A Dragon's Perspective
James Caan, serial entrepreneur, former Dragon and the force behind ground- breaking recruitment company Webrecruit says: before you start thinking about attracting new candidates, it's a good idea to first make sure you are not actually losing your best people.
This is a point most managers would agree with. The difficult part, however, is putting this into practice. In fact, equity-based incentives can play a valuable role and the incentives don't have to be big to have a profound effect.
Adapting the approach
Many employee share scheme involve share options. These usually offer the prospect of sizeable rewards to an individual or a small group if certain targets are achieved possibly performance based, or on a trade sale. One of the many advantages of option schemes, such as the government backed Enterprise Management Incentive (EMI), is that they can provide both carrot and stick: the promise of significant rewards at low tax rates, but also the prospect of losing all benefits if the employee leaves prematurely. Loyalty is therefore rewarded.
However, not all schemes are about targeted incentives for senior executives. The effects of high turnover among the workforce as a whole can also be very damaging. All too often, poor morale and low motivation are factors.
At the end of 2010 a report was published by the Chartered Institute of Personnel and Development suggesting that the less an employee is aware of their company's main objectives and purpose, the less motivated they become. Within the private companies surveyed, 59% of employees stated that they believed the main purpose of their employer was just to make the most profits for the owners. This perception may be accurate: but if there is no engagement or involvement for employees it is hard to see why they should feel any sense of motivation, or why they should stay with the company if a superficially better offer comes along.
Encouraging stakeholder attitudes
Offering an equity-based reward scheme to all or most of the workforce can make a real difference. It is not just about the size of the prospective reward it is helping employees to feel that they are stakeholders in the business with a direct interest in its success or failure. These schemes work best if combine with a policy of openness with employees, including a willingness to discuss the financial and commercial performance of the company.
A number of smaller surveys carried out by Computershare and London School of Economics have revealed the following about employees who are part of a scheme: they tend to stay with a Company longer, they are more likely to go the extra mile on a day to day basis and their efforts at work are rated more highly.
Some all-employee schemes also offer the opportunity to pay dividends. This reinforces the stakeholder message and can also be a relatively tax-efficient way of rewarding staff since no NICs are payable.
Share Incentive Plan
The schemes can be very tax-efficient. Under the Share Incentive Plan (SIP), which is government backed, employers place shares in trust for employees. After three years, any increase in the value of the shares is tax free. After five years, the whole value of the shares becomes free of all taxes. The amounts that can be offered in this way are quite small; shares to the value of a maximum of about £7,500 per employee per year. However the effects on employee involvement and motivation can be substantial. For private companies the results can be particularly positive since the value of the shares agreed with HM Revenue and Customs at the outset is usually very conservative. This creates the possibility of larger gains on a subsequent sale or flotation of the business.
To discuss anything in this article further, or for more information on employee share schemes and how they could help your business, please call us on 020 8949 5522 and ask to speak to one of our advisers.
Other than the quotation used at the beginning of this article, the views expressed here are of the RM2 Partnership Limited only.