The pandemic brought about several things – from redundancies to rehires. However, slowly but surely, businesses are starting to flourish again. Read on to find out why businesses have been applying for employee-ownership schemes post-pandemic.
For some businesses, employee-employer trust was tested during COVID-19 due to an increase in job losses and the Government’s rollout of the furlough scheme.
To rebuild trust and expand the workforce post-pandemic, UK companies are now having to go that extra mile and launch initiatives that they may not have considered a year ago, such as setting up an employee ownership trust.
According to the WRCEO’s White Rose Survey, the employee ownership sector grew from 170 businesses in June 2020 to 730 in June 2021, a 30% increase on last year, making 2021 a record year for employee ownership.
So, what is employee ownership? And why have different employee ownership scheme plans risen in popularity? In this article, we’ll discuss the advantages and disadvantages of such schemes and predict whether or not these business models are here to stay.
What is employee ownership?
Employee stock ownership, or employee share ownership, is a business model whereby a company’s employees own shares in that company and take responsibility for its success.
Employees typically acquire shares through an option scheme and seek advice from employee ownership advisors to implement the strategy. There are two ways employees can own part of their company under these schemes:
- Direct employee ownership: employees hold shares in the company directly and can purchase them at a tax-efficient rate.
- Indirect employee ownership: the company is owned by an employee share ownership trust on behalf of the employees.
There are a number of different types of employee ownership schemes, but the ones with tax credits tend to be the most popular. Some of these include:
- Save as you Earn (SAYE)
- Company Share Option Plan (CSOP)
- Share Incentive Plan (SIP)
- Enterprise Management Incentives (EMIs)
- Employee Ownership Trust (EOT)
Why has there been an increase in employers applying for employee-ownership scheme plans?
To attract new staff and retain existing staff
According to new figures, there has been a dramatic increase in the number of UK job vacancies. This current ratio of jobless people to open jobs — which rose to 4.1 at the peak of the coronavirus crisis — stands at 1.45, a figure that is below its pre-pandemic level and lower than any other point in 40 years.
With this current climate in mind, there is a growing need from employers to not only attract new staff but to retain existing staff members. Employee ownership schemes are mutually beneficially for employees and employers, help to solidify trust and reinstate an overarching goal between two parties – success and financial gain.
To motivate employees to work efficiently
In addition to profitable outcomes, ESOPs gives employees greater autonomy within a business, encouraging them to make key decisions about certain aspects of the business.
Studies show that 81% of employees work harder when they feel valued. Employee-owned schemes can, therefore, can help to foster a workplace where individuals feel considered and appreciated and will strive to work harder for the business.
After all, if an employee has a vested interest in helping the company succeed, they’ll be committed to trying their hardest and more reluctant to go elsewhere.
Securing the future of the business
During the pandemic, the number of people retiring soared as many benefitted from their pensions and retirement packages more than their redundancies pay-outs.
As a result, business owners may have turned to employee ownership schemes as a succession solution, allowing companies, job roles, and brands, a good chance of continued independent existence following the owner’s retirement.
Once an employee has shares within a business, the responsibilities within the company are shared amongst those within the trust and success or failure is no longer the sole responsibility of the owners.
What are the risks of running an employee-owned business?
Despite the numerous advantages, there are some disadvantages of employee share ownership schemes that businesses and workers should be aware of.
The start-up costs can be expensive
Employee Ownership Share Plans are quite complex to administer, more so than cash incentive schemes and are much more expensive to deliver. The short-term costs of drawing up the scheme, as well as the long-term costs of keeping records and managing the scheme, should all be taken into consideration before applying.
Dilution of control
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 risk losing control of your business. Nevertheless, there are practices in place – such as making sure you have control of 75 per cent of the voting shares – that can enable owners to maintain a majority.
Will you consider employee-ownership for your business?
In this post, we’ve discussed what employee ownership is, why there has been a rise in ESOP schemes, and the pros and cons to consider before setting up such schemes.
According to the Employee Ownership Association’s Impact Report the “impact of increasing employee ownership in the UK will lead to greater economic stability and an economic model” and bring about “more dynamic communities, higher levels of employment, and unprecedented levels of innovation, positioning the UK centre stage in a global competitive market.”
It’s difficult to predict what’s going to happen over the next decade, but when evaluating current trends and historical data, employee-owned businesses look as though they’re set to continue growing in popularity.