Employee Share Ownership Schemes – Pros and Cons

Employee share ownership schemes have been the subject of increased attention in Ireland recently, with the country’s very first Employee Share Ownership Day taking in place in Dublin in June.

The conference was hosted by the Irish ProShare Association (IPSA) – a voluntary organisation that promotes the use of Employee Financial Involvement – and therefore was obviously very much focused on the benefits such schemes can bring.

However, while the introduction of an employee share ownership scheme can undoubtedly be a positive business decision for some employers, there are many practical considerations to be taken into account and possible risks to be assessed, and therefore it is never a decision that should be taken lightly.

If you are thinking about introducing such scheme to your company then professional legal and financial advice is essential to help you fully evaluate the repercussions for yourself, your business and your employees.

Employee Share Ownership Schemes

One of the most important decisions you will need to make when considering the introduction of an employee share ownership scheme is which type of scheme is best suited to your business. There are several different types of schemes available, each of which serves a slightly different purpose.

For example, you could choose to go for a scheme that links the provision of shares to employee performance, such as a Long Term Incentive Plan, where shares are granted when employees meet set performance targets.

Alternatively, there are Stock Option schemes, which give employees the right to buy shares at a future date at a fixed price.

Other types of schemes available include:

• Approved Profit Sharing Schemes
• Employee Share Ownership Plans
• Executive Share Option Schemes

We can work with you to consider the advantages and disadvantages of the schemes available, in conjunction with your financial adviser, and help you decide which type of scheme is right for your business.

Benefits of Employee Share Ownership

Introducing a share ownership scheme can be a sound business decision, as long as this decision has been fully informed. Some of the benefits it could bring to your business include:

• It can give employees a vested interest in ensuring the business thrives and therefore should mean that they will be more motivated and harder working.
• It can help to retain valued members of staff. Linking the option to buy or receive shares to length of service can decrease the risk that employees will seek employment elsewhere.
• Being able to offer shares in the business to employees can be an effective way for smaller companies or business start-ups to attract and retain talented staff. Such companies can sometimes lack the financial resources to offer competitive salaries and without other incentives such as shares to attract employees they might struggle to reach their full growth potential.

Practical Considerations of Employee Share Ownership

As well as deciding on the type of scheme, there are many practical considerations to be taken into account to ensure you end up with a scheme that works for you and your business, such as:

• Potential cost implications. There is no getting away from the fact that introducing an employee share ownership scheme is a complex task and there will be costs associated with its set up and ongoing maintenance.
• If the company grows and more employees receive shares, then the value of individual shares can become diluted, which could create resentment amongst staff and make the scheme less attractive.
• Giving an employee a share in your business could mean you are giving away some degree of ownership. For a company owner who is used to sole ownership this can be a difficult adjustment, although it is of course possible to restrict rights to have any say in the running of the business through the terms of the scheme.
• If the provision of shares is to be linked to performance, then there must be robust performance evaluation procedures in place that are free from any bias. Otherwise the company could leave itself open to possible claims of discrimination from an employee who is unhappy with his or her allocation of shares.
• The current tax system in Ireland means that employee share ownership schemes may not be as attractive a benefit for employees as they are in other EU countries. IPSA highlights that the UK has a scheme called the Enterprise Management Incentive (EMI), which enables share options to be received by employees without any tax bill arising until the shares are sold. This scheme is now being copied by other European countries, and IPSA believes Ireland will be placed at a competitive disadvantage unless it develops its own version of EMI.
• Are the shares solely to provide a financial benefit, or do they give the shareholder other rights, such as a say in the running of the business?
• Does the shareholder pay for the shares now or are they given an option over certain shares on the happening of a certain event, such as the sale of the business or an IPO?
• What happens to the shares if the employee resigns, is dismissed or even dies?
• What happens if the business fails? Does the shareholder have any financial claim?
• Can the employee sell the shares to a third party?

Contact Us

If you would like further information on any of the points raised or if you are considering making an employee a shareholder, then contact us today and we can help you through the process simply and efficiently in conjunction with your financial advisor. We also recommend you fully examine the tax implications of any scheme.

Sources:

https://www.ipsa.ie/government-urged-to-fast-track-tax-reforms-or-face-brexit-disadvantage/

https://www.ipsa.ie/publications/guides/

https://www.businessworld.ie/news/Ireland-s-first-ever-Employee-Share-Ownership-Day-568690.html