Employee ownership schemes are a start-up’s best friend.
If you lack the cash to pay the talent you need, shares in your company may be one of the few assets you have.
That’s why, if the start-up succeeds, early employees usually make a killing. But such schemes are far less common in established firms, especially smaller, private ones.
Architectural firm Hayball is celebrating its 30th birthday after years of fast growth. In the past 10 years, revenue and staff numbers have trebled. And to guide their business through the next period of expansion, Hayball’s partners have decided on a radical proposal.
They want to give their employees a stake in the company, comprising 25% of total ownership within 10 years.
Tom Jordan, the managing director of Hayball, says the idea came about after seeing what happened to the firm’s workers after they were made partners and given an ownership stake.
“When people became partners in the past, we immediately got a much greater engagement from them on the business side of the practice,” he said.
“Not only did they have a greater understanding of what was going on, but they became much more focused on developing the businesses and generally acted more commercially.”
This makes sense. Someone with a direct stake in the overall financial success of the firm is less likely to waste time or resources.
What the new scheme does is try to extend these benefits beyond those in senior management. Exceptional employees at all levels of the business, going forward, will be given stock as a bonus.
They will then continue to hold this stock and a share in the firm’s profits, as long as they work for Hayball. Should they resign, they forfeit a percentage of the value of their holdings. Should they be made redundant, the company will buy back their stock at its full value. In this way, the scheme will aid retention of the firm’s best employees.
“What we want to is provide our senior staff with a career path and attract and retain the very highest calibre of staff we can find,” Jordan says.
“We’re not alone – engineering firms have done this in the past, particularly overseas. It’s not truly pioneering, but we’re one of the larger firms in our industry to bring in something like this.”
Unlike directors, the scheme has been drafted so employees with stock face limited liability should the company go bust.
“Non-director shareholders have some degree of protection from corporate liability,” Jordan says. “Setting that up was very complex – we had various opinions. We resolved that, but it wasn’t easy.
“Overall, the tax environment really doesn’t encourage this,” he adds. “We’re just going to cop the tax bills, unfortunately.”
Under the Australia tax system, employee share schemes are regarded as compensation, and so qualify for income tax in the year they are given. This is despite employees not actually receiving any money from the shares until they are sold.
“In other countries, the taxation system really supports employee share schemes,” Jordan says. “It’s a pity it doesn’t do so here.”
This story first appeared on SmartCompany.