Should I Have A Share Scheme?

Liz Hunter
RM2 Ltd

As a share scheme provider you might expect us to write an article on which share scheme is right for you, however, this ignores a fundamental question.  Before designing the ‘right’ share scheme, your objectives and whether or not the need is there should be considered.

From a shareholder/directors point of view, a share scheme should be implemented if you are looking to recruit, retain or motivate staff and cash bonuses/salary increases are either not an option or will not meet your objectives.  For instance, will a short term cash bonus ensure someone stays with you for the next 5 years building company value and help you exit the company? Unlikely.

From the employee’s point of view there is no point implementing a share scheme if there is no line of sight to value.  Value for most share schemes forms on the point of sale/exit. This suggests that if you are not looking to sell the company within the next 5 years, the timeframe for many employees may be too long to compel them to stay with you. If you have no exit in mind a share scheme can still work provided value is delivered. This can be created by either dividends paid or an opportunity at some set point in the future to sell shares back and make a profit i.e. the creation of an internal market.  (Please see our EBT factsheet).

It is also worth considering the individuals you are looking to motivate or retain with a share scheme.  Making a sweeping generalisation, younger employees (those under 30) who are not part of the management team are unlikely to be interested in a long term incentive plan or a potential sum of money after 5-10 years.  They need cash now to afford to fund things like getting married, buying a house and going on nice holidays.  So for these employees, small pay increases or cash bonuses may be more effective at driving the behaviour you require.  Senior employees (both in age and position) are much more likely to see the value in a potentially large pay out in 5+ years’ time and will happily work towards this.

If a share scheme will help the company achieve its objectives and the employees will see the value, then it is time to move on to discussing which share scheme is right for your company. In order to communicate the reasons behind the implementation of any share scheme to staff effectively it is important that an understanding exercise, which typically includes a presentation or one to one discussions with the employees involved as well as printed materials. While this is often seen as an optional extra, a large number of share scheme providers do not even supply this service. Having a share scheme implemented and not sufficiently explaining the benefits to the participants is both a waste of time and money.

From our experience we occasionally meet companies who are convinced they would like a share scheme yet in order to achieve their objectives they do not require one.  However, far more commonly we encounter the situation where the company is convinced they would like a specific share scheme which would not necessarily be the one we recommend.  This is frequently the case where a smaller company is looking at an all employee share scheme and would like a Share Incentive Plan (SIP).  For smaller companies with fewer than 40 employees it may be right for them to consider if the Enterprise Management Incentive (EMI) could be used for all employees instead.  The benefits of considering this would be that the time taken to implement an EMI is shorter, the gains under the EMI can be greater and usually the cost of setting up the scheme is lower however the SIP does provide for tax free gains unlike the EMI.

If you are unsure whether you require a share scheme, or are looking at which scheme may be most appropriate for you, please get in touch with RM2 and we will be happy to work through this with you.  For general information about the share schemes please see our factsheet page. For an interactive and fun way to determine which share scheme could be right for your Company, take our share scheme quiz!

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