Why you should consider giving employees a stake in your business

Share schemes are a great way to boost motivation and attract and retain key talent, argues Dave Paterson

Why you should consider giving employees a stake in your business

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

There are many reasons employers should consider offering employees a stake in the business, not least because share schemes are a fantastic way to incentivise, reward and retain key employees. Whether it’s achieving targets that are profit or revenue driven, giving key employees the opportunity to achieve certain benefits or sharing profits with the team, the whole business will reap the rewards.

There are many share schemes that employers can create and implement, including enterprise management incentive (EMI) schemes, share incentive plans (SIPs), 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 adoption and implementation, as each one has unique advantages and disadvantages.

Attracting and retaining talent

No matter the industry, talented individuals are in high demand. Without businesses offering considerable reasons to either join, or stay, it can be hard to attract and retain talent.

Giving employees a stake in your business and offering them ownership opportunities will make them feel as if they are a valued part of a business and encourage them to stay and help build your company. Alternative benefits like employee ownership, which other businesses don’t offer, is also a great way to stand out from the crowd and attract new employees.

The share scheme chosen should offer flexibility and benefits that will work for the specific people your business is trying to attract and retain. For example, SIPs offer you and your 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.

Increasing organisational performance

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

Conserving funds

Offering your employees compensation and benefits through stock and company ownership, rather than cash, will help your business conserve funds for necessary expenses in other areas. This is useful if your organisation has finite money (for example, if you are a start-up).

Many share schemes also offer generous tax advantages, which can help you when it comes to conserving funds. Employee ownership trusts (EOTs) offer income tax exemption of up to £3,600 per tax year on certain bonuses. If you’ve selected an EMI and the relevant criteria are met, you will 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 you sell a majority shareholding in your company to an EOT. If the relevant criteria are satisfied, you can benefit from a complete exemption from capital gains tax (CGT) on any gains made.

Employee gains

It’s not just businesses and their owners that benefit from employee ownership. There are a huge range of benefits for employees that come alongside being given a stake in your workplace. It becomes much easier to save for retirement, trust in management increases and job security is greater, therefore reducing the impact of common stressors.

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 an SIP until sold, employees won’t have to pay any CGT on their disposal.

Also, employees who own shares via an EOT can benefit from an income tax exemption on bonuses of up to £3,600 per tax year.

Dave Paterson is a partner in the corporate and commercial team at Blacks Solicitors