Recently, there has been a lot of chat regarding incentivising staff using employee-share schemes.

With the labour market the way it has been for the past couple of years, businesses have been looking at ways to retain key staff to secure them for the future. Should you do this, and when shouldn’t you? There are many things to take into account.

First, determine why you are doing this; is the motive succession, retention or capital raising? Each will come with different measures as to whether you should go ahead.

It will help to have a long-term plan before you start. Don’t just think, ‘Buy 10% shares in the company’ and not consider what might happen if more employees come along fit for ownership or what the plan is if someone wants out. For instance, will ownership stop at 10%, or will you move to a full takeover in the future?

What may work for one person will not necessarily be right for another. This is not something that can be systemised to suit all employees. Some people are great employees but are not made for ownership because they are too risk-averse or need help to make big decisions.

We have developed a list of pros and cons:

Pros:

• Retention of key team members

• Increased motivation and greater contribution (new energy)

• New level of responsibility, allowing existing owners to step back from the day-to-day functions

• New level of collective collegiality and support. Existing owners can share stresses and celebrate the success – it’s not so lonely at the top

• New employee shareholders can lead to growth through new networks and new status with existing and potential customers

• Cash from sale retained by existing owners or reinvested into the business for expansion

• Clarity around succession for existing shareholders

Cons

• Loss of freedom for existing shareholders

• Decision making

• Benefits (vehicles, insurance etc.)

• Loss of tax-planning flexibility

• Unrealised expectations can demotivate

• Financial rewards less than expected

• Not engaged in decision making

• Life no better than before

• Change in the relationship between the existing shareholder and employee shareholders and other employees

• Disgruntled employees that are not involved

• Additional administrative costs

• Can complicate succession plan or external sale of business

• Difficult to unwind if it doesn’t work

Employee-share schemes should be considered carefully as they can negatively impact the business’ culture or relationship with employees – seek advice and ensure that you consider what could happen in the future.

These schemes can work out amazingly well but can also go south. First and foremost, ensure you like the person – you are going into business with them, after all. Many alternatives that don’t include ownership can be used to retain staff, which could be a better fit for you and your team.