The Employee Ownership Effect – Then, now, and next

With talent attraction and retention a key focus for many employers, and business succession a concern for some founders, we look at how employee ownership has evolved and highlight some new opportunities that employers might pursue this year. We also share insights regarding potential changes ahead.

As we experience societal and economic shifts that mean, for many, ‘ownership’ has given way to ‘generation rent’, employee ownership – the opportunity to acquire an ownership interest in an employee’s employer– might be viewed as a welcome and accessible possibility and an enabler when trying to ‘level-up’ the playing field for equitable participation in value creation.

The theme of Employee Ownership Day 2023 is ‘the EO effect’ – so let’s start by looking at that.

Employee share plans first took hold in the UK during the 1980s and 1990s, with the early adopter being the bus industry. Since then, a multitude of different ways in which ownership can be crafted have spawned – from all-employee equity incentive arrangements (Share Incentive Plan (‘SIP’) and Save As You Earn (‘SAYE’)), to share option plans like Enterprise Management Incentive (‘EMI’) and Company Share Option Plan (‘CSOP’)) which are potentially open to all but more usually granted selectively.

Direct and indirect and hybrid ownership models now exist. There was also a brief dalliance with Employee Shareholder Status which conferred shares in exchange for surrender of certain employment rights.

The underlying belief, often borne out in empirical evidence, is that employee ownership drives positive outcomes for society and the economy.

To date, as illustrated by HMRC’s published share scheme statistics, it is discretionary share plans that prevail but there has been a post-pandemic uptick in the use of all-employee share plans.

From 6 April 2023, there’s been a welcome modernisation of CSOP, meaning more employees and employers can now benefit from that plan (see our earlier article here for more details).

Changes to the Capital Gains Tax annual exemption – also since 6 April 2023 – have the potential to affect how employees benefit from SAYE plans. But there are specific steps employers can consider to ensure SAYE continues to deliver for their workforce and their business (see our earlier article here for more details).

Business succession planning remains a top concern for many owners, whether that’s family businesses who risk withering on the vine absent an engaged next generation of family, or shareholders wishing to retire but are nervous about compromising their legacy and the culture of the company with a third-party sale. For an increasing number, an Employee Ownership Trust (‘EOT’) has provided a solution.

The go-to favourite plan, for those eligible, is EMI but that arrangement sometimes comes unstuck in terms of not meeting expectations at the time of the realization event – a healthcheck to mitigate against unexpected tax risk and liabilities is recommended as there are points of detail and changes to HMRC guidance that can prove problematic.