Fostering Social Responsibility: Equity Incentives and Employee Ownership Trusts

Increasingly, social responsibility is integral to business practices, with business owners recognising it is intertwined with (and critical) to positive public image, productivity, recruitment, and financial results. Furthermore, business owners are coming to recognise the potential risk where social responsibility is not prioritised, which can range from disincentivising employees, through to falling behind competitors who appeal to socially responsible customers.

Accordingly, prudent businesses are exploring innovative ways to align social responsibility with their business and financial interests and those of their employees. Two powerful strategies that can be utilised in this regard are the provision of equity incentives and/or the establishment of an Employee Ownership Trust (“EOT”). This article considers why socially responsible employers should consider these approaches.

1) The use of equity incentives to foster a sense of ownership and community

Large businesses around the world are recognising the importance of linking Environmental, Social and Governance (“ESG”) metrics and incentive plans, with research indicating that ESG metrics are reflected in 93% of executive incentive plans in Europe in 2022 (81% globally). Linking ESG and equity incentives can be a relatively simply and effective way to encourage and ensure that a business’s ESG goals are met or maintained.

Whilst equity plans can be used to help with the Environmental and Governance aspects of ESG, human capital metrics dominate the ESG metrics used in short term equity plans as employers who offer equity incentives to their employees recognise that they are not only investing in their workforce but are also making a statement about their commitment to social responsibility. The use of ESG metrics in longer term plans is also blossoming, tripling since 2019.

By sharing ownership, companies empower their employees to think beyond their job descriptions, instilling a sense of responsibility and a deeper connection to the organization's success. Equity incentives create a shared journey towards prosperity, as employees witness the direct impact of their efforts on the company's growth. This not only boosts morale but also fosters a collaborative and inclusive workplace culture. In addition, it aligns the financial interests of employees with those of the organization, leading to increased motivation and a shared commitment to sustainable business practices.

Some business owners may be concerned that providing equity to employees will lessen their own entitlement upon an exit event. The opposite is typically true. Creating the right culture and motivating employees to grow the business means that whilst an owner’s ‘slice of the pie’ is reduced, the ‘pie’ should become larger such that their slice ends up larger than it would have done but for the growth secured by incentivising and retaining employees with equity. In the UK, the government also encourages the use of equity plans by offering “tax advantaged” plans (the Enterprise Management Incentive scheme, and Company Share Option Plans) which are both flexible in design and extremely tax efficient.

2) Using EOTs to improve culture and secure the long-term future of the business and generations of employees

Socially responsible employers are increasingly turning to EOTs as a vehicle for sustainable business practices, with a 37% increase in employee-owned businesses in the UK in 2023.

EOTs provide a structured framework where a trust holds a significant stake in the company on behalf of its employees. Employees (and to some extent, the former business owners) can be involved as trustees, or advisors to the trust, to ensure their voices are heard in strategic decision-making processes and help ensure continuity and prosperity.

The EOT model promotes a more democratic and inclusive workplace, where employees can actively participate in key decisions that impact the company's direction. EOTs serve both as guardians of the company's values and of employees’ entitlement and, with recent surveys showing that 71% of employee-owned businesses have a statement of purpose which includes making a positive contribution to society (and the environment), it can be seen that social responsibility is not just a slogan for EOT models but a guiding principle influencing major decisions.

Notably, EOTs also facilitate wealth distribution and economic equality by enabling employees to share in the financial success of the company. 96% of employee-owned businesses surveyed said that looking after workforce is a key measure of business success. This not only aligns with the principles of social responsibility but also has a positive impact on employee retention and satisfaction.

Provided certain conditions are met, EOTs can provide tax free bonuses (£3,600 per year) to each employee. Equality is paramount with an EOT, and these must be paid equally to all employees, albeit with some flexibility to reflect factors such as length of service, hours worked, and salary - but importantly not to the extent that senior employees can be singled out for special benefit. For business owners considering an EOT, there are also significant potential tax benefits in place to encourage the use of EOTs, including the ability to defer tax on their gains realised on disposal, such is the governments appetite to encourage the use of EOTs.

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Societal alignment is also critical, especially given the increasing regulatory focus on social responsibility for large businesses in various jurisdictions. This regulatory alignment ensures that companies not only voluntarily pursue ESG goals but also adhere to mandatory standards, further embedding social responsibility into the core of their operations.

Our firm offers comprehensive services to help businesses integrate these strategies effectively, ensuring alignment with both regulatory requirements and broader societal goals. From designing equity incentive plans to establishing and managing Employee Ownership Trusts, we support your journey towards a socially responsible and prosperous business future.