Why your board should support a company share scheme – Vestd blog
If you’ve been researching how to set up a share scheme - and if it’s a good fit for your company - you’ve likely noticed the key ‘receiving board approval’ step.
The idea of selling your board on some kind of employee-ownership model with share options can seem intimidating. But, while your board and investors will have questions, there are a number of benefits for your business and employees that will help convince them that it is a smart idea.
Let’s take a look at why your board and investors will want to support your company’s share scheme and how this choice will grow your future business.
Why do you need board and investor approval for a company share scheme?
Due to HMRC’s requirements, your company board - which may include investors and co-founders, senior leadership members, or external advisers - must sign off on any share-incentive plans before you can offer shares.
Once approved, you’ll be in a position to push forward and launch a scheme. So how can you persuade them that short term dilution is going to add long term value?
Let’s explore the primary benefits of sharing ownership with your team.
Five reasons your board and investors should agree to a company share scheme
Before you set up your employee share scheme, your board and investors will need to hear why you want to grant options to employees.
Here are five crucial reasons that share option plans benefit your board, investors, and company overall:
1. Increased employee participation means better business
It’s no secret that the more all employees feel included in the mission, direction, and success of the business, the more they’re motivated to contribute to the company.
This investment doesn’t just mean a better work environment for your team; it results in improved earnings and growth, too.
Studies have repeatedly found that sharing ownership can be a game changer for business.
For instance, the employee-owned business (EOB) sector in the UK has grown 10% annually since 2014 as EOBs have become more popular, according to the Employee Ownership Association’s 2018 Review.
In 2017, the top 50 businesses in this sector saw a 7.3% increase in productivity, nearly £20 billion in sales, and a nearly 10% median increase in operating profits.
Research from the Employee Ownership Association has consistently shown that employee ownership results in better business performance. This not only is good news for your company alone but also boosts the UK economy. Currently, EOBs contribute about £30 billion to the GDP.
You don’t need to be majority owned by employees to benefit. Many companies allocate 15-20% of their equity to share schemes, to give the team a real sense of ownership.
It gets better. If you play your cards right you can greatly reduce the costs of running a scheme, and minimise the tax position for participants.
More than 12,000 UK companies have set up EMI schemes, which are an incredibly tax-efficient way of incentivising employees with equity. These schemes are well worth checking out.
2. Share schemes increase employee productivity, profitability, and longevity
Empowering your employees to contribute directly to their own success by working to improve your business not only makes them happier but also promotes greater productivity, profitability, and longevity.
According to the IZA World of Labor, employee ownership through company share option plans improves performance overall. In fact, two thirds of 129 studies have shown that this is true. This holds true even in times of economic stress, too.
This is because employees feel directly responsible for the value of their company, which motivates them to do their best work instead of doing the minimum required or searching for work elsewhere.
Additionally, studies have shown that employees at companies with share schemes take more responsibility for not only their own work but also that of their team members. Of the 40,000 workers surveyed in a World of Labor study, those with company stock and other initiatives were more likely to take action if a coworker was underperforming instead of ignoring the issue.
That results in lower costs related to training employees, replacing those that leave, and mitigating subpar performance.
More productive employees mean not just a better work culture and less turnover but also higher output, increased revenue for the business, and decreased costs related to finding talent and keeping them.
3. Share schemes improve employee retention and attraction
As we hinted above, offering employee share schemes boosts your company’s ability to attract and recruit talented people and makes it easier to keep them.
Today’s workforce benefits from healthy employment rates and expects a more holistic collection of work benefits than previous generations. That means they’re more critical of workplace incentives and more empowered to shop around for a new job if they don’t feel valued.
In fact, Glassdoor studies found that, among the younger generation in particular, 79% of employees value benefits more than they value raises. Specifically, 16% of those surveyed value investment plans and equity over a pay increase.
By investing in employee share ownership rather than just raises or annual bonuses, your company helps employees feel more valued and included in the direction of the company. As we’ve discussed, this not only attracts great people but also gives them a reason to stay on.
Also, by motivating employees to take some control in the success of your business, you decrease the likelihood of disappointing performance, the need for layoffs, or unsatisfied employees.
That decreases the amount of money your company has to spend interviewing and hiring replacements for employees who go elsewhere.
Studies have shown that for each salaried employee that leaves a company, the business spends about six to nine months of the previous employee’s salary replacing them (i.e., about $20K-$30K per $40K annual salary). This is consistent with research in the UK which puts the cost of replacing someone between £12k and £30k.
4. Share schemes support future growth plans and relieve cash-flow pressures
By offering options through an employee share scheme, your company doesn’t have to commit its cash flow to pay raises and annual bonuses, reserving these resources for future growth opportunities.
That allows you to plan for more stable and growth-focused budgeting.
HMRC studies have shown a number of business-side benefits for share schemes, such as the following:
- Stronger long-term focus
- Better ability to handle changing economic conditions
- Improved business focus, thanks to employee representation at the board level (particularly if this participation is increased between 30-60%)
- More growth when adding new customers
- Greater confidence expanding business volume ahead of market demands
While offering share schemes will reveal immediate benefits, transitioning to an EOB isn’t just about the real-time value; it’s also about investing in both your employees’ and your company’s future growth and development.
5. Share schemes increase the overall business value
Offering a share scheme doesn’t just help your employees build future wealth; it also bolsters the value of your company overall.
We’ve talked about how share schemes incentivise better employee performance as well as set you up to respond to future market opportunities quicker.
Employee-owned businesses have outperformed companies without share schemes by 7% over the past decade, according to research from our friends at Employee Benefits.
Overall, offering a share scheme is a win-win: your employees gain more job security and wealth down the road, and your company benefits from a more engaged team as well as increased cash flow, better employee retention, and improved business performance.
Get more information on share schemes and how they benefit your company
After you get buy-in from your board and investors, we know it can be daunting - and risky - to set up your share scheme on your own. That’s why we’ve created a free guide to launching an employee share scheme.
Hundreds of UK startups and SMEs use Vestd to create and manage their share schemes. Our in-house team of equity experts will help you to design a tax-efficient scheme, whether you want to reward a few key team members or the entire company.
If you’re seriously thinking about setting up a scheme then why not schedule a free, no-obligation consultation with one of our specialists? This isn’t a product demo, but rather a chance for you ask questions and get answers from people who do this every day. If you end up trying Vestd then so much the better!