Employee share schemes (ESS) are becoming more and more popular nowadays. It was once thought of as a plan offered only by emerging industries. However, with small and medium businesses now looking for new, creative ways to incentivize their employees, ESS has suddenly become a hot topic.
Employee Share Scheme: What Is It?
An employee share scheme (ESS) is a way for business owners to share company ownership to their team. How you do it is entirely up to you. You can reward all your employees with equity, or only choose one or more key people.
The basic idea of an employee share scheme is to give your team the opportunity to acquire equity in your business. Again, it’s also a way of providing an incentive to deserving individuals who contribute so much to the survival and success of the company. You can even distribute shares to non-employees, such as advisors and consultants.
Please take note, however, that it’s, most of the time, best for your company to run different scheme types for external and internal people. It can be confusing, but with the help of employee share scheme systems, like the one offered by Cake, the process becomes fast, simple, and affordable.
There are different ways to run an employee share scheme, as explained below.
How Does An Employee Share Scheme Work?
The answer to this question varies as it all depends on the employee share scheme type you’re referring to.
Broadly speaking, three types of ESS exist:
- Share Schemes – Internal or external people in the company buy shares
- Option Schemes – Internal or external people in the company to purchase shares later
- Phantom Schemes – Internal or external people in the company receive bonuses instead of shares
The Difference Between Options And Shares
1. Options
For business owners who want to set up a tax-efficient share scheme for employees, an enterprise management incentive (EMI) option scheme is the ideal way to go. It’s designed for smaller companies to enable them to attract and retain key staff members. Employee stock options allow participants to purchase shares later at a pre-approved price.
Here are the key takeaways from employee share option schemes:
- Ideal for high growth companies with an exit on the horizon.
- EMI options have a maximum 10-year exercise window. There’s also a cost to exercise in some cases, which some participants may struggle to afford.
- Recipients don’t get the same benefits that shareholders enjoy, such as voting rights and dividends, until they exercise their options. So, options aren’t real shares until exercised.
- Companies still need to qualify before they can issue EMI options.
- Employees who are working more than 75 percent of their time at the company are the only ones eligible to receive EMI options.
2. Real Shares
There are two types of real shares, as explained below:
- Ordinary Shares – These are real shares in any business that can be given to anyone. Unlike options, they’re not available for purchase at a later date. They’re typically the shares investors and business owners will hold.
- Growth Shares – The difference between growth shares and ordinary shares is that the former is issued at a “hurdle price”. What’s a hurdle price? It represents a small premium to the company’s value at that time. It’s often around 10 to 40 percent to reflect the shares’ “hope value”. That said, the participant only shares in the company’s growth in value from that specific point on.
Here are key takeaways from real shares:
- Unlike options, participants can receive voting rights.
- Participants can also benefit from dividends.
- Shares are issued in the participant’s name.
- Gives internal and external people real ownership immediately.
- So long as shares are issued for a price that actually reflects their current value, they only incur capital gains tax.
The Benefits Of Running Employee Share Schemes
Employee share schemes can benefit both employees and employers. These are actually a way to bridge the gap in interests between the two parties.
By giving your team the opportunity to earn shares in your company, they’re likely to work harder for your company’s success. It makes sense since an employee share scheme makes them a valued investment partner and an active member in the success of your business. From an employer’s perspective, ESS is a powerful method of increasing the productivity of their staff.
Rewarding your employees with an employee share scheme gives them a compelling reason to do their best at work. After all, the value of your company’s shares is largely dependent on how your business performs, which, in turn, can be linked to the productivity of the staff behind it. ESS is also an employment strategy that enables the hiring and retention of highly qualified employees.
Final Thoughts
The right type of employee share scheme for your business will be one that’s well-aligned to your company’s overall strategic objectives. It also must be one that has been specifically designed for your circumstances. An employee share scheme can be extremely complicated if it’s your first time running it, so take advantage of software or systems that make scheme planning a breeze.
