Key question is who “you” are in this scenario. Founder, senior manager, junior employee.
Plus being financially “rich” is relative.
Bill Gates might feel poor when he sees Elon Musk!
Also we’re just considering Employee Ownership Trusts (EOTs) here, being the indirect ownership model.
Founders
↑ Cash
↓ Wealth
↓ Earnings
By selling to an EOT, the founder is cashing in their chips.
They can get a decent pay out (albeit often over multiple years), but are forfeiting their rights to future growth of the business.
Having a business in a position to sell to an EOT means the founder is likely already wealthier than the majority of society. The sales proceeds payable by the EOT, with zero tax to pay, should cement the founder’s financial position.
They are however handing over future business prosperity to the employees.
If Jeff Bezos had sold his Amazon shares to an EOT for fair market value in 2010, he wouldn’t even break the top 1,000 richest people now, let alone the top 5. Retaining a hefty stake in that rapidly growing company saw his wealth escalate.
The EOT transfer makes future wealth generated by the company more evenly spread. The historic wealth generated is cashed in, for the founder.
EOTs therefore can make the founders “rich” by most people’s definitions. It will however reduce their future income, so won’t help their wealth spiral further upwards.
Senior managers/directors
↔ Cash
↔ Wealth
↑ Earnings
Directors in EOT owned companies have just as much reason to expect a hefty salary as their privately owned counterparts. They’re leading a business, and responsible for it. Their earnings should be very respectable.
The EOT means they’re entitled to a share of any business profits. Obviously how big those profits are will depend on many factors, and the individual will only have limited control.
How the profits are split among staff will be chosen by the trustees. This could be egalitarian (everyone gets the same). Or perhaps in line with salaries, on the basis more senior staff likely had a bigger hand to play in generating profits than junior staff.
EOT owned companies can pay bonuses independent of profit share. If a director performs well, met all targets etc, they could get a big bonus.
Unlike profit share payments, these bonuses can be skewed towards high performers, but won’t have any tax-free element. IE this element is no different to privately owned companies.
Overall, senior managers in EOT owned companies should expect to be marginally financially better off than their equivalents elsewhere. They won’t be joining the super rich, but can earn very well.
Junior employees
↔ Cash
↔ Wealth
↑ Earnings
Things play out similarly for junior employees as they do for more senior ones.
They should expect to be on a salary similar to their counterparts in privately owned companies. If they’re a junior apprentice, this may be modest.
Junior employees are unlikely to be singled out for big performance based bonuses.
The EOT does entitle staff at all levels to a share of profits.
The trustees may decide for the profit share to be in line with salaries, or length of service, in which case junior staff’s share may be modest.
Some trustees will decide profits should be split equally across all staff, irrespective of seniority. This can make them very juicy for lower earners.
Remember also that the £3,600 tax free applies regardless of whether your earnings are £20k or £80k, so it can feel more significant to lower earners. Having said that, the person on £20k/year is saving 20% tax, the person on £80k/year is saving 40%.
Overall, junior employees in EOT owned companies should expect to be financially better off than their equivalents elsewhere. Potentially significantly so. But few would consider them “rich”.
Summary
There’s lots of variables, so one EOT company won’t be the same as the next. However generally:
- founders are sacrificing long term right to profits, for short term tax free amount.
- most EOT companies will have hierarchies, senior staff earning more than juniors.
- senior staff should get similar salaries to elsewhere, plus profit share.
- junior staff should get similar salaries to elsewhere, plus profit share.
- EOT gives founder a decent pay off, leaving employees to reap financial rewards of future business success.