How employee ownership can boost business performance

Reproduced with permission from The Times Enterprise Network. To subscribe click here.

Published Thursday June 08 2023

My first Saturday job as a teenager was on the tills at John Barnes (now Waitrose) on the Finchley Road in Swiss Cottage, north London. I remember the allure of their commitment to “partnership” as part of the John Lewis group even then. A business linking culture, service and performance to rewards resonated even while I was also preoccupied with typical teenage pursuits.

Although it is disappointing to hear about their business and organisational challenges we should not forget that John Spedan Lewis created the partnership as an experiment in industrial democracy about a century ago because he believed that there was a better way to do business. I believe that that is as true today as it was then.

Employee ownership is not a single model and 100 per cent ownership should not be a straightjacket. The nervousness about John Lewis selling a stake to raise capital may have merit but the option should be considered, even if its partners do not like the idea. In fact employee ownership can range from 100 per cent or majority-owned by employees (eg, an employee-owned trust) to a situation where every employee has shares but their combined holding is not a majority.

I have seen these different structures work effectively on many occasions in businesses of different sizes, sectors and geographies. When employees have an owner’s mindset they are more likely to stay, provide goods and services to a standard that customers rate and drive a better business performance.
We are not bad in the UK at promoting employee ownership and our policies to support share options are credited as being among the best.

From April the Treasury has widened access to the company share option plan scheme and made it more generous. This scheme gives employees the option to buy up to £60,000 of shares in the future at a fixed price and they will not have to pay income tax or national insurance contributions on the difference between what they pay for the shares and what they are worth.

The taxman has also made it simpler to grant options under the enterprise management incentives scheme, although this is restricted to businesses with no more than 250 employees and up to £30 million of gross assets.

The UK public markets may have lost their lustre for many successful mid-cap businesses but these employee share schemes offer all private companies many of the advantages of stakeholder capitalism without the distractions of the City, including its short-termism.

At Ground Control we have had wide employee ownership ever since my fellow directors Simon and Kim Morrish took over the business in 2004. As we enter the third year of our current five-year growth plan we have been looking further afield to see if we are keeping up with best practice when it comes to how we run our share options schemes. The detail will differ by business but the following three broad aspects will hopefully be useful to others considering this path.

First there is communication and education. It is crucial that all employees fully understand the share scheme and how it could be of value to them personally. I opt for simplicity against complexity and try to avoid misunderstandings by focusing on the number of shares and their value rather than percentages of ownership. It also helps to under-promise and over-deliver wherever possible with an illustrative example of what happens if we achieve our plan, as well as a range from a low case to high case scenario.
It really is important to explain how the value of the options can rise and fall depending on the decisions that individual employees make. It will mean that they look at decisions about generating revenue and spending money in the context of their own equity return on investment.

This is an area where we all feel we could have explained share ownership better. I have now found that it helps with an illustration, such as the changes in value of a new home with say a 50 per cent mortgage at 10 per cent interest. When our profits grow that increases the value of the home and if we can turn that profit more efficiently into cash we can pay off the loan capital and interest leaving a surplus, from which our owners all benefit. If, however, we underperform as a business and the value of the home decreases, the mortgage can only be partly repaid or even not at all while our share owners hold options that are worth less.
The final point is that if we restructure the business — in our illustration, paying for a refurbishment to the home — and it becomes a better asset as a result it will be worth more. There may be short-term pain, but long-term gain.

Deciding who gets offered share options and how much is one of the toughest areas. My advice is to make the decisions with a small group of directors, including non-executives if you have them. This will hopefully make the process more objective and fair.

Factors to consider might include: seniority (which can determine the person’s impact on the value of the business); tenure (which may affect how long you make them wait before they earn the options); and an employee’s willingness to invest more of their own money (risk they are willing to take). Ideally you want people to have “skin in the game” where if you deliver to plan you all win but share some pain if you do not.
As a final check, it helps to estimate what the value of the shares held by individuals might be if the plan is met to ensure that there is a sound logic for any differences between people.

Shares in private companies are not the same as those of businesses listed on stock markets but equally businesses should not think that they have to plan for a full sale to bring to life the incentives that share options provide.

You can create a market for your shares from cash reserves, using debt and from the sale of directors’ holdings but it is important to plan to buy back shares at least every five years so that the carrot of ownership is realised.

When this happens I would communicate that your business expects a certain percentage of any individual’s gains to be rolled over to show long-term commitment. You will also need to think through what you will do if you have people with share options that leave on good terms, on bad terms and where people change roles, whether through promotion or demotion.

Ultimately when the business performs well the benefit of employee share ownership is the wonderful stories we hear, the things they have been able to do for themselves and others that would not otherwise have been possible.

It is not a panacea: the value of businesses can go down as well as up, as the partners at John Lewis have found, but when it works well it is a virtuous circle where everyone benefits.