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Published on 31 January 2011 by Tony Groom
Employee Equity Can Improve the Chances of a Successful
Restructuring
Businesses and the UK economy are under pressure from inflation thanks to increased
taxes, such as VAT, and commodity prices and also pressure due to declining sales
thanks to the reduction in consumer spending.
The current situation is unusual as there has been a considerable amount of wage
restraint in the marketplace with employees more concerned about keeping their
job than earning more. This fear of job loss however does not apply to all staff, where
retaining certain key employees is crucial as their loss would have an adverse impact
on the business.
This is a common problem for restructuring advisers who need to solve it when
dealing with companies in financial difficulties. While a financial crisis can be a good
opportunity to reduce wages and develop a more flexible approach to
employment, retaining key people without burdening a business with higher wages is
a challenge.
When a business is in financial difficulty management often seeks to reduce staff
costs such as by asking employees to take a pay cut in order to help the company
survive and to keep their jobs. Under employment protection law they do have the
right of refusal but accepting a cut may only be staving off the inevitable, especially
if key employees then leave.
Many attempts at restructuring insolvent companies fail due to flawed restructuring
strategies and an inability to get the support of staff for a realistic solution. In the case
of the Rover car company, too many jobs were retained, and with too little flexibility
for subsequent reorganising of the business. The opportunity was there to restructure
the company using the £500 million dowry from BMW. But management failure and a
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2. lack of ownership of the problem by staff and their union representatives contributed
to the company failing five years later when all employees losing their jobs.
Engaging with staff and their union representatives and involving them in any
restructuring process can produce spectacularly positive results. Employees tend to
be more concerned about the survival and future viability of their jobs, and as a
consequence their employer, than most other stakeholders. Banks and lenders tend
only to be interested in the security of their outstanding loan, and shareholders often
sell their shares or just ‘hang on and hope’ without further investment.
Involving employees in the development of a restructuring plan instead of imposing
decisions on them, such as staff reduction or wage constraints, can bring about
solutions such as real cost savings and flexibility. A collaborative approach has other
benefits as it improves relations between managers and staff, it can align objectives
with owners, build a stronger team based on mutual trust.
While commissions are traditionally used to incentivise short-term performance, they
don’t establish a sense of a long term ownership whereas equity can. The issue for
staff holding equity is that it doesn’t put ‘cash in their pocket’ immediately. The issue
for owners sharing equity with employees is that they might retain their shares when
they leave. These can be easily addressed with an appropriate agreement where
the real issue is one of trust between owners, managers and employees.
This notion of giving employees a greater say in their future exists in other countries,
notably in Germany where employees’ representatives sit on the board of directors,
and in the USA where unions like the Teamsters often hold shares in their member
companies and are actively involved in strategic decision making.
It may mean management has to change its approach as well, but it moves
discussion from a confrontational to a consensual model, which is often key to
survival when times are difficult. Giving employees, and their unions, a seat at the
table from the start also provides another resource for the restructuring adviser in
terms of their knowledge and skills in that particular business.
There are examples of shareholder employees in the UK such as at FirstGroup where
many employees are also members of the Unite union. However the relationship has
not been collaborative with the union not being involved in decision making. Instead
management proposes unacceptable pay deals which are rejected on the grounds
of being derisory whether or not they are realistic for the business to have a future.
This then sets the tone of confrontational negotiations. It seems that employee
support is needed to deal with the downside, but they rarely get to share the upside.
From the employee perspective, participating in an equity scheme moves the focus
from the short-term preservation of jobs or salaries to the longer-term preservation of
the company, in which everyone has a vested interest, and that means greater
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3. protection and security especially at times like the present when many people are
perhaps wondering for how much longer they will have a job.
We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth.
Our team has worked for over 20 years to help stabilise and return hundreds of businesses to
profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors
and use your company’s assets to pay themselves. We work for you, not creditors.
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K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540