best known examples of employee ownership being a retailer (The John Lewis Partnership) it’s still little understood, and even less widely taken up, by eCommerce retailers. It’s an interesting idea that’s worth investigating. For some it might be the answer to their management succession challenges. For others, it’s a way to embed a more positive employee culture. And for others still, it’s a way of shielding the business against takeover, or at least ensuring that all employees get a voice in that sort of major decision. And with attractive tax reliefs available for businesses to transition to broad employee ownership, many are giving the idea a second look.
The idea behind it is simple. Give your employees a slice of the business (e.g. shares in a company) and you will improve employee engagement, incentivisation and retention. Improve all these things and – so the theory goes – better business performance will follow. Many businesses will be familiar with share option plans for key individuals, which are intended to work on this basis. Share options encourage the senior management to grow the value of the business because they hold a stake. However, this can make senior management focussed on pushing the business towards an exit opportunity, when they can turn those shares into real money.
The idea can be taken further - and avoid excessive focus on exit - with structures more like that of John Lewis. John Lewis is entirely owned by a trust, and the shares in the trust are held for the benefit of all the employees of the group. In this structure, no one individual holds any particular percentage and the managing director cannot (for example) dream about selling their 5% stake, because they don’t hold a 5% stake. The trust is instead a mechanism which underpins the structures and governance for wider employee engagement. Employee-owned companies would still have a conventional board of directors, but the composition of that board might be different, including more employee representatives. Or the board might be accountable to employee forums and similar bodies.
One hundred percent employee-owned companies also typically distribute their profits in a different way. Instead of paying out dividends, the company would typically ensure excess profits are paid out to employees. Some of that will be in conventional forms (salary, discretionary individual bonuses) but some of that may be in the form of employee-wide bonuses. John Lewis, for example, pays a “Partnership Bonus” equal to a percentage of salary to all employees based on how well the business has done that year.
The concept of John Lewis style employee ownership was given a boost by an independent review for the government by Graeme Nuttall in 2012, which highlighted the advantages of the structure and led to the introduction of attractive tax reliefs for businesses moving towards majority ownership by an Employee Ownership Trust (or EOT). For companies that become 51% or more owned by a trust for the whole employee group, the following key reliefs are potentially available:
- Complete exemption from capital gains tax for the shareholders selling into the EOT
- A tax-free allowance of up to £3,600 per employee per year for bonuses which are paid out as part of an all employee-scheme like a Partnership Bonus
This can be an attractive option for company owners who are looking to reduce their involvement in the business, revitalise the management of their company, and who don’t want to sell to a third party. There are lots of issues to consider including (1) how much of the business to sell into the EOT, (2) how the management structures of the business might need to change, and (3) how to fund it all. It’s always possible for company owners to gift their shares to the EOT. But if owners want to sell their shares for something like market value, there are various ways of using company value to fund the transaction.
What is certain is that employee ownership can help embed a more positive culture, and offers an alignment of the interests of shareholders and employees, as well as bringing significant tax advantages. With such a range of benefits on offer it is likely that EOTs will be considered by businesses in the eCommerce space, offering a fresh perspective on how these companies can operate.
Matthew Rowbotham is a partner and head of tax, reward and incentives at Lewis Silkin LLP.