Employee participation: How do you make employees part of your company?

What is employee participation?

Employee participation is a way to engage employees more in the company where they work. It means that employees can financially share in the success of the business. This can be done in different ways, for example by receiving shares, sharing in the profits, or by receiving special rights linked to the company's value. The idea behind employee participation is that if employees benefit from the success of the company, they will also work harder to achieve that success. Moreover, it can help to attract and retain good employees, which is particularly valuable in the current labor market. Employee participation can also foster a stronger sense of belonging within the company, which is beneficial for the atmosphere and collaboration.

Popular forms of employee participation

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Shares

One of the most well-known forms of employee participation is giving shares to employees. When an employee receives shares, they become a small co-owner of the company. This means that the employee is entitled to a portion of the profits (dividend) and can benefit if the company increases in value. Common shares also provide voting rights, which means that the employee can participate in important decisions within the company. Some companies choose to issue non-voting shares. In this case, the employee does receive the financial benefits but does not have a say in votes. An advantage of shares is that employees truly feel like co-owners. A disadvantage may be that it can be complicated for small companies to manage this well.

Certificates of shares

Certificates of shares are an alternative to regular shares. In this form, the actual shares are managed by a special foundation, known as a Stichting Administratiekantoor or STAK. The STAK then issues certificates to the employees. These certificates give rights to the financial benefits of the shares, such as dividends and value growth, but not to the voting rights. The voting rights remain with the STAK, which is usually managed by the owners of the company. The advantage of this is that employees can benefit, while the owners retain control over important decisions. A disadvantage is that setting up a STAK costs additional time and money. Good agreements must also be made about how the STAK is managed.

Stock Appreciation Rights (SARs)

Stock Appreciation Rights, often abbreviated as SARs or SAR arrangements, are a form of employee participation where employees do not receive actual shares but can still benefit from the company's increase in value. With SARs, an employee is given the right to receive a cash amount later that equals the appreciation of a specific number of shares. For example, if a SAR is granted when the share is worth 10 euros, and later the share is worth 15 euros, then the employee receives 5 euros per SAR as payment. The advantage of SARs is that they are relatively easy to set up, and employees do not have to invest money. A disadvantage may be that employees feel less like 'owners' than with actual shares. SARs are also often only valuable if the company is doing well and the shares are increasing in value.

A great advantage of a SAR arrangement for the employer is that the costs of the SAR are deductible from corporate taxes.

Profit-sharing

Profit-sharing is a form of employee participation where employees receive a portion of the company's profits. This can be arranged in various ways. Some companies choose to distribute a fixed percentage of profits among all employees each year. Other companies tie profit-sharing to individual or team performance. The advantage of profit-sharing is that it is relatively easy to set up, and all employees can immediately benefit if the company does well. A disadvantage may be that the payout can vary each year, depending on how profitable the company is. It can also sometimes be perceived as unfair if some employees work harder than others, but everyone receives the same amount. Profit-sharing can help employees feel more involved in the success of the company as a whole.

Tax aspects

Taxes play an important role in employee participation. When an employee receives shares or other forms of participation, this may be seen as a form of compensation. In that case, payroll taxes often need to be paid. How much tax must be paid depends on the value of what the employee receives. Determining this value can be difficult, especially for companies that are not publicly traded. The tax authorities often use special calculation methods to determine a company's value. One of those methods is the 'Discounted Cash Flow' method, which looks at the expected future profits of the company. It is important to seek good advice about the tax implications of employee participation. Sometimes it is possible to make prior agreements with the tax authorities to prevent surprises later on.

How do you choose the right form?

Choosing the right form of employee participation is customized. What fits best depends on various factors. Firstly, it is important to think about what the company wants to achieve with employee participation. Do you mainly want to bind and reward employees, or do you want them to genuinely think along about the future of the company? The size and life stage of the company also play a role. A startup often has different needs than an established family business. Additionally, it’s essential to consider the wishes and needs of the employees. Some employees find it exciting to truly become co-owners, while others prefer a simpler form of profit-sharing. The administrative burden and costs of setting up and maintaining a participation plan are also crucial considerations. It is wise to seek professional advice when making this choice. A consultant can help list all the pros and cons and ensure that everything is legally and fiscally well arranged.

Do you want to perform an initial check yourself? We’ve created a decision tree for you. Click here to view it.

Conclusion

Employee participation can be a powerful tool for motivating and binding employees to your company. It gives employees the feeling that they are truly part of the company and allows them to benefit from its success. There are various forms possible, from distributing actual shares to profit-sharing arrangements. Which form fits best depends on the specific situation of the company and the desires of both owners and employees. It’s important to carefully consider the advantages and disadvantages of each form and to seek professional advice. While setting up an employee participation plan may require some effort, it can yield many benefits in the long term. It can lead to more engaged and motivated employees, ultimately contributing to the success of the entire company. If you are considering implementing employee participation, it is certainly worth exploring the possibilities and seeing what fits best with your company and employees.

At RoundE, we can help you with these questions. Feel free to contact us for an introductory conversation. This way, you not only secure a motivated leadership team but also a thriving company.

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