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Why Employee Equity is an Important Issue For Every Business

Gary Green
Gary Green
January 12, 2022

Being a business leader is about being willing to embrace innovation and be flexible about how to achieve the desired success. Businesses that refuse to adapt and change will very quickly find themselves overtaken by competitors.

A large part of this success is driven by employees; they deliver the service and products on a day to day basis, so it is imperative that they are motivated, enthusiastic and high-quality. It is not always easy keeping and retaining the best employees; paying a good salary is not always enough. This is where employee equity can make the difference.

We take a closer look at why every business should at least consider employee equity, and why it is such a pressing issue today.

Benefits of Employee Equity

If you are still trying to weigh up whether employee equity is something that would work for your business, it is worth considering the following points:

Greater Profits

In the UK, companies tend to be much slower to pass on equity than in other countries, and some experts believe this impacts on the ability to expand and grow. Venture capital experts Index Ventures have said that the lack of encouragement in employee ownership is one of the reasons Europe is not creating corporate giants such as Google and Amazon, as the US is. 

The impact of employee ownership and the importance of equity is backed up by the Employee Ownership Index. This data shows that businesses who reserve at least 3% of their shares for employees consistently deliver better performances than their competitors in the market.

Attract Top-Quality Candidates

In order to deliver the highest profits, you will need the best staff but in a cut-throat environment, how do you persuade candidates to apply for your vacancy? Equity as part of their remuneration package is the answer.

Studies released by the Employee Ownership Association revealed that 44% of adults would be more attracted to a job that included employees among the business owners. By providing the chance to have equity in the company, your vacancies will appeal to those who are seeking the best opportunities.

Retaining Key Personnel

When a person leaves, it is not just about being able to replace them with an equally talented individual, there are also a range of direct and indirect costs to swallow. Some estimates suggest that it costs £19,000 to recruit and train a new employee, a figure that makes retention of key personnel even more vital.

Research from Loughborough University concluded, like many other similar studies, that owning equity made employees stay. Researchers found that employees who stood to lose out financially by leaving the company were much more likely to stay and be genuinely committed.

Ease Pressure on Cashflow

Paying employees the most competitive salary can help to retain staff, but that comes at a cost. By offering a portion of their remuneration in shares, businesses can benefit from keeping employees motivated and happy while simultaneously easing pressure on cash flow.

How Can I Deliver Employee Equity?

If you are thinking that employee equity might be a feasible strategy for your business recruitment, you have a number of avenues to consider. There are different ways to reward employees with equity, and each has a different impact on the business.

Before opening conversations with employees, you need to have thoroughly discussed the subject with your accountant and your board. Raising the idea as a possibility with employees and not following through would be more damaging than never mentioning equity in the first place.

For employee equity to work, you need to find the right solution for your business and to be clear that all interested parties support the decision.

Some of the possibilities you could pursue include:

Enterprise Management Incentives

Enterprise Management Incentives (EMIs) are approved by HMRC and are not taxed when they are granted nor when they are exercised, providing they were not given at a discount.

There are strict rules around the size of the company, and the working hours of any employees who you are seeking to include in the scheme. However, if you meet all the criteria, this is one of the most flexible and efficient ways to grant equity to employees in the UK.

A good alternative to an EMI is a Company Share Option Plan (CSOP). Both an EMI and CSOP allow the business to make the equity available to selected employees only, should they choose to take part in the schemes.

Other Tax-Advantaged Schemes

Although EMIs offer the greatest potential benefit, there are other tax-advantaged schemes that make employee equity a possibility.

These include Share Incentive Plans and Save As You Earn. Employees will need to contribute to reap the rewards of equity, but having a stake in the company can promote engagement and improve retention.

Growth Shares

These are an individual class of shares that are created to enable incentives for equity to be granted to employees and management. Growth shares can be set up in different ways but enable key personnel to be rewarded when the company grows beyond a specified level.

Employee Ownership Trust

If you consider employee equity as a mechanism for succession planning, an Employee Ownership Trust (EOT) might be the right route to take. This is a tax-efficient way to pass a controlling share of the business with attractive Capital Gains Tax rates instead of income tax rates for employees.

Studies have found that an EOT encourages long-term retention of key personnel and the development of a positive culture within the workplace.

With an EOT, there are Trustees whose role is to act in the interests of the EOT beneficiaries i.e. the employees.

This is not an option that will suit every business but if yours meets the criteria it can be beneficial for all.

Get Professional Advice

The above are just a snapshot of the main types of equity schemes available, so make sure you seek professional advice to ascertain which works the best for your business.

If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 020 3728 2848.

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