Offering shares to employees is an alternative form of remuneration - but is this putting too much of your business' future in the hands of others? There are other ways to maximise your potential for growth in hard times.
Employees in today’s turbulent market are familiar with the ever present spectre of redundancy. Ironically, for employers, an equally vexing question is how to motivate and retain key employees, whose value only escalates in difficult times.
Traditionally, one way in which employers have answered the question is by offering employees shares in the business. The rationale is that an equity stake assists with recruitment, retention and motivation of key staff, as well as aligning the interests of senior executives with those of the company’s stakeholders. Issuing shares can even reduce employment costs, as successive governments have introduced a range of tax incentives subject to certain conditions being met.
From an employee’s perspective, share ownership historically bred a sense of enfranchisement and loyalty. Now a seismic shift in attitude on this front is happening: employees in the banking and financial sectors, who have traditionally received significant proportions of their remuneration in the form of share options, have seen thousands of pounds wiped off the value of their pension pots, and it remains to be seen whether numerous Facebook employees will be thanking their employer for share options they were granted in lieu of hard cash.
Coupled with the fact that repeat rounds of redundancies have seriously eroded the concept of employee loyalty, and bearing in mind the current volatility of share prices, employers may now struggle to convince employees that share option schemes offer any kind of ‘incentive’ at all.
Is the share incentive scheme dead? Most certainly not. Listed companies in the UK operate such schemes and the expectation will undoubtedly remain that they should continue to do so in the future. Share incentive schemes also offer an important, but not the only, alternative for mid-sized businesses. In this sphere, however, employers must remain focused on the cost/reward balance – share incentive schemes can be complex and costly. Great care needs to be taken in deciding whether they offer the most cost efficient means of achieving an agreed end.
So what do we mean by ‘share incentive schemes’? In simple terms, these are arrangements to provide benefits to employees in the form of shares, share options, interests in shares or other benefits derived from shares. That is where the simplicity ends. There are a vast array of share incentive schemes available, all of which have distinct rules, advantages and drawbacks.
The acronyms alone can be mind-boggling, including CSOPs, SAYE, SIPs, EMIs, LTIPs and EBTs. A detailed consideration of each of these is outside this article (and indeed outside most of our waking consciousness) but any employer considering this route must take specialist advice to understand the differences.
Key questions include:
Does the scheme require HMRC approval?
What are the tax benefits?
Must the scheme be offered to all employees or can the employer be selective?
Can the scheme be linked to performance targets?
Are there any qualification requirements in terms of type or size of business or number of employees involved?
Are there any applicable financial limits?
How complex is the scheme to operate?How do I sell this as an ‘incentive’ to my employees?
SMEs will also be acutely aware of the impact minority shareholders (in the form of key employees) can have on a business: even a tiny minority can have a significant ‘hassle factor’ if disgruntled. It will therefore be important before issuing any shares to consider the following:
What, if any, voting rights should attach to these shares?
You must be mindful of the proportion of shares issued to individual employees and also of the aggregate issued to the employee group as a whole, to ensure power is not inadvertently given away.
What restrictions should apply on transfer? Is a simple pre-emption sufficient or does the employer require an absolute ability to retain ownership?
If so, some form of employee benefit trust may be appropriate to create a guaranteed market for those shares.
Employers will almost certainly require the employee to transfer back his shares at the end of his employment. To this end, ‘good leaver/bad leaver’ provisions may be appropriate (linking the value of the employee’s shares to the circumstances of his departure).
Employers should also consider their own long term strategy, and in particular how the issue of shares to employees may impact on their ability to sell the business.
Are drag along provisions appropriate, so that the employees can be forced to sell their shares on terms agreed by the majority shareholders?
Each of these issues will require a detailed consideration of, and probable amendment to, the company’s articles of association, which will in turn require approval by shareholders holding at least 75 per cent of the company’s shares.
Does the employer have the necessary level of support to implement these changes? Are there any shareholder agreements in place which would require additional consents?
It's a complex and expensive process, enough so that SMEs may prefer to look for alternative methods to incentivise their employees.
Phantom share schemes were, before the current market turbulence, a popular choice, linking financial reward to the overall performance of the business while avoiding the difficulties associated with giving away equity. However, they still require a good deal of careful drafting and administration, which impacts on cost efficiencies.
In today’s market, simple can often be best, so don’t mock the straightforward remuneration package coupled with perks such as flexible working (as to which, incidentally, we await with bated breath to see whether the Olympics trend will leave a long term legacy of flexible working in Canary Wharf).
Incentivising employees is not brain surgery: if you think an employee is good, tell them they’re good and be pro-active in rewarding them as such.