Most business owners agree that incentivising staff is a no-brainer, and it is not a case of employees needing an incentive to do their job it is about creating a strong culture of reward and recognition, which is crucial to business success. How so?
According to a report by Vestd and YouGov, the number one factor that motivates most Brits in the workplace is being appreciated and thanked by management. One way to meaningfully reward and recognise staff is with incentives.
Different incentives go above and beyond the costly cash bonuses and free lunches; there is another way. Consider sharing equity instead!
Employees with shares in a business care more about its success – it is what we call “The Ownership Effect”. Data has consistently shown that SMEs with share schemes and option schemes found their teams performed better and stayed with the companies for longer.
One in four UK-based SMEs now shares ownership with all or some of their employees for those very reasons. Not only that but levels of engagement, happiness, and productivity too. So, what better way to incentivise staff than with a slice of the action?
In this article, we are going to talk about how a share option scheme is an incentive that really does incentivise staff – Equity is a powerful incentive.
What is a share option scheme?
Share option schemes are a cost-effective (and often tax-advantageous) way of sharing company ownership with all employees or a select few.
Just to be clear, shares and options are not the same thing.
There is a fundamental difference between the two:
- Shares allow a recipient to become an immediate shareholder.
- Options give a recipient the right (but not the obligation) to turn options into shares in the future at a pre-agreed price.
Various share option schemes are available in the UK (subject to eligibility) to incentivise staff at start-ups, SMEs, and larger corporations.
How do share option schemes incentivise staff?
Share option schemes are usually conditional, meaning that a recipient needs to hit criteria to reap the rewards. For instance, an employee may have to work at the company for a minimum of 12 months before their options can vest. Or perhaps, the employee needs to hit a performance-based milestone first, maybe a revenue target within 12 months of joining the company.
When options start to vest, that is the moment they start essentially ‘earning’ the options issued to them. Once the vesting period is over, and the employee has hit their performance goal, they can then exercise their options (turn them into shares).
These types of conditions give employees something to aspire to long-term and work towards knowing they will get more than just a “pat on the back” for a job well done.
As well as incentivising the individual, share option schemes influence the whole team. In fact, a share option scheme is proven to:
- Align teams
- Improve retention rates
- Increase productivity
- Promote positive company culture
- Attract new talent
A share option scheme is so much more than just an incentive to incentivise staff; it is a tool for business growth!
What are the different types of share option schemes?
There are different kinds of share option schemes in the UK to suit specific business needs and stages of the journey. Some share option schemes like Company Share Option Plans (CSOPs) and Enterprise Management Incentives (EMIs) are HMRC-approved.
Others are not, which is not a bad thing by any means. Unapproved Options, for instance, offer a lot of flexibility. Though, HMRC-approved schemes do tend to be more tax-efficient. Dive a little deeper and identify the best share option scheme for your business.
More often than not, EMI is the best choice for SMEs. It is also a popular choice. The latest UK Gov stats indicate that EMI is the main driver behind the increasing number of companies introducing tax-advantaged share schemes to their teams.
The joy of EMI Option Schemes
EMI also offers massive tax advantages for both the employer and employee. You can offset the scheme’s cost and the tax benefits achieved by the employees against the company’s tax liability.
Employees granted options are eligible for Entrepreneur’s Relief at the time of sale, so instead of paying 20% Capital Gains Tax, they only pay 10% on any gain over the value at the time of the award. So long as the shares are not sold within 24 months of the option grant.
There is also nothing to pay when the options are granted, making an EMI scheme a clever way to incentivise staff while preserving cash flow. And if employees fail to meet the agreed expectations, the options fall away, so you do not have to give away equity not rightfully earned.
As previously mentioned, various share option schemes and incentives exist, so if your business is not eligible for EMI, there are other ways to share equity with your team.
Educate staff about share options
One thing business often fails to do is educate their teams about the option scheme on offer. If senior management does not advocate it, employees are unlikely to engage with it.
Why not prepare a presentation to announce the scheme? Or provide educational materials that outline the benefits of having options that will one day become valuable assets. After all, you want staff to feel excited at the prospect of having a future stake in the business.
It is also a way of showing them how you value their hard work and want them to stick around. Be part of the company success story years down the line.
How do I set up a share option scheme?
Traditionally, setting up a company share option scheme like EMI involves liaising with lawyers and accountants and tackling a ton of paperwork that inevitably ends up in an employee’s drawer never seen again. But there is a new, better way of managing equity – digitally.
Vestd is the UK’s only first, most advanced, and only regulated digital share scheme platform for SMEs. All option holders have access to a dynamic online platform, so educating staff and getting them excited about share options is much easier. They can see their options vest for themselves and visualise their value.
You can book a free, no-obligation consultation with one of our equity specialists to discover the best share option scheme for your business to incentivise staff.