Zaha Hadid Architects (ZHA) has become the UK’s largest architecture practice to be owned by its employees. Last month, shares in the 500-strong company were gifted to a trust, where they are now held on behalf of staff, following the wishes outlined in Hadid’s will.
The practice is far from alone in turning to the John Lewis-style model. In 2020 there were 75 RIBA chartered businesses owned by employee trusts, but in 2021 this figure leaped to 110. Practices including Hawkins\Brown, Studio Egret West, Purcell, LDA and Assael have all made the change in recent years.
ZHA said its change was crucial as ‘younger generations of architects are demanding our profession becomes more accessible and egalitarian’. It pledged to ‘give every member of our team a voice’ and ‘reinvest all profits back into the business, into our people, [and into] equipment and facilities to benefit all our employees.’
There are several incentives to becoming employee-owned, including sorting out succession planning and, according to the Employee Ownership Association, ‘superior business performance’. But practices that convert to employee ownership routinely say the change will democratise their business and create a fairer division of profits.
At the time of converting, BuckleyGrayYeoman co‑founder Matt Yeoman said the practice’s transition to employee ownership was ‘conceived as a strong and fairer way to govern the practice going forward’. Orms said its move would bring a ‘range of benefits’ including ensuring ‘all voices are heard’. And Hawkins\Brown said its transition would make ‘every colleague a co-owner, an ambassador and an entrepreneur’.
But not all staff are convinced. The union for architectural workers, Section of Architectural Workers at the United Voices of the World Union (UVW-SAW), says its members have mixed experience of employee ownership with some reporting that little has changed.
‘Employee-owned trusts do not really divest power from business-owners to their employees as the owners choose the way it is set up,’ argues Will Stephens, comms co-ordinator at the union. ‘This will not lead to the redress of power that we believe is needed in the architectural industry.’
So what does employee ownership mean for the average architect? Can they expect better pay and more of a say in running the business? And if not, who really benefits when a practice switches to employee ownership?
Employee ownership was relatively rare until 2014, when the coalition government unveiled generous tax breaks for employee-owned trusts (EOTs). These are a type of employee benefit trust (EBT) – a legal body that holds shares on behalf of all employees. Companies buy their own shares to put them into a trust. Profits are then shared through bonuses rather than dividends.
Compared to general employee benefit trusts, EOTs have a tighter legal definition about how they must be structured and operate. However, they have been by far the most popular model for employee ownership in recent years. When a director sells their shares to an EOT they do not have to pay capital gains tax. EOTs are also exempt from income tax on bonuses of up to £3,600 per employee per year.
Graeme Nuttall, the lawyer who authored the 2012 government review into employee ownership and who first proposed the capital gains tax waiver, says the tax break has proved a ‘powerful nudge’ for director-owners selling up.
Most new employee-owned practices are EOTs, but not all. ZHA, for example, has become an EBT; Stride Treglown, meanwhile, has a direct model whereby staff buy and sell their own shares; while MJP Architects has a hybrid model with both a trust and direct ownership.
The main reason for practice leaders to sell shares to a trust is succession planning. Directors who sell shares to a trust can continue to run their business but also create a self-sustaining company structure which they can leave when they are ready. They do not have to sell their business to a corporate monolith which will slowly devour the practice’s name and culture, nor to junior partners who may struggle to afford to buy shares. And although director-owners typically have to wait several years to be paid, they also realise the full value of their shares.
When a company becomes employee-owned, it does not mean that rank-and-file workers begin to govern themselves. Directors continue to make decisions about running the company but are expected to communicate more and undergo greater scrutiny.
‘Sometimes people have a slight misconception,’ says Laura Gore, head of finance and company secretary at Make. ‘You have got to realise that [EOTs] are still an ordinary company run by board of directors, and a board of directors’ decision is probably final. It’s not Animal Farm.’
Employee trusts typically have a small board responsible for administering employee ownership. These boards have senior leaders of a practice and may also have employee representatives and an independent member.
AHMM and Studio Egret West are two practices that have employee representatives on their boards. They both have two reps, approved by management, on a board of five people. The reps canvas views from their colleagues and scrutinise management decisions over the strategy of the company – as well as suggesting new initiatives or company policy.
