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How employee share ownership can revitalise the compact between workers and firms to their mutual benefit

How employee share ownership can revitalise the compact between workers and firms to their mutual benefit

Sceptics argue that behind every successful business is a mere handful of stars – generally founders and senior executives. This widely though seriously flawed view has skewed the design of most employee share schemes to fit the circumstances and aspirations of C-suiters.

But it ignores the reality that for any business, established or start-up, customer satisfaction is the product of a long line of employees, each quietly performing their role with diligence, care and skill. A disenfranchised workforce will kill off a business by a thousand cuts, regardless of how many stars are shining back at head office.

Changes announced in the March budget by the previous government, supported by the Opposition, represent the most significant employee share scheme reforms in the nation’s history – a complete overhaul of the regulatory plumbing that underpins the operation of ESS in this country.

Meaningful equity incentives

Until now, Australian businesses have been operating under a regulatory straitjacket, especially inhibiting for high-growth scale-ups and large unlisted companies, unable to offer meaningful equity incentives to anyone other than sophisticated investors, senior managers and a clutch of other participants.

For those employees who don’t fall into one of these defined categories, unlisted companies have been forced to rely on the existing class order relief, which restricts the value of offers to $5000 per person each year.

As of October 1, unlisted companies may offer meaningful equity incentives to all employees. Employees at all levels will be able to obtain an unlimited number of shares with unlimited underlying value, as long as certain safeguards are met. The $5000 value cap has been removed and replaced with a monetary cap of $30,000 a year, or $150,000 over five years.

The purpose of the reforms is not altruistic. A significant and growing body of research from international ESS powerhouses demonstrates that businesses with greater employee ownership elicit improvements in employee commitment, engagement and reported wellbeing. Unsurprisingly, they also perform better and are more resilient to economic shocks.

Private equity is also beginning to twig to these advantages.

Spearheaded by Peter Stavros, co-head of US Private Equity at global investment firm KKR in New York, an employee ownership movement is gaining momentum, backed by world-leading private equity funds and asset managers.

Ownership Works, the organisation founded by Stavros, promotes broad-based employee ownership as a way of creating meaningful wealth building opportunities for all employees. The idea being that giving ownership to lower-level employees better aligns their interests with those of management and shareholders and creates a stronger culture.

Over in Britain, a growing number of businesses are transitioning to employee ownership through a relatively new form of structure called an employee ownership trust.

EOTs are trusts that are established to acquire at least 51 per cent of shares in a company for the benefit of all employees. The main tax benefits are a CGT exemption for founders who sell their stake to the EOT, and tax-exempt bonuses for employees.

Back in Australia, while some rules still need to be tweaked, and tax structuring of employee ownership is still too complex, the new regime will enable both listed and unlisted companies to dramatically scale their ambitions for employee ownership. But if, and only if, the government, businesses and the organisations that represent them recognise and promote the myriad win-win advantages.

Last month, the day before the new rules kicked in, the Australian Securities and Investments Commission announced a consultation process to iron out some wrinkles and reassured businesses they could maintain existing class orders until the start of 2023 to allow time to transition.

Employee ownership should never come at the expense of wages or other benefits. Nor is it about transferring business risk to the workforce. It’s about revitalising the compact between employers and the Australian workforce for the benefit of both sides, and for the economy and community as a whole.

Shaun Cartoon is a tax partner at Arnold Bloch Leibler, a fellow of the Global Equity Organisation, and a member of Employee Ownership Australia’s experts panel.

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