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Why do companies give employees shares?

Why do companies give employees shares?

According to HMRC, in the tax year ending 2021, there were 16,330 UK companies offering shares to their employees. That’s a jump of 6% compared to the last tax year.

As an employee or someone looking for their next opportunity, you might be wondering whether you should target your search toward companies with share schemes, and what’s actually in it for you

The truth is, there are many benefits for companies who offer employees shares, but just as many benefits for employees too. 

If you’re unclear on what this is all about, let’s explore a little deeper. 

What happens when an employee owns shares?

This type of situation occurs when companies reward their employees or key players with shares or options within the business.

Understand the difference between shares and options.

That means that, in effect, they own (or can own in the future) a small part of the business, and in some cases, they may receive dividends too.

Typically, the more successful a business is, the more the value of its shares increases - and that directly impacts the gains an employee will make should they wish to exercise their share options and sell later down the line.

It’s not hard to see what business owners are trying to do here - build loyalty and productivity which, providing the company does well, benefits everyone in the end. 

The Ownership Effect

The ownership effect is a series of positive results that come about when a company gives its employees a slice of the pie. These include:

  • Increased loyalty
  • Motivation to work harder
  • Increased productivity (and profits)
  • A boost to employee engagement

Ultimately, it instils a sense of belonging and being a part of something bigger than themselves (something all humans need). And an increased sense of security, especially given the current cost of living crisis and the rise in inflation.

As you can see, gifting shares to employees benefits all, but as an employee, it can give you that sense of fulfilment and satisfaction in your job that you may otherwise be lacking. 

At the end of the day, we all spend a huge amount of time at work and if that time is less than enjoyable, it can have a drastic effect on your mental health.

Employers are starting to understand the extreme importance of employee engagement, that is employees developing a deep emotional connection to their workplace. And sharing equity helps to boost that engagement.

The financial benefits for businesses

The UK Government has several schemes available to individuals who take part in an Employee Share Scheme, or ESS. The advantages are also useful for businesses too. 

The four main schemes are:

  • SAYE - Save As You Earn
  • SIP - Share Incentive Plan
  • CSOP - Company Share Options Plans
  • EMI - Enterprise Management Incentives

SAYE and SIP are specifically for employees and offer tax and national insurance reductions, therefore keeping cash in your pocket. In some cases, CSOP and EMI can be applied for at the discretion of the employer too, therefore granting extra savings on both sides. 

Learn more about EMI - the UK's most tax-efficient share option scheme.

Let's recap

When you break it down, it’s not surprising that more and more businesses are choosing to share equity with employees.

Not only does it maintain a loyal connection between employee and employer, but it also motivates the employee to work harder to ensure the success of the business. 

Depending on the share scheme, employees can receive tax benefits too, making it an even more attractive proposition. 

In a time when money is tight and small businesses can't afford to increase people's pay as much as they'd like, such schemes are a way to preserve cash flow while helping employees to feel engaged and connected to their workplace.

Book a free, no-obligation consultation with an equity specialist today.

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