Is setting up an employee share ownership plan a good idea?
Employee share ownership plans are an interesting idea, but do they actually work, or are they more trouble than they’re worth?
A desire to share the proceeds and responsibility of the success of your business amongst its employees was the genesis of the employee share ownership scheme.
The scheme has been implemented in many companies across the UK, and people are starting to hear more and more about share incentive plans. The buzz around the idea probably led you to this article after thinking, “if other companies can do it, would it work for mine?”
Today, we’re going to help you find that out by covering what employee share ownership plans are, the different types you can choose from, and all their advantages and disadvantages. We’ll then come to a conclusion on whether they’re a good idea or not, so stay tuned if you want to find out more…
What is an employee share ownership scheme?
Employee share ownership plans (ESOP) give employees the opportunity to acquire shares in their company to the benefit of both the company and its employees. There are two ways for employees to own part of the company:
Direct employee ownership: employees hold their shares in the company directly, and can obtain them at a tax-efficient rate.
Indirect employee ownership: the company is owned by an employee share ownership trust on behalf of the employees, making the employees indirect owners.
ESOPs are the most popular form of employee ownership in the UK, with over two million employees holding shares or options through one of these schemes. In fact, eight out of ten FTSE 100 companies have employee share ownership plans.
The reasoning behind ESOPs is to build strong links between company profits and the labour making the profits. If the workers have a direct incentive to help the business succeed, the better the company does and the more money they get in return.
What are the different types of share ownership schemes?
Now that we’ve given you a general idea of what employee share ownership schemes are, we’re going to quickly cover the different types, which you can look into further yourself if you need more information on them. All these types are considered tax advantaged schemes, as employees don’t have to pay Income Tax or National Insurance on their value.
1. Save as you Earn (SAYE)
With this employee share option plan, the business offers its employees an option price which can be up to 20 percent lower than the market price. Those employees who join the scheme can select a contract period anywhere between three and five years, where between 5 and 500 pounds of their post-tax salary is saved.
At the end of their chosen contract period, the money they’ve saved is used to buy shares at the initial option price they were offered. If the share price of the company has gone up, they make money off the excess. If the share price has decreased, they don’t lose any money, they just get all their savings back in full.
2. Company Share Option Plan (CSOP)
This employee share ownership scheme allows each employee to buy shares that are worth up to £30,000, but with no discount on the market value, like SAYE schemes allow. It usually takes three years before these options can be taken up. As this is a discretionary option plan, employees who otherwise wouldn’t be offered shares in the company are able to buy them.
3. Share Incentive Plan (SIP)
This plan has more options than the others, as the company gets to choose whether to offer free shares, partnership shares, matching shares or dividend shares:
Free shares allow the company to gift up to £3,600 worth of shares to each of their employees annually;
Partnership shares allow employees to buy shares of up to £1,800 from their pre-tax salary annually;
Matching shares can be matched to each partnership share an employee owns for the same amount.
Dividends from previous years can be used to purchase new shares annually.
4. Enterprise Management Incentives (EMIs)
If your company has assets lower than 30 million pounds, and less than 250 full-time employees, you can offer shares up to £250,000 per employee. The main purpose of this employee share ownership scheme is to allow smaller companies to attract and retain valuable workers, without having to pay them a huge salary.
The main benefit for the employee is that they don’t have to pay National Insurance or Income Tax on the shares. So, they actually make more money than if you paid them a big wage of the same value.
5. Employee Ownership Trust (EOT)
Employee share ownership trusts are an extension of the conventional employee benefit trust. For this scheme to be viable, an EOT must hold a controlling stake in your company and share the benefits equally amongst all your employees.
The added benefit of using a trust for your share scheme is the Income Tax relief of £3,600 per tax year on employee bonuses. This provides additional compensation for them outside their usual wage packet.
What are the share ownership scheme advantages and disadvantages?
Okay, so now we have a pretty good idea of what ESOPs are for, and the differences between each type. But what are the overall employee share ownership advantages and disadvantages for both you, and your employees? Let’s take a look…
ESOP advantages
This article is mostly for companies looking to implement these schemes, but it’s important to list the advantages for your employees as well, considering most of these schemes are designed to keep your employees happy and encourage them to work hard.
Employees work harder
Empirical research studies have proven that, when employees have a stake in the company they work for, the business performs better than it would without a share scheme. A common focus on the company’s share price fosters a community of workers who try their best to get that number up, improving theirs and their co-workers’ wealth.
Retaining employees and reducing absenteeism
As we saw in the last section, many of these ESOPs are specifically designed to retain employees and encourage new talent to join the company. After all, if an employee has a vested interest in helping the company succeed, they’ll be more reluctant to go elsewhere and go back to ‘earning what they earn’.
This may completely alter an employee’s mindset. For those who take time off frequently, or don’t try as hard as they should because they’re just getting through the day to earn their wage, will think twice if it affects their own pocket.
Attracting new talent
New talent may choose to come to your company, as most people want to be a part of something bigger than themselves. The remuneration packages and the potential to earn extra cash that ESOPs offer, all free from National Insurance and Income Tax, is an enticing line to add to your job adverts. It also builds a sense of community from the get-go, which is especially attractive to younger workers.
Includes employees in company decision making
Some companies try their best to include their employees in their decision making. That said, most make decisions for their employees and don’t ask for their input.
There is a lot of valuable information you can get from employees who often know more than the head of the company about problems with the way certain aspects of the business are running. If your employees are on an employee share ownership plan, they will be able to take part in annual general meetings and share their valuable insights on the way the company is running.
Can save money on other incentives
Many employees may choose a company based on their commission, bonuses, and pensions. Instead, an ESOP can replace a lot of this, potentially requiring less money from the business, but still encouraging the team to work hard.
ESOP disadvantages? 
Despite the numerous advantages, as with everything in life, there are a lot of disadvantages of these employee share ownership schemes you need to be aware of.
Too expensive
ESOPs are quite complex to administer, more so than cash incentive schemes and are much more expensive to provide. The short-term costs of drawing up the scheme and getting it approved, plus the long-term costs of keeping records and managing the scheme, may eat into your funds more than simple cash incentives.
Unpredictable
Because share prices are volatile and can fall quite easily, the size of the reward for your employees can be unpredictable. This can have a negative effect on job retention and company morale.
Despite this, most employee share ownership schemes have a ‘no-lose’ failsafe baked into them. So, at worst, the employees won’t see an increase on their investment if the company fails to progress, but won’t see a decrease either.
Dilution of ownership
As you issue more shares in your company through an ESOP, each share you own equals a smaller percentage of the company and you could lose control of your business. If you want to avoid this, you must make sure you have 75 percent of the voting shares.
So, is employee share ownership a good idea or not?
In this article, we’ve provided an employee share ownership scheme definition, explained some of the types, and done a run-down of the pros and cons of the scheme. So, are these schemes worth investing in?
There are a few risks involved in creating one of these schemes, and they cost a bit of money to set up. But, if you can afford to set one up and manage the number of shares you have to maintain control, they are definitely a good investment.
The volatility of shares shouldn’t be too much of an issue, as your employees should work harder and increase the valuation of your company. The benefits of retaining key employees, attracting talent, and just the overall community spirit fostered around growing your business far outweigh the risks.
At the end of the day though, it’s entirely up to you. Hopefully we’ve given you pause for thought on whether you want to employ one of these schemes in your company or not.
