One in four UK SMEs motivate employees with equity

One in four UK-based SMEs now share ownership with some or all of their employees, according to an independent study commissioned by Vestd and conducted by 3Gem.

The Employee Equity Trends 2020 report is now available to download for free. Let’s explore a few of the highlights…

Share schemes improve employee loyalty

We asked founders, owners and C-level execs what a share scheme has done for their business. Based on the results, it is crystal clear that employees feel and behave differently when they own a piece of the action.

Loyalty was ranked in first place. More than six out of ten SMEs pointed to increased employee retention as the primary benefit. There is considerable value here, given how much it costs to hire and train new team members (often between £5k-£30k, depending on the role).

Improved performance was another key benefit of equity incentives. 58% of respondents said their team had become more productive, something that has been repeatedly highlighted in other studies.

A further benefit is team alignment (56%). Equity aligns interests like nothing else, as The Ownership Effect is an incredibly powerful motivator. Alignment will become increasingly important as more companies allow their employees to work remotely.

Share schemes are also an excellent way to strengthen company culture (49%) and they make it easier for businesses to attract talent (45%).

SMEs love EMI option schemes

EMI schemes are the most popular way to distribute equity, according to the research, with 41% of SMEs with schemes using this method. It is no surprise, given the tremendous tax benefits on offer for both employees and employers.

Recipients of EMI options pay just 10% CGT on any gains, once the shares have been sold. No other type of scheme comes close to this tax position.

In addition, the company can offset both the cost of the scheme and the tax benefits achieved by employees against its Corporation Tax liability. As such, EMI schemes can help grow the value of a business without costing a penny.

EMI schemes are also incredibly flexible. They allow employers to set various conditions to govern the release of equity, such as time-based and / or performance milestones. Furthermore, the vesting schedule can also be customised in various different ways (Vestd offers monthly, annual or custom vesting, as well as exercisable or exit-only schemes).

Why don’t more SMEs share ownership?

Those founders that have yet to set up a scheme tend to be more concerned with costs and dilution.

Again, this is no surprise, given some of the astronomical quotes we’ve seen from accountants and lawyers, which tend to be the first port of call for people looking to launch a share scheme. 

One lawyer quoted more than £12k to set up an EMI scheme for 11 people. An accountant tried to extract £9.5k from one of our customers, to launch a scheme for just three people. 

For the record, our fees are a fraction of these quotes.

Dilution is par for the course when you issue new shares, but there are ways of mitigating the effects and if the overall business value grows sufficiently then it shouldn’t be an issue. Especially if the team is more loyal, more productive and more aligned to the goals of the company.

With that in mind, one in three respondents said their share scheme had increased the value of the business.

Another reason why founders don’t distribute equity among the team is because they aren’t aware that you can pick and choose who gets equity. Some 17% of respondents haven’t launched a scheme because they don’t want the whole team to have shares.

Schemes don’t need to be universal, and all too often they’re not. In fact, executives are twice as likely to receive equity as the whole team.

Figuring out who to reward (and the amount of equity to set aside) really comes down to the personal philosophy of the founders, or in some cases, the investors. Companies are often mandated to launch an options scheme by those funding the business, which speaks volumes as to the effectiveness of incentivising people with equity.

Why are people thinking about launching a scheme now?

There are two big, related things going on: Covid-19 and the rise of remote working.

Around half of the respondents to the survey pointed to Covid-19, saying that it has made them rethink how they operate, and also that it has demonstrated the value and importance of their team.

We’ve had many conversations with company founders and execs since the crisis began, and many of them are reflecting on the future shape of their business, operational processes, team and culture.

There is much talk around how companies may transform their operations on a more permanent basis, having been forced to embrace remote working during the pandemic. Many have done so successfully and will continue to allow teams to work in distributed locations from now on.

Team alignment was the third most referenced reason for launching a scheme (42%). Equity can be used as a pivotal tool among partially or fully remote businesses to keep everyone on track.

Vestd operates as a fully remote business and has done so for years. Our own share scheme definitely helps everyone to pull in the same direction (and we all love to work remotely).

Salary stagnation is upon us

Around 15% of SMEs expect to cut salaries in the next 12 months, according to our data. 48% of SMEs intend to keep salaries at the current rate, with a further 17% undecided.

Equity can be used in these circumstances to offset short term pay issues. In the long run it could be worth many times more to the employee than any temporary gap in salary growth.

During the Covid-19 crisis we have launched a number of share schemes for SMEs that wanted to compensate employees, who have in some cases been asked to reduce their salaries and / or hours.

How to launch a share scheme

Equity can get complicated very quickly, which is why we built Vestd: to make it easy for people to set up and manage share schemes. We have some tried and tested pathways for you to follow.

If you’re thinking about giving some or all of the team shares then schedule a 30-minute discovery call with one of our specialists. There’s no quicker way to get the answers you need.

We have helped more than one thousand UK SMEs figure out the best way to share ownership, in a tax efficient, safe manner, and we’d love to help you too.