Many clients are exploring ways to keep their employees incentivised during such a difficult trading period, when cashflow is tight or non-existent, and traditional methods of enhanced compensation (such as bonus payments) may not be available to them. Share options can be useful as a longer term incentive for key employees.
Giving employees a stake in your future
Usually share options are granted to create a sense of ownership and shared goals by giving key employees the right to acquire shares in the company at some point in the future. Now more than ever, companies need to position themselves to take full advantage of the upturn in trading once the lockdown restrictions are eased – that means making sure your key people are not going to be tempted to move by the immediacy of a salary increase alone.
Share options encourage key staff to stay with a company over the medium to long term (e.g. three to five years) while the company works towards a sale, an IPO, or another form of realisation of value for its shareholders. When the economy recovers, which it inevitably will, high-performing individuals are less likely to consider a move if valuable share options will be lost.
Share options can be relatively straightforward and cost-effective to set up and administer. The most commonly used by SMEs are Enterprise Management Incentives (EMI) options – a tax-advantageous, government approved scheme which allows the option to be tailored to the company’s needs, subject to some basic eligibility requirements. For example, the ability to exercise the options can be linked to future profitability of the company as a whole, or individual KPIs, provided they are objective, quantifiable and reasonable.
Under an EMI scheme, the price paid by the key employee when the option is exercised is usually set at the market value of the shares when the option is granted. There are therefore obvious benefits in issuing options now while valuations are likely to be lower, so that the benefit to the employee and ultimately the company is maximised.
Each business will have different pressures right now, but do consider share options as a course of action that can be tailored to your company’s specific needs.