Employee Share Ownership at its Best – The Xtrac Story

At a reception following the ESOP Centre’s British Symposium on 7^th March 2019, I had the privilege of accepting, on behalf of Xtrac Limited, the 2018 award for the ‘Best All-Employee Share Plan in a Smaller Company’ in recognition of that company’s efforts and achievements in promoting share ownership amongst all its employees. Since it was founded in 1984, the company has over the years received many awards for its success in the design and manufacture of high-precision gearboxes and powertrains for Formula 1 and other motorsports, an industry in which it is a world leader. In 1997 its founder, Mike Endean, retired and sold the company to its management and an employees’ trust. Since then, the company has grown, from around 100, to currently over 360 employees and apprentices and a turnover in the region of £50 million. Its state-of-the-art factory and design facility in Thatcham opened in 2000, and a major extension was recently inaugurated by the Prime Minister, Theresa May. Although now substantially owned by a private-equity fund, the company is a shining example of how a policy of positively encouraging employee share-ownership has contributed to the group’s success and positive employee engagement.

Xtrac is, perhaps, unique in having, since 1997 and whenever possible having regard to its ownership structure from time to time, made use of every recognised type of employee share scheme. For so long as it was ‘independent’, Xtrac operated a (pre-2000) ‘Inland Revenue-approved profit-sharing scheme’, as well as Inland Revenue-approved ‘savings-related’ and ‘company share option (“CSOP”) schemes’. Following the introduction of “Share incentive Plans” (“SIPs”) in 2000, the company has established a series of such plans under which shares have been regularly awarded as ‘free’ shares as well as, on occasions, having also been offered for purchase out of pre-tax earnings (i.e. gross earnings before tax) as ‘partnership shares’. Some employees have, in the past, benefitted from EMI (“enterprise management incentive”) and ‘unapproved’ share options, as well as joint share ownership arrangements and so-called ‘growth shares’. Crucially, perhaps, participating employees have been afforded opportunities to realise the value of their shares, to which they have contributed by their labours, both when they retire from service and on the occasions when investment by third party private equity funds, and the inevitable corporate reorganisation, has afforded the opportunity for employees to do so. This has, in many cases, allowed employees to realise relatively substantial capital amounts, either in a single lump sum or, as appropriate, through a series of payments over time. Consequently, employees have recognised and enjoyed additional benefits in working at Xtrac when compared with the more limited opportunities for financial participation in other companies. Even after the most recent change of ownership of the group in 2018, participating employees remain holding financial interests through loan notes held, for the most part, within the tax-free envelope of the SIPs under which shares were first awarded.

Share scheme advisers may be interested in the fact that, unusually, the Xtrac Employees’ Trust first established in 1997, and used to warehouse shares, award them pursuant to SIPs, and transfer them in satisfaction of share options, as well as buy-back or receive shares sold or forfeited by leavers, is a UK – not an overseas-based – trust. The trustee is a single corporate trustee (a company with a share capital) which is wholly-owned by what is now an intermediate holding company within the Xtrac group. Its directors include both employees’ representatives and an individual (me!) who has only a non-beneficial interest in the financial success of the group. At all times, the Xtrac share schemes, including the SIPs, have been self-administered by an officer of the company without the need to engage third-party plan administrators. Although the company’s use of tax-favoured schemes has over the years thrown up a number of technical issues exploring the scope and application of the tax legislation, it is fair to say that all of the arrangements made by the company to take full advantage of available tax reliefs have operated as intended by government and HMRC and, accordingly, the recognition accorded by the ESOP Centre award is well deserved. Xtrac is an example to others of how, used appropriately, employee share ownership benefits the company itself and all its shareholders. Congratulations to Xtrac.