How it works
salary but in dividends on shares.
IN MORE DETAIL
1. Income: employees are paid a slice of Profit as dividends
- The Company issues Ordinary Shares to the Employee at market value, but not “paid up”. These are held by a Trust.
Periodically divide the profits between Shareholders as dividends on all shares equally.
Profits are protected through investor safeguards. So all shareholders get their fair slice of the Profit “cake”.
2. Employees can earn shares in the Company
- When the employee leaves the Company buys back his shares at the new value – enough to repay the initial market value at which the shares were issued to that employee.
The Employee keeps any remaining shares, i.e. shares equivalent to the growth in value of the shares issued to him in the first place.
The problem is that this makes an employee into a minority shareholder in a private company. For this to work, he has to feel that his shareholding is safe, that it can’t be manipulated. So that an employee can’t be cheated out of his due – dividends and share value.
There need to be safeguards in the company rules to prevent investors in the business taking advantage of employees. And to prevent employees taking advantage of investors. A business needs both capital and labour, so the people who put in money and the people who do the work need to know they’ll each get what they bargained for.
And this is the key: the shareholder protections built into the company rules. Checks and balances. They protect either group, employees or investors, from taking advantage of each other.
Can an Employee keep Shares when he leaves? Only if they have gone up in value. If so, then the employee keeps the shares above the total value when he joined. If not, the shares just get cancelled.
What if the value of the Shares has gone down? The company buys them back at the original price (i.e. cancels them all).
What if an Employee joins part-way during the year? He goes on PAYE until the start of the next year, when he can be issued with shares. A try-out period is best, since you don’t know how someone will turn out.
What about pensions? The Company can still pay into a pension on behalf of Employees, as now.
What about redundancy? Redundancy payments can still be written into the employment contract.
How does an Employee live month to month? Monthly dividends on the shares. This will keep employees up to date on how the business is doing month-to-month.
How are Shares valued? Set at the start of each year. Based on a formula for that business sector. That formula can be complex or simple, but it should be consistent, year to year. It’s best if Employees can follow it easily.
What if Profits go down? The same as with any business that can’t pay its employees. Some may get made redundant.
Who holds the employee’s Shares? The Employee Shareholder Trust. Employees elect the Trustees. The employee is the beneficial owner.