For businesses both new and established, attracting and retaining the most talented employees is important for ongoing success. While competitive salaries might have secured that talent in the past, these days cash is not necessarily king.
Made popular in the U.S. during the 1970s and 1980s, employee share plans have established themselves as an essential tool for most businesses when it comes to recruitment and retention.
“Good news stories in America tend to eventually come over here and in the late 1980s Britain’s companies started to put share plans in place at the demand of their employees,” says Mark Le Saint, director, RBC corporate employee & executive services (RBC cees), part of RBC Wealth Management.
“In the past, employees were paid a salary and perhaps beyond that didn’t really care about anything else, as long as things didn’t get so bad that they lost their job,” he says. “However, by linking a proportion of an employee’s remuneration to how the business performs, a company is aligning the interests of the employees with directors and shareholders.”
Aligning your interests with your employees
Deciding to offer a share plan is the first step, the next is finding the most suitable type of plan for your business and for what you are trying to achieve.
There are several types of share plan available to business owners in the UK, such as Company Share Option Plans (CSOP), Enterprise Management Incentives (EMI), Save As You Earn (SAYE) and Share Incentive Plans (SIP), all of which are HMRC approved and carry tax benefits. The right plan for your business will depend on a range of factors, such as the size and age of the company, the type of business, the number of employees and what it is you’re trying to achieve by offering the share plan.
“Following discussions with advisers, a plan can be designed specifically for your business, depending on where you are in your growth cycle and what the forecast for the business looks like, among other things,” Le Saint says. “Share plans can really align the interests of employees with the other stakeholders in the business. They are sometimes referred to as the ‘corporate glue’ that binds a company together.”
For private companies, an HMRC tax-approved plan such as the EMI Share Option Plan may be an attractive choice. Awards granted under such a plan typically vest on an exit, such as a listing or sale of the business. At this point the value of the company and its shares may have risen in value considerably, which could provide a significant financial gain for the plan members.
The use of such plans are a particularly popular choice for start-ups or businesses that cannot perhaps offer large salaries or cash bonuses. However, through the use of equity and a share plan, these companies can still attract the talent they require by offering the potential for significant future wealth from the growth in value of company shares.
“Even if it isn’t the type of plan where the awards only vest on a key event, such as a listing, awards may be based on individual performance or simply staying employed for a period of time, so employees can build up a shareholding in the business,” Le Saint says.
Consider all the outcomes
Of course, there can also be perceived downsides to the decision to implement a share plan within a business, depending on the existing ownership culture and how strong the desire to change that culture is.
Elanco Kanagasabapathy, an associate director for RBC cees in Jersey, says some employees will prefer the certainty of having money to spend today, so offering shares partly in lieu of cash could potentially hinder employee recruitment in some cases. Also, by transferring shares to employees through a share plan, the owners of the business will need to accept a level of dilution and that the shareholder base of the company will grow.
Where a business owner prefers that the equity in the company remains closely held, perhaps within the family unit, providing shares to employees can present a dilemma. However, one potential solution is to create a new class of non-voting shares that are issued to employees through the share plan. While such shares may fully participate in any growth of the company’s value, the control of the company remains with the holders of the original class of shares with voting rights.
“Often, owners of a business have the vast majority of their wealth tied-up in the shares of the company,” Kanagasabapathy says. “In such situations, an employee share trust can be created to purchase shares from existing shareholders, thereby creating a market and allowing owners to realise cash from their investment.” Such shares can then be held in the trust to be used to satisfy awards granted to employees under the rules of a share plan.
“What has become clear is that if you can’t offer some form of equity participation to your key employees, then you are potentially not as an attractive proposition as those competitors that do,” Le Saint says. “Often when talented people are looking to move or stay, an important consideration is whether there is a share plan in place that allows them to benefit financially, from any future growth in value of the company.”