Whether you’re a business consultant or a company leader, it’s likely you’ve heard that share schemes are powerful drivers of business growth.
To find out why, we’ve asked our partners at Vestd for their take on why share schemes can be good for the bottom line. But firstly, let’s start with the basics…
What exactly is a share scheme?
Think of it like this. The value of your business is like a pie and you can slice it up and offer pieces of it to others in return for their valuable contribution.
In its most basic sense, you could share some of these slices with members of your team and at a later date (when you sell the company for example), everybody gets their cut.
This is great because it’s essentially a bonus that costs you next to nothing (aside from the initial costs of setting up the scheme) but aside from that, there’s a wide range of benefits that directly accelerate business progress.
Keep your talent, and lower your recruitment costs.
Enabling your employees to participate in your share scheme actively boosts your ability to keep your hires for longer.
Largely, this is down to the ‘ownership effect’ – a known psychological effect that foments loyalty and tenacity. If somebody owns something, even just a part of it, they’ll fight for it in ways that they wouldn’t if it belonged to somebody else. When people have skin in the game, they’ll be driven to make that business succeed and they’ll stick it out until they see the end result.
You can also structure your share scheme to amplify this effect. Most companies choose to give their team members ‘Options’ rather than ‘Shares’. The difference is that Shares are straightforward cuts of the company, but Options are a contractual promise to your team member that they will get their shares at a later date. So if, for example, you sold your company, your team member’s Options would then convert into Shares on that date.
One of the many benefits of doing this is that you can ‘vest’ their Options over time so that your staff members see a quarter of their Options turn into Shares after twelve months, half of their Options after two years etc. So essentially, the longer their service, the greater their reward.
Additionally, by investing in employee share schemes, your company will help employees to feel more valued as active participants in the company’s journey. Not only is this motivating for the individual but it also means that you’ll get the best out of their performance, reducing your time spent on layoffs, performance management or dealing with demoralised team members.
All in all, share schemes attract better quality candidates and compel them to stick around for the duration.
But when you do need to recruit…
You’ll find it easier if you list a share scheme as a key benefit.
Vestd recently surveyed business owners from across the UK and found that of those with share schemes, 93% confirmed that their scheme had enabled them to attract the right talent.
Additionally, a YouGov survey last year found that one third of UK employees are actively looking for jobs with share schemes. Everybody knows that workforce expectations have changed and that job seekers now expect a more holistic package of benefits. By adding a share scheme to the mix, you’ll be ensuring that you are offering a premium suite of benefits.
This also gives you a significant advantage if you are unable to match the salary offer of a competing business. Equity can grow enormously in value over time and many employees are now aware of its power, meaning that you’ll be putting a very tempting offer on the table indeed.
You can also relieve cash-flow pressures
By offering an employee share scheme, you won’t have to allocate a chunk of your cash flow to pay raises or annual bonuses. By freeing this cash up, you can deploy your funds more intelligently from the beginning.
In terms of growth, HMRC studies have shown a number of business-side benefits for share schemes, such as the following:
- Stronger long-term focus.
- More resilience against changing economic conditions.
- Improved business focus, thanks to employee representation at the board level.
- More growth when adding new customers.
- Greater confidence expanding business volume ahead of market demands.
Share schemes increase the overall business value
By operating a share scheme, you’ll be helping your employees to build future wealth and you’ll also be boosting the value of your company overall.
Employee-owned businesses outperformed companies without share schemes by approximately 7%. So if you are looking to drive growth with empowered, engaged and productive employees and you’re looking to enhance your profitability and longevity, you could do worse than start your own scheme!