RM2 > Employee Share Schemes

Employee Share Schemes

What is a share scheme?

Share schemes or share plans are an effective way to offer equity-related awards to employees, non-executives and consultants.  Awarding staff with shares in a company can help to develop a sense of ownership and ultimately increase loyalty and engagement. This helps to align their interests with existing shareholders, to drive growth, and to increase share value.

There are a variety of different types of plan available, so you can use a tailored scheme that best matches the needs of your business. The variety of plans at your disposal helps to ensure employees are rewarded appropriately for their contribution to the business. 

Awards can come in many shapes and sizes: 

  • Targeted vs. all employees
  • Shares vs. right to future shares ("options")
  • Shares to be gifted vs. purchased
  • Awards to employees vs. non-employees

Whatever your desired outcome, we can work closely alongside you to advise on the most efficient and appropriate way to achieve your goals. 

Why Do Companies Introduce Share Schemes?

Attract

Having an equity awards system in place can be extremely attractive, particularly when the company is perceived as having strong growth prospects. This additional benefit helps attract key industry players to the company as it allows them to participate in the future enterprise value. Having an employee share plan demonstrates that you are keen to engage employees in adding value and this can really help not just in attracting talent, but also in attracting investors.

Motivate

Providing ownership rights to your staff will often mean people start thinking and feeling differently about the business. Their interests become aligned with those of the existing shareholders as they are further incentivised to increase share value. Enhanced engagement helps to create a shared vision of the future. This can lead to a more productive and efficient working environment.

Reward

Why use a share scheme instead of a more traditional cash bonus? The truth is different types of awards will be appealing to different people at different times so you should include various elements on your total reward offering. Share plans can provide significant tax advantages and benefit cash flow. Performance conditions can be attached to share awards to ensure growth is heading in the right direction, sustainably, overtime and not just short-term.

Retain Key People

For many companies, individuals are the key to success. This makes staff retention vitally important. Time-based and/or other performance conditions can be attached to many awards to ensure key people stay with the company and achieve your longer-term goals.

Sucession

The use of employee share schemes can provide an excellent mechanism for slowly passing share capital into the hands of successors in a tax efficient manner. Using performance conditions can help to ensure that successors are ready to take the reins.

How Does a Share Scheme Work?

Let’s begin by taking a really simple example:

  • Think of a company as a cake. As the sole shareholder, you own all of that ‘cake’, and would like for its value to increase.
  • A proportion of the company’s share capital is allocated for employee awards – usually referred to as a ‘share pool’.
  • By implementing an employee share plan, you are effectively awarding a slice of the ‘cake’ to your employees.
  • They are therefore motivated to grow the value of the ‘cake’ and consequently their own individual reward.
  • This in turn grows the value of the entire company and increases the value of all shareholder interests.

You can decide:

  • Who is to receive shares
  • On what condition shares become available
  • Will employee shares have voting rights?
  • At what cost will employees attain shares?
  • Will employees get shares or share options?
  • Will employees forfeit rights/shares if they leave?
  • You do not need to have all the answers now as we can help guide you through these during the plan design.

Share Scheme Categories

Schemes are broadly split into 3 categories, and are suitable for different businesses, and for different reasons:

  • OPTIONS: Right to buy in the future, no risk but no dividends or voting rights.
  • PURCHASE: Payment upfront or can be deferred to make affordable.
  • GIFT: Shares given, tax paid on value

Next Steps

For more information on the different types of Share Plan available, please contact RM2 directly on 020 8949 5522, or via enquiries@rm2.co.uk.