How to motivate staff (and Founders) as we return to normal?

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How to motivate staff (and Founders) as we return to normal?

Published 9 julio 2020

It doesn’t take a genius to work out that pretty much every business has been shaken to its core, to some degree or another, over the last few months.  No-one yet knows how the new world will look: Will we look back and say everything is just like it was before with no real change; or will this be a game changer in terms of how we all work? 

One thing is for certain though, each and every one of us have had more time to think about our lives and how we want them to look; and exceptional people will become more and more valuable to their employer.  In addition, some business owners will have been asking themselves (or their family) have I had enough of the 9 to 5 and once we have ridden out this crisis, is now the time to step down? Let others take their turn at running the ship.

Read on if you want (a) some ideas as to how to motivate those staff (when money is tight) and (b) an idea as to how the business owners can step down. The writer is our tax and incentives partner so obviously we highlight some of impressive tax advantages you can see.

Share Options – Something for the staff

Now is the time to grant the key staff options to acquire shares in the Company. This is a free way of telling people how valuable they are and can tie them into the business and align them to the business’ financial goals. Ideally, a share option should have clear and targeted performance conditions which need to be satisfied before the option can be turned into shares. 

If you want to sell your company for more than £10million, then make it a pre-condition of exercising any share options that the company is sold for more than £10million. If you want to increase profits then tie the options to a certain level of profitability being achieved.   

Share Options – The tax bit

Get it right and you can make share options incredibly tax efficient. 

If your company is in the right sector (which the overwhelming majority of companies are) and is not controlled by another company, so long as your gross assets aren’t too big and you have less than 250 employees you can use the incredibly tax efficient EMI. 

For most of our clients who do this, they see staff paying just 10% tax and the company itself gets a tax refund which in our experience is normally around £1million.  

Employee Ownership Trust – Coming of age

We think Employee Ownership Trust (“EOTs”) are a hidden gem and will come into their own over the next few months and years. They have been around for 6 years now, slowly gathering traction as well as some ardent fans. They are a great way of extracting value from your business, motivating the next generation of managers who slowly take over without burdening them with debt yet allowing the exiting generation to retain control during the transition. There is even a nice tax twist to the tale (as to which see below).

EOT - Headline Take Away

The owners of a business set up an employee ownership trust which purchases all (or most) of the shares in the business for either cash on day one or the price is left outstanding to be paid from future profits. 

The sellers become the trustees of the EOT and can remain as the directors of the business whilst this transitions to the next generation. In, say, 5 years from now the current owners have received all their value and the business is now held on trust for the remaining employees. Just like John Lewis, the company’s profits are the staff’s profits. 

It is perfect for a people business as it motivates staff by showing them they have a real stake in the business. 

High street banks are now willing to lend to EOTs with interest rates closer to those on mortgage products than private equity loans. 

EOT – How does it work in practice?

  • you can sell your business to an entity which you remain in charge of;
  • you can receive full value funded by tax free dividends (or bank finance);
  • you can kick start the process by using retained earnings;
  • the staff will feel motivated because shortly it will truly be their business;
  • staff can get annual tax free bonuses of up to £3,600 per person per year;
  • it is government approved and promoted; but best of all,
  • the money paid to the current owners is tax free!

EOT – Tax – What’s the catch?

As lawyers, whenever we see the phrase ‘tax free’ our initial instinct is to be cautious. After all is this some dodgy tax scheme you read about in the papers?

The key to understanding that question is ask why would HM Treasury give tax receipts away. The answer is that they take the long term view – Study after study shows that employees whose interests are aligned with the owners work harder, smarter and more efficiently than before especially if they have ‘skin in the game’. In time, profits will have risen up with the result that HMRC wins; more profits means more corporation tax, greater number of employees paying more income tax and NIC receipts and overall a more thriving economy. It really is a win – win! 

What kind of business is this suitable for?

Any business can become EOT owned and it doesn’t matter if you are currently operating through a partnership, LLP or company. The only real pre-condition is you can’t do this just to pass the company to your children or other close relatives and you need a good number of non-family members employed by the business.

In practice, it doesn’t work well for businesses whose value is made up of property or other physical assets. It works best for people businesses.

Want to know more?

Our head of tax and incentives John Dunlop was asked by the leading legal know-how magazine (practical law magazine) to update the legal profession on this and a copy of his article is at https://www.dacbeachcroft.com/en/gb/articles/2019/may/the-rise-of-employee-ownership-trusts/

Get in touch

If this sounds like something you would like to explore, get in touch with John on the contact details below, even if it's just to find out how your competitors are going to extract up to ten years' profits tax free and motivate their staff to work harder. We don’t charge for the first getting to know you meeting.

Authors

John Dunlop

John Dunlop

London - Walbrook

+44 (0)20 7894 6330

Matt Spencer

Matt Spencer

London - Walbrook

+44 (0)20 7894 6697

Michael McCormack

Michael McCormack

London - Walbrook

+44 (0) 20 7894 6328

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