So you want to reward employees for their contribution. Or incentivise teams to meet performance-based milestones. You might be thinking that a cash bonus scheme is the best option. After all, it’s the tried and tested way. But have you considered sharing equity instead?
We know that the Ownership Effect has a positive impact on productivity, engagement and retention. It’s why employee share schemes are so successful. In fact, a whopping 95% of Vestd customers said that their EMI (Enterprise Management Incentive) has actively helped to improve employee loyalty.
But how can a share or option scheme possibly compete with a cash bonus? Well, employee engagement is crucial to business success. And if there’s one thing that share incentives do, it’s to increase engagement (as proven in various studies).
Once a cash bonus is paid, that’s that. They’ve crossed the finish line, but now what? The key is keeping employees engaged for the duration they are with you.
With option schemes like EMI, employees become option holders with the opportunity (but not the obligation) to become shareholders in the future. And by that point, the shares could have considerably increased in value which could be more financially rewarding than a one-time cash payout.
Alternatively, Growth Shares schemes offer the best of both worlds; shares and cash rewards in the form of dividends. Both EMI and Growth Shares schemes are conditional, so the release of equity is tied to performance. We’ll explore EMI and Growth Shares in more detail later.
There's also a theory that bonus schemes can have an adverse effect; instead of feeling motivated when someone dangles a big bonus, a person may feel overly controlled and therefore reluctant to meet expectations, especially in highly competitive environments.
Shared ownership, on the other hand, fosters a sense of camaraderie. Team members are more likely to work together well to ensure the future success of the business.
Not only that, but countless companies are recovering from the impact of COVID-19 on the economy and their business. Therefore, it may not be possible to pay hardworking employees a lump sum right now or in the next 12 months.
By offering a share or option scheme, employees can still feel valued while you preserve cash flow. And in the case of EMIs, there’s nothing to pay when granting options.
These are just a few reasons why we think you should scrap your employee bonus scheme and share equity instead. Let’s take a closer look at the most popular share/option schemes with SMEs to help you decide which one is right for your business.
Bonus vs. EMI
EMI is a government-backed share option scheme specially designed with SMEs in mind. A popular choice with many of our clients. In 2018-19, around 12,400 companies had an EMI scheme in place. One of the main reasons is because EMIs offer huge tax advantages for both employer and employee.
Traditional company bonuses incur Income Tax and National Insurance at the usual rates, whereas recipients of EMIs pay just 10% CGT on any gains when the shares are sold. The table below outlines the tax efficiency of EMI in comparison to other schemes.
Some may argue that investing in a bonus scheme is less risky than giving away equity, especially in a startup. However, if you design a share scheme properly there is zero risk to existing shareholders: conditions can be applied to EMI schemes ensuring that option holders meet specific targets before any equity is released.
For instance, a common prerequisite is that 12 months must have gone by before any options vest. You might see this expressed as a one-year "cliff". Set a four year vesting period and the employee must stick around for the duration before they’ll receive their full allocation of equity. By putting in place clear conditions, you can mitigate the risk.
You do need to keep your scheme compliant though. As a government-backed scheme, Companies House requires annual notifications and valuations. Unlike the traditional way of managing a share scheme, on a digital equity management platform like Vestd, that process is fairly straightforward. Not every company qualifies for EMI, but that's fine. There are other attractive alternatives.
Bonus vs. Growth Shares
Like Growth Shares. Unlike EMI options, Growth Shares are real shares issued almost immediately, providing that the recipient has to agree to conditions outlined by you. Only once those conditions are met (and awarded to a share class) can they receive dividends. And if recipients never meet those conditions, the allocated shares can become deferred shares (worthless).
We use the word recipient here because Growth Shares can be awarded to non-employees, enabling anyone contributing to the success of the business to share in that success. Growth Shares are more flexible than EMI options in that respect, with fewer restrictions. Recipients don’t have to pay Income Tax on exercise either, only Capital Gains Tax on sale.
Because Growth Shares are conditional and recipients can receive dividends, the scheme has parallels with a conventional employee bonus structure. But with the added benefit of the Ownership Effect. Something a bonus scheme can’t offer.
Other Share Schemes
There are other alternatives such as Unapproved Option schemes and Agile Partnerships, which may be better suited to your business needs.
Unapproved Option schemes aren’t as tax efficient as a HMRC-approved EMI scheme, but like Growth Shares, offer greater flexibility with fewer formalities. With an Unapproved Option scheme, employees, advisors, contractors and consultants all get a slice of the pie. And you can stipulate performance-based conditions before equity is released to give you peace of mind.
Our Agile Partnerships framework was devised to help business owners release (and reward) equity proportionate to what people contribute. Agile Partnerships are bespoke, and conditions can be changed later down the line depending on the needs of the business.
Book a free consultation today and tell us how and why you want to reward your teams. We’ll recommend the best share or option scheme for you.
We’re not just recommending sharing equity as an alternative to a cash bonus because of tax advantages and the Ownership Effect. Employee expectations and workplace motivations are changing.
In a survey conducted with YouGov, we asked 2,000 workers what motivates them. Being appreciated and thanked by managers was top of the list. Modern employees aren’t as swayed by high salaries and big bonuses anymore.
So, move with the times. Reward employees differently; scrap conventional methods like bonus schemes and share equity instead.