Can employee-share schemes secure your team for the long haul?
A recent PwC study suggested that 1 in 5 employees are still considering leaving their employer (in the near term – within 12 months). It also found that 35% of employees plan to ask for a raise in the next year
That’s an enormous cost about to hit (or continue hitting) businesses (big and small) – it will be important for all employers to be on the front foot with retention strategies to minimise the impact of this global trend.
Holding on to your team is critical – not only for day-to-day business performance, but also during an exit, where continued performance is critical.
Enabling key staff to hold equity (employee share schemes) can be a killer retention strategy. It can give them skin in the game and help them look at the business in a different light. It also provides strong encouragement for loyalty to the business.
That said, the devil is in the detail – Let’s consider some of the options business owners commonly reach for:
Employees Holding Shares
There are many things to understand when considering employees holding shares:
- Will this be a plan you share across multiple staff?
- Will staff have to buy in, or will they receive shares without incurring costs?
- Will shares be provided outright, or based on hitting targets?
- What are the tax implications for you, and for them?
And importantly, what terms will govern their long-term holding, for example, can they participate in decision-making, and will you require the shares to be returned if they leave?
Ensuring clarity around any form of share scheme and what rights share ownership give to the shareholder is essential for this to be an effective strategy for employees, the business itself and the original business owners.
A word of warning: Timing of this type of initiative is critical. Ensure you have a strong shareholder agreement in place well before considering any employee share scheme. Once shares are allocated, you effectively have new business partners – and with more cooks in the kitchen it can be too late ensure structures and agreements align with your idea of exit.
A good alternative to staff shares is a bonus scheme made up of either or both short- or long-term incentives. Long-term incentives, for example, may be where the payment of a portion of the bonus earned for performance in one year is deferred to one, two or three years later. This approach can be particularly effective when disincentivising staff who are considering leaving.
Bonus schemes can be a far easier way to reward performance and provide a financial lock-in for staff rather than embarking on a plan for staff shareholding. Many staff might also prefer this to holding equity from a personal risk perspective.
Phantom Equity provides another alternative. It is effectively a bonus that shadows the performance of the company. It can provide similar incentives to share ownership, by giving employees a benefit based on the increasing value of the business but without diluting the owners’ voting power and control of the company.
Although it can be an extremely effective staff retention mechanism, this type of scheme can have unintended consequences. For example, if the trigger for the payment is the sale of the business – who has to pay (the buyer or the seller?) and how will this work in with tax for the employee (who ultimately ends up being taxed at the higher income tax rate rather than being treated as a capital gain).
Phantom share schemes can also be based around other calculation points like annual payments based on growth of the business value over time. Complexity can still arise from the process of objectively establishing what the business value is at any point. Overall, bonuses and share schemes are often simpler, but I have also seen phantom share schemes implemented extremely effectively, when done right.
Having employee share schemes gives you options – You have the option of affecting multiple staff, your entire staff pool or one or two key staff with holding shares. And bonus schemes and phantom equity are alternatives worth considering if you’re not looking to dilute control or decision making.
Whichever way you go, all the above options are worthwhile considering – engaging employees so they stay by choice is hopefully going to make for smoother operations and performance aligned to business goals and objectives (a reduction in recruitment costs is a bonus!).
Written by Joanna Oakey.
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