Lizi Cushen, an associate at AHMM who is one of the employee reps, says the trustee board meetings ‘formalise a line of communication between staff and directors’ at the practice. Studio Egret West employee rep James Cook, meanwhile, says he is being ‘very careful not to unionise this process’– with discussions centring on broad issues of company strategy and culture, rather than specific complaints.
Not all practices have employee reps, however. Make is currently reviewing its employee ownership arrangements but at the moment has no employees on its three-person trust board – while forums for staff discussion have stopped during the pandemic.
Advocates of employee trusts say they foster a participatory culture even if employees’ formal power over the company they co-own is minimal.
‘A trust does not necessarily take away management [power],’ concedes John Whiles, whose practice Jestico + Whiles was an early adopter of the employee-owned model, ‘but it creates a spirit of communication and connection.’
Nuttall concurs. ‘Employee benefit trusts behave well towards employees,’ he says.
Not all employees agree, according to UVW-SAW’s Stephens. ‘Generally the way that [employee benefit] trusts function is chosen by the founders and so is not really under the control of the workers, even if they are representative on the trusts board,’ he says.
‘The power of the trusts varies, with some employers listening to the trust and making changes, where others just take the trust’s decisions under advisement and the scope of possible change is narrow.
‘We advocate for democratising architectural workplaces and empowering workers to have direct decision-making ability over how they work and what they work on. EOTs do not achieve this although in some workplaces it can be a step in the right direction.’
Transitioning to an employee ownership trust does not overhaul employee remuneration either. A company board still decides what the bosses should be paid – and the figure remains in the hundreds of thousands for several employee-owned architecture practices.
Bosses also decide how much excess profit can be distributed among employees – with bonuses shared with all staff according to a formula. Most EOTs see bonuses paid according to salary earned in a year, meaning directors, who earn the most, see the greatest return from the scheme.
It also takes time before the full benefit of employee profit sharing is realised. Companies must first spend around eight years paying off the debt to former owners, created through the share purchase. The extra debt could mean, in lean years, that less money is also invested into the company and staff.
Employee ownership is still a good deal for staff. In a successful company they will likely receive a handy extra slice of money each year – especially once former owners have been fully paid off. Their practice is also protected from corporate takeover and staff can be promoted on merit rather than ability to buy shares.
But practices often frame employee ownership as handing power to employees – even though employee ownership does not significantly change power relations at a business. It’s still up to directors whether to take participation and employee welfare seriously.
The biggest winners are directors – who sell their shares for a competitive price, avoid hefty capital gains tax payments and still remain in control of their business.
Director’s view: Christophe Egret on Studio Egret West becoming employee-owned in 2020
When I started in architecture it was quite common for a practice to reach a certain turnover and scale to be bought out by a larger fish,. But that is not really on offer in the same way now.
Also, every practice which is bought out is swallowed by its purchasers. It is not a model with longevity. Whereas EOTs dictate that you can’t sell the business – or at least it has to be voted on in very specific circumstances to happen. Indeed David [West] and I left Will Allsop because venture capitalists had bought out his practice.
[David and I] always admired the John Lewis partnership structure, even though it was not called an EOT. We also believed our studio had enough of a sense of purpose and identify and clear principles that it was worth passing on to the next generation.
Last year we felt like it was the right time – we knew the talent that surrounded us. We were not previously allowing the rest of the studio to take [enough] responsibility. I am not intending to leave, however. I want to work for a long time yet!
The financial incentives [around Capital Gains Tax exemptions] was an incentive to become an EOT. Practices that follow the EOT model are more successful. Practices that sell out usually collapse. So it was a win-win.
The purchase of the shares will take between seven and 10 years. There is a certain sum which [EOTs] can distribute without tax [to all employees] and that is £3,600. We are not completely fixed about how we work out [bonus figures] but we protect that sum, and then there are other elements like length in practice and seniority which effect bonus structure.
It’s always difficult, the mathematics of that. We try to make it as fair as possible… but if your bonus is [overly] linked to longevity then people never leave and that could create difficultly with dead wood, while young people would not be incentivised to climb up the ranks.
What the EOT has done either consciously or unconsciously is that people in the studio feel a sense of ownership – not financial, but cultural. There are a couple of people that are driving sustainability agenda. Others are driving other agendas; everybody is taking different parts of charter and that is wonderful: for responsibility to come from bottom up.
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