Share schemes: the key to unlocking business success?
Share incentive schemes for employees are an effective, but underused, way of increasing both their productivity and their commitment to a business
A growing number of firms are finding that giving their employees a share in the business is an excellent way to incentivise and reward their people. HMRC’s most recent report on the subject confirmed that there had been an 11% annual increase in the number of companies implementing tax-advantaged share schemes. That’s a significant rise and it’s worth exploring why.
Uncertain times mean that it is more important than ever for companies to attract and retain the best talent in their field. Successful businesses don’t look at their workforce as a mere resource to be maximised: when companies recognise that employees are truly their greatest assets, rather than just saying it, the results can be transformational.
Using shares to engage your staff makes sense. If an employee has a real stake in the company in which they work, they are more likely to pay attention to the metrics and increase their personal contribution in delivering the desired results.
And the benefits go beyond individual cash rewards. A research study published by Loughborough University in 2013 found that companies offering employee share schemes reported higher productivity levels, more engagement from employees and harmonious employee relations. Employees in these companies believed themselves to be more financially savvy, managed their own cash effectively, and were more likely to remain with their employer for the long term. The overall contribution employee share schemes make to the UK economy is recognised at government level and is reflected in the significant tax advantages to employees and employers offered by HMRC.
There is no “one size fits all” when selecting the right share scheme. There is a wide range of alternatives, and it’s worth investing some time in deciding what the overarching objectives are, and how the share scheme can align employee interests with corporate goals.
According to figures released by HMRC, enterprise management incentives (EMIs) are soaring in popularity. EMIs are a tax effective way for smaller entrepreneurial firms to provide equity to staff and are designed primarily to incentivise the key drivers of the business – mainly senior executives or rising stars. EMIs can be extended out to all employees, where appropriate, and linked to specific business goals.
A similar upward trend is not, however, apparent in relation to all share schemes. There has been a significant decline in company share option plans (CSOPs), and a relatively static picture for both share incentive plans (SIPs) and save as you earn (SAYE) schemes. A well communicated, properly executed SIP can be the most tax effective means to align an entire workforce with business aims, and reward employees for delivering results. It’s difficult to understand why there isn’t a growing level of takeup.
There is a perception that implementing a share scheme can be complicated and expensive. That needn’t be the case. For example, the SIP is designed to be a DIY scheme and the necessary instructions and documentation are freely available on the HMRC website. The SIP allows frontline employees to build up considerable value in their business, a value that can be realised tax-free if certain conditions are met.
Whichever scheme is chosen, effective communication is critical. If a share plan is viewed merely as an add-on to an individual’s remuneration package, it’s unlikely the desired outcomes will be fully achieved. Investing time in explaining to employees how the share scheme works, how their actions impact on the organisation’s bottom line, and how they can maximise value for the company and for themselves will lead to a more effective plan.
Share schemes will continue to be one of the most effective tools in the employee engagement toolbox. Get the right advice, choose the most appropriate scheme and communicate it well. You and your employees can reap the dividends.
Rodger Cairns is a corporate finance partner and head of the Employee Share Incentives team at Shepherd & Wedderburn