, with new employee-owned businesses reporting an immediate increase in profits, says De le Vingne.
Employee share schemes and the opportunity to hold equity in an organisation are clearly valued, and are often promoted as a key tool in the recruitment process. This then follows through to support staff retention and motivation.