Do you have questions about your employee share scheme or one you want to introduce?
- We have trouble recruiting and retaining staff in our sector, how could a share plan help?
- We are thinking about an exit in 3-5 years’ time. Will a share plan be useful and why?
- If employees get too big a pay out on a sale, how can we tie them in to support the business going forward?
- We have a share plan that was set up 5 years ago, can we use that to grant new options?
- The demographic profile of our employees is under 35. Will share plans still work?
Good people make businesses successful. Many sectors are highly reliant on skilled or experienced staff and are ‘people businesses’. These include recruitment, technology, media, hospitality and leisure. Even traditional manufacturing industries need to find and keep skilled employees.
Share schemes offer a range of benefits to business. Below are some of the main ones.
- Some sectors are not used to having share awards as part of a package and so it can be a real differentiator. For example, it is less common in the hospitality and recruitment sectors. This is something you can offer with little additional cost that may make a key chef or recruitment executive see that they have real career opportunities with the company.
- Employees who have share awards, in whatever format, will know that they could have a future, significant value. Competitors seeking to poach staff will either need to match the share awards to pay extra to buy out that potential opportunity
- Awards can easily be linked to the Company or Group objectives. So long as these objectives are in a form that is easy to track and measure (SMART objectives), employees and directors will have the motivation and potential for reward if they support the achievement of the business plan. This alignment with shareholder objectives allows investors to feel comfortable about the potential dilution of their interests.
- Employees feel valued to have been given the opportunity to share in the growth of the business alongside the current owners. Additionally, allowing them to track key growth indicators, perhaps as part of the performance objectives, allows them to have a greater insight and understand of the business and what they need to do to help it grow. This is reported to help with engagement of the workforce as a whole.
Just a little tip – don’t set up your share plan then forget about it. Communicating the plan at the start and on a regular basis, is important to make it a success.
An exit (retirement, sale, MBO, IPO, etc) is an opportunity for shareholders to get the benefit of the growth in value of the business. For employees (and non-shareholding directors), however the prospect of an exit can be unsettling.
They might be anxious about what the future holds for the business and for them. It is common for employees or directors in these uncertain situations to be lured away or look for alternatives – to jump because they fear they will be pushed.
Also, they may need to put in a lot of hard work for the benefit of the shareholders, and get nothing for themselves.
Making share awards in the lead up to an exit typically has two main benefits:
- the participating employee/directors can feel that they will be rewarded for their efforts in preparing the business for a successful exit and their interests will be aligned with those of the shareholders; and
- key staff will be more likely to stay and support of the future of the business. Instead of worrying whether a new owner would seek to replace them, they will be more inclined to stay to get the potential reward. If the share plan performance is linked to objectives it gives them a chance to be involved with the future of the business and know what is planned.
3. If employees get too big a pay out on a sale, how can we tie them in to support the business going forward?
This is a theoretical risk but is easily managed.
We commonly provide modelling to show potential values passing to shareholders and potential share plan participants. This helps to work out a sensible return on investment by the current shareholders and identifies the potential gains for participants in the share plan at different levels of participation. This way a sensible value can be estimated, though of course it is not possible to predict sale or IPO values.
A potential purchaser will identify the key team members and generally they will want to retain them by offering new incentives going forward. It is possible to include provisions in a share plan requiring participants to remain with the company post-exit, but this could put off a purchaser who may have a different view on who they want to retain and how much they want to pay.
It is worth considering the broader picture, including employment contract terms and restrictive covenants.
Possibly. That isn’t a particularly helpful response but accurate. The last five years have seen various changes to the different types of share plans, particularly those with HMRC tax-advantaged status (eg EMIs, CSOPs, SIPs and SAYEs). It would be a shame to save the costs of a review or new plan only to discover the old version misses something needed to preserve the tax reliefs for the company and the individuals.
There have also been other legal changes, like discrimination and GDPR, which might mean the company should protect its position with an update.
It is true that employees under 35 are less interested in share plans. Some will think short term and won’t want to participate in the plans requiring savings or payments (eg SIPs and SAYEs). Others don’t expect to stay in a job long enough to take up the benefits.
But this is just perception and there are ways to address this.
Call centres, care workers, shop workers and restaurant staff often have a employees under 35 but there have been success stories in these sectors.
Much of it comes down to communication and picking a plan that is flexible. For example:
- plain share options involve no financial commitment for the employee and yet if offered on a broad basis may help with retention for a typically mobile group of workers;
- SAYE plans involve saving, but if employees are reminded that they can withdraw at any time and get their money back, they will be more interested;
- many under 35 believe they will never be able to save up for a deposit on a house or flat but, while nothing can be certain, share awards can be a rare opportunity for younger team members to earn a windfall to be used towards ‘bricks and mortar or if they want to go travelling or enrol in further education; and
- SIPs allow the award of free shares by companies. There is no commitment by cash strapped junior staff but the Company can provide for the free shares to be lost if the employee leaves within three years, encouraging staff to stay longer.
For more information please get in touch with Fiona Bell.