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Sharing the rewards

20 October 14

The incentives and advantages of all-employee share ownership schemes, as HM Treasury consults on a possible new shareholding

by Carole Leslie

Employee ownership remains high on the agenda. We have seen a raft of measures stemming from the Nuttall Report crystallise into policy, and both Westminster and Holyrood Governments are committed to increasing the number of employee-owned businesses in the UK. The Employee Ownership Association is aiming for 10% of GDP to come from the sector by 2020, and Co-operative Development Scotland, the arm of Scottish Enterprise tasked with supporting co-ownership in Scotland, aims to increase the number of Scottish based employee-owned businesses tenfold.

Share ownership is a key element of employee ownership, but there are some misconceptions: first, that shares are the preserve of the senior executive team, and secondly, that share schemes are complex and difficult to implement. HM Treasury has launched a consultation on the establishment of a new employee shareholding vehicle that will address these two issues. Is this required, and is legislation the way to promote employee ownership?

Structures

Rodger Cairns, partner with Shepherd & Wedderburn and recognised as one of the UK’s leading share scheme experts, is passionate about the benefits of all employees having a stake in the business in which they work. He sees this consultation as an encouraging development.

“There exists already a suite of different structures available to companies looking to implement a share scheme. The key is in finding the solution that fits with the business, its long term aims and then communicating the plan to the employees,” observes Cairns, who is seeing an increasing interest in broad-based schemes.

“Tax effective share schemes can be good for the employee and good for the company. If the Government’s consultation process leads to the creation of a straightforward 'vanilla' mechanism that is easy to implement and administer and can be used to hold and distribute shares – with no impact from capital gains tax, stamp duty, inheritance tax and so on – then I can definitely see the attraction. One of the reasons share incentive plans (SIP) are so popular amongst smaller companies is that the forms and model rules can be downloaded from the HMRC website. It’s an easy plan to establish and the tax advantages are valued.”

However, tax effective remuneration has suffered from some bad press recently because of a few high profile tax avoidance cases. This has had a disappointing impact on genuine employee engagement schemes.

“The result is that HMRC is wary of avoidance, and this brings a host of safeguards and checks that inevitably mean that any new vehicle with tax benefits is likely to be tightly controlled”, Cairns continues. “And of course, this then adds complexity to the implementation process. This consultation suggests that HMRC is considering an 'off the shelf' scheme. This could be a good addition, although, as ever, the devil will be in the detail.”

Benefits

Cairns is unequivocal about the benefits of implementing all-employee share schemes: “Why not include all employees? Executive schemes have their place, but in most companies the engagement of all staff is critical to success. A properly designed and implemented share scheme raises awareness of overall business performance, and can prove an effective mechanism for aligning an organisation’s people with its corporate goals. It would be difficult to find a listed company that doesn’t have some form of employee share ownership, and many private companies are following suit. Shares remain a key tool in attracting talent, and a share-related incentive scheme is now expected as part of the standard remuneration package.”

Employees are benefiting increasingly from their shareholding as the economy emerges from recession. HMRC reported that the tax relief on plans increased by 45% last year. The exercise of company share options saved employee taxpayers £840 million in 2012-13.

The business benefits are proven. A study by Loughborough University, published in 2012, found that almost a third of employees felt more motivated by participating in an employers’ share scheme, and 70% reported that they were more likely to consider the impact of their actions since becoming shareholders. There are wider benefits for employees: nearly 60% of staff reported that share ownership had given them a greater level of knowledge and understanding of how they could manage their own money.

Is implementing a share plan the key to employee engagement? Not on its own, according to Cairns.

“Communication is critical to the success of a share scheme. The benefits begin when people understand how the arrangement works, and how the contribution they make in their daily work impacts on business performance. The importance of investing time in communication, both at the point of launch and throughout the business year, cannot be overstated.”

Campaign

Sarah Deas, chief executive of Cooperative Development Scotland, is optimistic that legislative changes will have some impact, but sees lack of awareness as the biggest obstacle to wider adoption of employee ownership models.

“We are currently running a campaign, 'Successful Succession', with the aim of raising the profile of employee ownership as an exit option for business owners”, she reports. “We are only four months in and already companies have come forward to explore the model, with several starting the transition process. It’s a model fast gaining traction, for startups as well as established companies.”

Deas believes that law firms have their part to play. “I’m tremendously encouraged by the interest and enthusiasm that now exists in the legal profession. More legal advisers are talking to their clients about employee ownership. The step change will come.”

Carole Leslie is a specialist adviser with Co-operative Development Scotland
For further information visit www.cdscotland.co.uk or call 0141 951 3055. Follow CDS on Twitter @cdscotland or look at the blog www.cdsblog.co.uk
The final event in the CDS Expert Briefing programme for lawyers and accountants will be on the topic of governance in employee owned businesses. This will take place on 5 November 2014 on 8.30am at Santander’s Auditorium, 301 St Vincent St, Glasgow. The session will be led by Chris Kerr and Craig McKerracher of Harper MacLeod, with a contribution from Professor Nick Kuenssberg, non Executive Chair, Scott & Fyfe. Email Carole.Leslie@cdscotland.co.uk to reserve a place.
As part of the CDS Successful Succession programme, there will be a visit to Stewart Buchanan Gauges on 22 October 2014. For more information click here

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Sion Whellens

Monday October 20, 2014, 09:22

Perhaps we should be looking at a UK version of Italy's Marcora Law, which has been highly successful in promulgating new employee owned coops since 1985. Roughly, it allows groups of redundant workers to roll up 3 years' forward unemployment benefits to provide capital to start new coops (usually buyouts), and provides additional potential capital from a 3% hypothecated levy on the profits of existing coops.

Non-transferable par value shares can be a useful element, but an element of common ownership underpins most durable and successful worker coops.