6 pros and cons of offering equity as an employee incentiveBack
In 2021, the “Great Resignation” began and workers across the world started to leave jobs that no longer fulfilled them or paid enough to cover their bills and outgoings. Now, over a year later, despite the waning of the Covid-19 pandemic – widely believed to have been the trigger – the trend continues.
According to the Office for National Statistics (ONS), UK unemployment is at its lowest level since 1974. Meanwhile, the number of job vacancies has reached a historically high level. Put simply: there are more job vacancies than job seekers, and that makes it an employee’s market.
As a business owner, you may have been wondering what you can offer to make sure your job vacancies are filled with the right people. The cost of living may be continuing to eat into your available cash, and so offering equity in your business to new hires alongside their salary might have presented itself as an option.
But even though this could help your listing to stand out on the jobs board, is it really the right option for your business?
Read on to learn about the pros and cons of equity as an employee incentive to help you decide if it could be something that benefits your business.
3 benefits to offering stock options
1. Stock options help employees feel more connected to the cause
When employees own a small part of the company they work for, they may feel more invested in its success, since greater performance will bring them greater financial rewards.
This can mean employees are more motivated to play their part in improving outputs and helping the company to achieve its objectives – a win-win for both employer and employee.
An indirect result of this could be an increase in employee retention. If the company performs well and share prices rise, this could be an incentive for the employee to remain in their position rather than seeking a new position elsewhere.
Improved staff retention means that you not only grow a team who understand your business and your customers very well, helping you to offer a much better service, it also helps you to save money on recruitment costs.
2. It’s a cost-effective addition to a competitive compensation package
During the dot-com bubble in the 1990s, share options were popular for keeping cashflow in check for early-stage start-ups who wanted to employ the very best in the business but couldn’t afford to offer high salaries. When the bubble burst, a lot of people were left holding worthless stocks.
Since then, stock options have rarely been seen as an alternative to a competitive salary, yet they can be a great addition to a compensation package that could help you to attract top talent.
While share options do have their own costs, they don’t require any upfront cash. By contrast, other types of perks like work retreats or catered lunches for staff can lead to large bills on a regular basis. This means that offering share options could help you to attract top talent without overstretching your budget, particularly in the early years of running your business.
3. There are tax incentives, depending on the type of share scheme you opt for
There may be tax advantages for the business and for the employees who are offered shares in the company, depending on what type of scheme you use.
Share incentive plans, save as you earn (SAYE), company share option plans, and enterprise management incentives (EMI) are schemes you could use to offer shares to your employees that might offer some tax advantages. For example, the employee may not need to pay Income Tax or National Insurance (NI) on the value of the shares they receive.
3 drawbacks of offering stock options
1. The process of setting up share options can be complicated
There is a lot to consider when offering stock options, not the least of which being the tax implications for the business and for the individuals receiving stock options. These can be difficult to navigate, and the time and cost involved in doing so might outweigh the benefits of the share scheme.
You will need to decide what will happen to stock options when an employee leaves. Some schemes place restrictions on who is eligible to receive stock options, such as how long they have worked at the company. You will need to decide what is most appropriate for your business and your employees.
2. Increasing share values relies on a whole-company effort
Even though offering shares in the business is intended to reward staff for their hard work in helping the business to grow in value, that bonus will only materialise if the whole company pulls together. If one employee works especially hard while the others put in much less effort, the overperforming employee is unlikely to see a proportionate increase in the value of their particular shares.
Similarly, if you have one employee or team who puts in substantially less effort than all of the others, they will still be rewarded equally with those who had a greater influence over the increase in share prices.
This could damage morale for some individuals in the company and have the opposite effect than intended when you chose to offer stock options.
3. Dilution can reduce the value of existing shares
By its very nature, introducing a scheme that gives equity to new employees means that anyone who holds existing shares will see their stake in the company reduce. Unless the value of your company increases as a result of your new hires, this could mean that the value of the shares held by existing shareholders also goes down.
If you have already awarded equity to co-founders or key investors in the early stages of your business, this dilution might be seen negatively by them. It is important to consult all your shareholders before offering equity to employees, and to think carefully about how many shares you can offer so as not to dilute existing shares too much.
Get in touch
If you’re a business owner looking for advice about managing your wealth, we can help. Email firstname.lastname@example.org or call 020 8946 8186 to find out more.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.