- 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 a very large 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 five years ago. Can we use it to grant new options?
- The demographic profile of our employees is under 35. Will share plans incentivise our workforce?
1. We have trouble recruiting and retaining staff. How could an employee share plan help?
Good people make businesses successful, and most sectors are highly reliant on skilled or experienced staff. Employee reward schemes such as share plans can help you attract talent and keep them engaged with the business long-term. Below are some of the main benefits of employee share plans.
- Some sectors, for example hospitality and recruitment, are not used to having share awards as part of a package, so they can be a real differentiator. You can offer this reward with little additional cost and it can make a key recruit see that they have real career opportunities with your business.
- When staff are part of an employee reward scheme they know they stand to gain significant capital in the future. Competitors seeking to poach staff will either need to match the share awards or pay extra to buy out that potential opportunity.
- Awards can easily be linked to the company or group objectives. When these objectives are easy to track and measure, employees and directors will have the motivation to drive the business plan and gain their reward. Having alignment with shareholder objectives also helps investors feel comfortable about the potential dilution of their interests.
- Employees feel valued when given the opportunity to share in the growth of the business alongside the current owners. Allowing them to track their performance against key growth indicators gives them greater insight and understanding of the business and helps the to understand what they must achieve to help the business grow. Working towards a common goal helps to engage and unite a workforce.
- Through regular communication about your share plan, your employees will better understand what they can do to increase their gains.
2. We are thinking about an exit in 3-5 years’ time. Will a share plan be useful and why?
An exit (retirement, sale, MBO, IPO, etc) is an opportunity for shareholders to benefit from the growth in business value. 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. They may also need to put in a lot of hard work for the benefit of the shareholders yet get no rewards for themselves.
Making share awards in the lead-up to an exit has two main benefits:
- Employees and directors know they will be rewarded for their efforts in preparing the business for a successful exit and that their interests will be aligned with those of the shareholders; and
- Instead of worrying whether a new owner would seek to replace them, key staff 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 a very large pay out on a sale, how can we tie them in to support the business going forward?
This is a theoretical risk but one that is easily managed.
We commonly use modelling to show potential values passing to shareholders and share plan participants. It helps us work out a sensible return on investment for the current shareholders and identifies the potential gains for employees at different levels of participation on the plan. It is not possible to predict sale or IPO values, but modelling helps us estimate a sensible figure.
A potential purchaser will identify the key team members and generally aim to retain them by offering new incentives. It is possible to include provisions in a share plan requiring participants to stay with the company post-exit. However, 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 may also be worth considering other arrangements, such as employment contract terms and restrictive covenants.
4. We have a share plan that was set up five years ago. Can we use it to grant new options?
It is possible but it should be reviewed. The last five years have seen various changes to share plans, particularly those with HMRC tax-advantaged status (eg EMIs, CSOPs, SIPs and SAYEs). It would be a shame to save spending on a review or new plan only to discover the old version misses something needed to preserve the tax reliefs for the company and individuals.
There have also been other legal changes in recent years, like discrimination regulations and GDPR, which might mean the company should protect its position with an update. A review that considers new legislation and its impacts can be very valuable.
5. The demographic profile of our employees is under 35. Will share plans incentivise our workforce?
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. Call centres, care providers, retail businesses and hospitality businesses often have employees under 35 and have seen great success in engaging their workforce through share plans.
There are ways to ensure that your plan is an effective workplace incentive for employees of all ages. Flexible plans and robust communication are key, for example:
- plain share options involve no financial commitment for the employee yet may help with retention for a typically mobile group of workers;
- SAYE plans involve saving, but employees can be more interested in doing so if they are reminded that they can withdraw at any time and get their money back;
- many people under 35 believe they will never be able to save for a deposit on a property but, while nothing can be certain, share awards can be a rare opportunity for younger team members to earn a windfall for buying a home or other life goals like travelling or funding further education; and
- SIPs allow companies to award free shares. Cash-strapped junior staff don’t need to make a commitment, but it can be specified that they will lose their shares if they leave within three years, encouraging staff to stay longer.
Guide to employee share plans
Discover your options with our comprehensive guide to employee share plans here.
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