Why consider share incentives? Whilst it is important that all staff feel engaged, most employers can identify a handful of senior individuals who are critical to the future of the company. It is important that these individuals are not only appropriately rewarded but are also incentivised to help grow the business. Every business should consider how key employees are rewarded and incentivised as the right package can have a number of significant benefits.
1. Increase business growth
A committed team with a sense of ownership can increase the value of the business for everyone’s benefit. Whilst the shareholders may think they are giving away a percentage of the business a well-executed share incentive scheme that is central to delivering the business growth strategy could see a boost in overall value for the shareholders.
2. Maximise shareholder exit value
A strong second tier management team should increase the value of the business. A potential purchaser will assess whether the business performance can be sustained without the main owner manager. This is often not addressed until it is too late and the impact on business valuation or the overall ability to even market and sell a business can be significant.
3. Recruit the best talent
The right reward and incentive package can help attract the best recruits. In particular, start-up and small growing businesses can issue share capital or options over share capital as a way of minimising the initial cost of employment whilst ensuring they attract a high calibre senior team.
4. Lock-in talent
Individuals that are rewarded and incentivised are less likely to than join a competitor or start up on their own in direct competition. By getting the package right, with a mix of salary, bonus and equity awards, this can significantly improve loyalty within the senior workforce.
5. Motivate key employees
Our experience shows that key employees that are appropriately incentivised demonstrate increased motivation compared to those who are not. The award of shares or options to acquire shares can motivate staff to grow the business, and therefore the value of their shares.
6. Align employee interests with those of the shareholders
Share awards or share options can help to align the interests of the employees with those of the shareholders. An employee who will benefit from an increase in growth in their employer (i.e. through their shares increasing in value) will be more willing to work to grow the business. This is particularly the case where everyone is working towards an exit event (perhaps a sale of the company), at which time the key employees will benefit if the right incentives are in place.
7. Modernise your reward structure
Senior employees look for a modern reward structure. A mix of salary and bonus may not be seen as a suitable structure to attract the best and retain those people in your business.
8. A cost effective alternative
Shares in a privately owned business are generally only worth something in terms of cash when there is a trade sale to a third party. A promise of a significant capital return later is cost free strategy compared to an annual bonus. Professional fees will be incurred in setting up the scheme but these may be modest compared to the overall benefit.
Share Incentive Schemes; in conclusion
The latest Chartered Institute of People Development survey on staff engagement found that only 35% of employees feel motivated at work. The right incentive and reward package can improve staff motivation and ultimately help to increase the value of your business. There are a number of tax efficient ways to reward and incentivise key employees, including using equity awards, share options and other tax efficient benefits.
If you would like to find out more about share incentives schemes, please do not hesitate to contact us.
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
View my articlesTags: Reward and Incentives
