In the UK, more SMEs than ever are implementing Enterprise Management Incentives (EMIs) and other tax-advantaged share and share option schemes.
But what actually is an employee share option scheme? How does it work? And what do you as an employee need to know?
What is an employee share option scheme? In plain English, please...
Put simply, it's a scheme where employees have the right to a literal share in the company’s success. But instead of the company issuing shares to employees (immediately making them shareholders), the company awards share options instead which vest over time.
Think of options as shares with your name on them - not to buy now but at a later date (or following an exit event) at a discounted rate.
It's worth knowing that there are a few different types of employee share option schemes in the UK to suit businesses of all shapes and sizes.
What's in it for employees?
Let's say you're awarded share options under a scheme like EMI - that means you have the option to become a shareholder in the future at a discounted rate.
If the company you're working for is successful, by the time you can exercise your options (pay the exercise price to convert the options into shares), the share value is likely to have increased considerably.
That could equate to a tasty lump sum to put towards a car, a dream holiday, a house - whatever!
And that's why in some cases, an employee share scheme can be far more financially rewarding than a one-time bonus.
In fact, one report goes so far as to say that low-paid workers with access to an employee share scheme are £10K better off on average than those without.
Plus, with EMI, you only pay 10% Capital Gains Tax on any gains when the shares are sold, instead of the usual 20%.
An employee share option scheme is also a valuable addition to your compensation package, especially when you consider the current economic climate...
Not all employers are in a position to offer a pay rise, and those who can don't always top up salaries enough to combat the rise in inflation. With that in mind, lots of companies are now considering adopting a share option scheme to improve retention while conserving cash.
And that leads us nicely to our next point, why do companies share equity with their teams?
Why would a private company give employees share options?
Employee share option schemes align teams. If everyone is literally invested in the company, then they're more likely to be emotionally invested in its success too. It's called the Ownership Effect.
Numerous studies show that employees with a piece of the pie are more engaged, motivated and supportive of each other - because if the company wins, they win too.
And as we know, employee engagement is key to employee retention. If your career gives you a sense of pride, purpose, and meaning, you're more likely to feel satisfied and happy where you are.
And what does that also impact? Productivity and performance. HM Treasury research found that tax-advantaged employee share plans increase company productivity by 2.5% to 4.1%.
From a purely financial perspective, employee share option schemes like EMI are cost-effective and tax-efficient too.
Plus putting a share scheme on the table can give smaller companies and startups the edge over more established companies when competing for talent.
Companies are just as incentivised to set up an employee share scheme as they help:
- Attract and retain talent
- Align and inspire teams
- Boost productivity and performance
- Improve employee engagement
- Manage cash flow
- Increase overall business value
Sounds good right? If you're a business owner, book a free, no-obligation consultation with a member of our team today and unlock the power of your equity to motivate your team and grow your business!
How to maximise your employee share scheme
While the success of any employee share scheme will come down to how many millionaires it creates, it's just as important to set up the scheme fairly in the event the company doesn't quite grow as expected.
Vesting schedules that reward loyalty and/or performance and fair exercise prices are both good places to start, and totally possible with Vestd.
But educating (and regularly reminding) employees about the benefits of their options are key to getting everyone's buy-in and working towards the same goal.
And it's also important that you understand the terms of your share agreement too - if there are criteria you need to meet or time restrictions - like the 90-day window to exercise EMI options.
Our Equity Fundamentals guide is a great read for anyone who wants to learn more. And if you think your employer might be interested why not point them in our direction? We'd be happy to help.