M any hauliers would acknowledge that drivers become motivated by sharing
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in the wealth created by their ability to deliver the goods on time. This simple principle can be applied to employees from directors to the maintenance workshop. As well as creating a happier workforce, employee share ownership can add value to the company.
For the owners of a business to afford the employees a slice of the company, it must be with the aim of making the pie bigger for everyone. The impact of a broad base of employee share ownership is impossible to measure. But studies in both the US and UK indicate that companies which operate employee share ownership perform better and gain advantages: US statistics reveal that companies which allow wide employee share ownership have experienced • growth on average 11% faster than other companies; • share prices of publicly quoted US companies with more than 10% employee ownership have risen faster than most market averages in recent years; In a survey of UK companies • three out of four management teams believed that employee share ownership had a positive effect on productivity; , • two-thirds of companies with employee share ownership plans felt that they had become more competitive because of the effect on staff motivation; • increased awareness by employees of the need for the company to make profits makes the workforce more understanding of commercial realities, particularly if share ownership is complemented by communication with employees on the company's financial performance; • it can lead to more commercially realistic union representation; • operating share schemes can be a tax efficient attraction when recruiting senior employees; • because tax efficient share schemes often require shares to be held for a number of years before their value can be realised, they can assist the company in reducing employee turnover at all levels; Employee share incentives can also have particular advantages in a management buyout. Offering the employees a stake in the buyout can gain the support of the workforce for the management's plans. This support can prove an important or even vital benefit to the management team, for example where the seller is concerned to know that employees will be well looked after following the buy-out.
This can often be the case in the buy-out of a family-owned haulage company or on the privatisation of local authority or state-owned businesses or where there is a competing external bid for the company.
Having strong support from the workforce can influence the seller's decision as to which offer to accept and can even dissuade the external bidder from proceeding in the face of a workforce which is hostile to its bid. Including the employees in a buy-out can also help to dispel the "them and us" attitude of staff to the management team. How should employees participation be structured? You can simply offer shares to employees for purchase, but some employees may not be able to afford the purchase price. Also, if shares are simply offered for sale directly to employees, neither the employees nor the company will obtain the tax benefits available under Inland Revenue-approved share schemes. These schemes are designed to allow employees to receive shares either free or at less than market value without income tax liability on the benefit they receive. There are three such approved schemes: • profit sharing share schemes; • SAYE share option schemes; • executive share option schemes.
Despite the apparent merit of allowing employees to become shareholders, and although the approved schemes offer tremendous tax efficiency in feeding shares to employees, until relatively recently few private companies had introduced such schemes. There are two reasons for this.
Paper value
First, the absence of a ready market for shares in a private company leads employees to regard their shares as of paper value only, with no realisable cash value. Second, the owners of private companies are reluctant to allow shares to pass into employees' hands: those employees may pass their shares to family or to other third parties or may retain the shares after they leave the company's employment. If the shares are no longer in the hands of current employees they cannot act as an incentive, By using an employee share ownership plan "ESOP" both of these problems can be overcome. The structure of an ESOP is very simple and consists of: • a discretionary employee benefit trust— the ESOP trust—which acquires and holds shares in the company; and • one or more mechanisms for distributing the shares from the ESOP trust to employees which can include the Inland Revenueapproved schemes referred to above.
An ESOP can overcome the problems by creating an internal market for the shares. Employees who want to realise part of their investment can sell their shares to the ESOP trust which can warehouse those shares for distribution to current or new employees.
At the same time, the articles of association of the company can be drafted so that employees can only sell their shares to the ESOP trust, and those who leave must sell their shares to the ESOP trust. In this way, the company can be sure that the shares will always be held by current employees.
The use of an ESOP can also be highly tax efficient. Contributions made by the company to an ESOP trust to buy shares in the company are deductible in calculating the company's corporation tax liability.
Given the promise of added value and a happier workforce, every company, whether listed or private, should consider introducing employee share incentives.
IT Tony Randle Partner in the commercial division of legal firm Dibb Lupton Broomhead'