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"Recruit, Reward, Retain"

Posted on April 23, 2013

If anyone should know how best to attract and retain staff, it’s recruitment companies. People are not just the currency of the recruitment business; they’re also its single most valuable asset. Recruitment is a knowledge intensive industry, in which companies sink or swim based on their consultants’ expertise, commitment, and contact network. 

As anyone that’s lost a string of top consultants knows, losing great staff can be as damaging as losing great clients. In fact, when the former happens, the latter is rarely far round the corner – after all your ex-employee is now a competitive threat out in the marketplace. You’ve also squandered the costs you’ve sunk into training that employee, and the man-hours cost to the company of recruiting their replacement.

In a challenging market where budgets are under scrutiny and every contract is competitive, it can be difficult to meet the remuneration expectations of a large number of ambitious, upwardly mobile staff. With pay being the most commonly cited motivating factor among employees leaving their jobs, managers in the recruitment sector clearly have a challenge on their hands. Surely there is a way of improving retention without committing to long-term salary increases?

Why a cash bonus isn’t the answer

  • Their impact on motivation diminishes quickly, and they often only keep staff around whilst they’re waiting to be paid.
  • Once the money’s in the bank an unhappy employee will all too often lose their incentive to stay at the company.
  • They are an extremely tax inefficient (the combined tax and NIC charge could total as high as 60.8%) fix to appease disengaged employees.
  • If an employee makes the decision to leave, it can be extremely difficult to claw-back bonus payments.

Why share schemes are better

Share schemes are a smart option which a few leading-edge firms are adopting – from industry giants like Harvey Nash to sector leaders like PiR Interims. They are also heavily supported by a Government making ever-louder calls for a “John Lewis economy”.  In contrast to short term bonuses, employee share ownership schemes can offer the following:

  • Foster long-term loyalty.
  • Alignment of the interests of the employees with that of the company.
  • Can be extremely tax efficient.
  • Awards can lapse or be clawed back if an employee leaves.

Which share plan?

An Enterprise Management Scheme (EMI) allows a company to grant options over shares to individual employees on a discretionary basis. EMIs are the preferred share scheme choice for many recruitment companies. The main features of the scheme are:

  • Discretionary flexible awards.
  • Can be linked to performance targets.
  • Can be forfeitable on cessation of employment.
  • Can be over restricted shares (e.g. non-voting).
  • No tax charge when the award is made.

Gains realised by employees will now, due to new legislation in The Finance (No. 2) Bill 2013, usually only give rise to a 10% tax charge even if the options are only exercised at exit and even if the shares have restricted right and regardless of the equity percentage interest size.

This change, to make Entrepreneurs’ Relief (ER) more widely available to those acquiring shares under EMI, also means owners can enjoy less dilution of their interests as a smaller tax charge means fewer shares need to be awarded in order to provide the intended post-tax incentive gain to a key employee.

Share Incentive Plans (SIPs) are suitable for recruitment companies with around 30 or more employees who wish to offer equity to all employees. These can deliver share awards completely tax-free. Under this arrangement the company can gift free shares, the employee can purchase shares and any shares bought by employees can be matched (free) by the employer in up to a 2:1 ratio. In most cases the company's NIC savings alone makes this an extremely attractive incentive.

The recruitment sector should lead the jobs market in effectively retaining quality staff. By unlocking the benefits of employee share ownership schemes, smart recruitment companies can give their staff a strong and sustained incentive to stay. And crucially, in a tough financial climate, they can do so for a fraction of the time cost of tax-inefficient bonus schemes.

For more information on any of the topics featured in the article above, please contact liz.hunter@rm2.co.uk or call the office directly on 020 8949 5522.

RM2 are pleased to sponsor Elite Leaders, a recruitment peer-to-peer learning, support and development forum. For an introduction to Elite Leaders, please contact Fiona Bell via Fiona.Bell@rm2.co.uk.

 
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