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The employee shareholder

A look at some of the benefits, as well as some of the associated practical considerations, for businesses which are considering bringing employees…

In this article we look at some of the benefits, as well as some of the associated practical considerations, that need to be borne in mind for businesses which are considering bringing employees into share ownership.

The rationale

Attracting, rewarding and motivating staff is a key factor for all types of organisation and employee share schemes represent an increasingly common and significant part of a company’s overall remuneration strategy.

Well-designed equity incentive or share option arrangements can be an important factor in attracting and retaining key personnel as well as helping to motivate staff by aligning the interests of employees with those of the shareholders of the company. They can also be used as part of a business succession planning strategy.

Encouraging wider employee ownership is something the government has been, and continues to be, keen to support and there have been a range of regulatory and legislative initiatives in recent years, some more successful than others.

Environmental and economic factors, such as the move from a manufacturing to service economy where the value of many businesses is in the human capital, have also contributed to the upsurge in employee share ownership.

There have also been a number of reports and surveys that have found that a positive correlation between firms that have brought employees into the ownership and improved performance and customer service.

Design and implementation

The key to any successful employee share scheme, which can encompass a wide range of potential alternatives from option schemes based around an exit or succession to simply issuing shares to employees, lie in the careful design and implementation of the arrangements in order to deliver the requisite benefits as well as the effective communication of the benefits to the relevant staff.

How the proposals are communicated is often as important, if not more important, than the actual proposals themselves. In order to deliver the desired benefits for all parties, both the current shareholders and the employees to whom shares (or share options) are to be offered must appreciate the potential rewards and benefit of share ownership and “buy in” to the proposal.

The first step is therefore to determine whether becoming co-owners is something that the employees actually want. This point is one that is sometimes overlooked. There is no point offering staff a share in the business if they believe it is simply a token gesture that will not actually deliver any tangible benefit or reward.

Whilst there can be a psychological benefit in granting employees shares or share options, making them feel valued, in most private companies where there is no market in the shares the only real economic return is likely to arise on a sale (or listing) of the company.

By way of example, if a family business grants employees share options that can only be exercised on a sale of the business and there is no underlying plan or objective to grow and sell the business on the basis it will be passed on to other family members such as the children of the owner, then an ’exit only’ share option scheme is unlikely to actually incentivise or motivate staff. In these circumstances, providing staff with shares on which annual dividends can be declared (on a potentially more tax efficient basis than say the payment of bonuses) would perhaps be more attractive and relevant to the staff.

As indicated above, share ownership does allow for employees to be able to receive dividends and share in profits but the ability to receive such dividends are dependent upon the company’s reserves and business needs and therefore will usually remain at the discretion of the owner(s). Care is therefore required not to over emphasise this benefit if, in practice, dividends are likely to be infrequent or of very modest sums as this could undermine the whole purpose of the arrangements.

Alternatively, an annual cash bonus scheme may be more attractive to the employees and may offer a degree of lock in, though not perhaps as much the issue of shares or share options would. Unlike dividends, bonus payments and other cash incentives do not have to be matched by available distributable profits but still have to be funded which is another attraction, all things being equal, of the use of share incentives…. READ FULL ARTICLE