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Why Employee Ownership Day 2020 is more purposeful than ever

Employee Ownership Day 2020

We look at why the employee ownership business model is appealing as employers seek to navigate a ‘new normal’

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Liz Hunter

Director of Equity Reward, People Services, Tax

KPMG in the UK

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As companies seek to transition through the impact of COVID-19, we identify aspects of employee ownership that can help employers formulate a sustainable response. How can they unite the workforce, reward fairly but save cash, and secure the future of the business?  

Uniting the workforce behind a common for-profit purpose

A striking feature of the global response to COVID-19 is how the immense challenges have been met with collective ambition and purposeful drive to overcome the impact. From unique collaborations on research and development to creative pivoting of services activity and trading production to meet new needs on an accelerated timescale, the innovation has been inspiring.

‘Necessity is the mother of invention’ but how might employers harness that momentum as part of the new business as normal? We can look towards the employee ownership community, in which the prevailing culture is distinctly purpose-led.

When a business transitions into employee ownership it can do so in various ways (see our - fact sheet to find out more). A common feature, however, is that the company’s founders or existing shareholders often document guiding principles setting out the purpose, values and ethos to which the business and its officers and employees are to abide and which should shape decision-making in good times and bad, in perpetuity.

A similar approach is found in many family business constitutions and is, perhaps, a reason why some family businesses gravitate towards employee ownership when it’s no longer possible to hand over to next generation family members.

Saving cash while rewarding fairly

Cashflow, liquidity and financial resilience are of paramount importance at this time.  Basic pay and profit-share bonuses (even if qualifying for tax-free treatment under the Employee Ownership Trust controlled company legislation) may therefore be placed under stress.

There may also be greater scrutiny, particularly if central government support has been drawn upon, of how reward is distributed throughout an organisation and recognition that its ‘key’ people are not just those in the C-suite.

Equity may therefore become a helpful component of remuneration to share more widely amongst employees. The appropriate type of equity incentive arrangement(s) will depend on the facts and circumstances of each business. The company might already operate a discretionary plan for senior management but perhaps now is the time to further cascade equity participation.

For qualifying, larger, employers the Share Incentive Plan (SIP) offers a way to provide firm-wide colleagues with up to £3,600 worth of Free Shares tax efficiently each year, without employees having to meet any cost. Awards can be made contingent on business performance and offer a potentially tax-free return as a foundation level reward across an entire workforce, to recognise continued loyalty and value add contribution at a time when cash pay may not be sustained in the manner originally envisaged (Our SIP - factsheet sets out further details).

A review of flexible, cost-effective, desirable benefits and communication of total reward might also be matters to have on your go-forward agenda. 

What’s the exit strategy?

Employee ownership is one of several approaches to consider when thinking about ownership succession. Shareholders are wise to think about alternatives to assess the most appropriate course of action to meet their objectives.

When weighing up choices, some of the benefits of the employee ownership route include:

  • A vendor financed sale based on a patient capital approach to financing the buy-out via future profits over the medium to long term (as opposed to a potentially highly leveraged third party investor purchase);
  • Allowing shareholders to realise cash from the business in an affordable way over time, whilst retaining a minority stake if desired;
  • Tax efficiencies on sale, notably an exemption from Capital Gains Tax on qualifying disposals;
  • Vendors can craft and entrench future governance principles to preserve the ethos of their business and brand integrity beyond their personal tenure; and
  • It engages the entire workforce with an ‘in it together’ collective endeavour and the benefit of shared reward, supporting domestic employment and commercial sustainability.

If you’d like to explore how employee ownership could deliver for your business or are already employee owned and wish to consider how to optimise your employee reward and benefits, please contact Liz Hunter, Director of Equity Reward, People Services, Tax, your usual KPMG contact, or email employersclub@kpmg.co.uk.

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