If you run your own business, it’s likely you’ll be looking for ways to reward and retain key staff.
Equally, if you are a top executive in a promising business, you may be wondering whether your future lies here or elsewhere.
Either way, there are a number of approaches to getting the most out of a team by making them feel wanted and valued.
Securing invested employees makes sense for the company
To to feel really wanted, people need ‘skin in the game’ – or, looking at the flipside, the risk or potential of losing something.
To do this, many businesses default to offering bonuses.
While these can offer a short-term target incentive for the team, it can be difficult to structure a bonus scheme to work effectively over the long term without seeing much of it swallowed up by income tax and NI.
For a reward mechanism that really works, it needs to tick the following boxes:
- Makes employees feel important and included
- Is for the long(ish) term
- Drives the right behaviors
- Feels tangible – now
- Is tax efficient
- Is flexible
A more compelling approach than a simple bonus scheme (and a mechanism which achieves all of the above bullets) is to offer share options under Enterprise Management Incentives (EMIs) to key team members – those who the business simply cannot afford to risk losing.
While some business owners may want keep their equity closely guarded and undiluted, EMIs offers a much higher level of motivation, buy-in and commitment from the team with little or no cash cost to the business.
As a business owner, giving your key people access to shares – be it directly or via options – is the ultimate way of saying:
“You are important to me and this business; I value what you are doing and I’d like you to share in the profits we stand to make.”
Additionally, those looking to grow their business and at some point make an exit (be it trade sale, management buy-out, private equity buy-in or maybe floatation) will need a highly committed and motivated team. No entrepreneur can make a successful journey to exit on their own.
Becoming a stakeholder in the business makes sense for the team members
If correctly structured this is a win:win mechanism – team members stand to benefit in the same way as the business owner. Granting of options gives team members the legal right to buy a company’s shares in the future – but at a price that has been fixed now.
It also gives employees the opportunity to be a stakeholder in the business and benefit from the growth of the business – so a rare opportunity in the world of employment where they are directly able to influence a capital return they will receive. This is a powerful motivation.
Team members have the opportunity to make a significant profit when they exercise options and sell shares – something which is very attractive to early stage (often tech) companies, which means they can employ the most talented staff.
Being ‘just’ an option, there is no initial cash outlay for the team member on grant of the option. And it gets better because the later exercising of the option and the immediate sale of shares also requires no outlay for the team member.
It is also very tax efficient as there is no income tax or National Insurance to pay either when the options are granted (provided they were granted at market value) or when they are exercised to buy the shares. Also, any gain on the option is subject to only 10% Capital Gains Tax if the option has been held for 12 months – if you are a higher rate taxpayer you would pay 20% Capital Gains Tax.
About the author
Mark Nicholss is managing director at Tectona Partnership. Tectona helps business owners sleep at night by having one of its 15 commercially savvy, finance directors embedded in your management team – a part time solution is usually the most effective for the smaller business. Tectona makes sure you have the management information and strategic insight and will tell you what you need to know, when you need to know it.