Introducing an employee share scheme into the business can bring significant benefits to the business, the employees and the owners. Employee share schemes align the interests of owners and employees giving employees the opportunity to participate in the financial value created by the business. They also help to boost retention and productivity.
However, in order that employees value the opportunity to be shareholders in the business and the business benefits from productivity gains and retention, it is critical that employees understand the benefits of employee share schemes through clear, regular, accessible and compliant share plan communications.
In addition, where employees are investing their personal funds or incurring personal taxes in connection with their share incentives, it is critical that businesses are clear to employees about the risks as well as the rewards of being an owner in the business.
Contents:
- Communicating a share plan at launch
- Demystifying share plan jargon
- Utilising digital and online channels
- Providing ongoing communication of the employee share scheme
- Compliant communications which are clear about financial risks and tax implications
- How do I set up an employee share scheme for my company?
Communicating a share plan at launch
The launch of an employee share scheme requires collaboration between owners and managers. Businesses spend a lot of time and effort designing the scheme and should engage advisers to prepare the scheme documentation to ensure it is legally compliant.
In order to maximise employee engagement, employee communications should be prepared at launch which explain the arrangement to employees, so they fully understand the benefits.
Demystifying share plan jargon
When preparing employee share scheme communications, there is a lot of financial jargon associated with employee share schemes which can make share schemes inaccessible and difficult to understand. Terms such as an 'option', 'exercise', 'vesting' and 'vesting schedule' are bandied about and must be clearly explained to employees.
An 'option' is a future legal right to acquire a share. 'Exercise' means to acquire a share. 'Vesting' is a complex term which can have different meanings depending on how it is being used. Where 'vesting' is used in relation to share options, it often refers to the satisfaction of a condition to acquire a share. Many share option schemes have time vesting which means a period of service must be completed by the employee for the condition to be met. Vesting schedules set out the time period over which time vesting conditions can be met.
The complexity of the terminology means it’s vital to explain the scheme to employees in plain English and also consider alternative tools such as online channels in order to maximise engagement with the scheme.
Utilising digital and online channels
Online portals are a very effective and increasingly popular method of communicating employee share schemes. Employees can log in to a portal which shows a real-time view of their holdings, including their vesting schedule. These tools allow employees to track their benefits over a period of time and can build transparency and trust in the reward. They also help to re-inforce the link between service and personal reward. Some portals will also provide access to share price information, for example the price at which a recent financing was completed. This can help to show the financial value of an employees’ reward, although it is important to manage expectations that share prices can go up and down and to be clear about potential financial returns particularly where there are different share classes with different economic rights.
Another advantage of online tools is they improve accessibility to employee share schemes because they can harness different media to communicate the scheme and allow employees to log in in their personal time.
Providing ongoing communication of the employee share scheme
It is also important to provide regular updates relating to the employee share scheme to maintain engagement. Meeting scheme performance metrics or milestones provide an opportunity to communicate and celebrate the success of the scheme. Particularly where the scheme is an all-employee scheme and therefore open to all employees to join, regular updates help reinforce the value of the scheme and can create corporate glue binding the workforce together.
Compliant communications which are clear about financial risks and tax implications
Finally, communications must be legally compliant. Communications regarding employee share schemes may be subject to the financial promotions’ regime which the Financial Conduct Authority regulates. There are exemptions from this regime for employee share schemes, but it is important to take legal advice to ensure that a particular communication will benefit from an exemption.
It is also critical that employees understand the financial risks associated with a personal investment in a share scheme. There is no financial risk to an employee when a share option is granted. However, when a share option is exercised and shares are acquired, employees may be required to invest their personal resources. Like any investment, there is a risk that employees won’t get their investment back if the company value declines or the company fails.
Businesses should also clearly communicate the tax consequences of participating in an employee share scheme. This is particularly important if so-called 'dry tax charges' arise when employees buy shares at a time when the shares cannot be monetised. Dry tax charges mean employees need to self-fund their tax bill as there are no cash proceeds to fund the tax, which there would be if the shares were liquid or there was a corporate exit. Getting a surprise tax bill reduces the trust and value placed by employees in the scheme. Legal and tax advisors can provide advice on these issues to help businesses mitigate these risks.
How do I set up an employee share scheme for my company?
If you’d like to find out more about how employee share schemes can benefit both your employees and your business, watch our free webinar where we delve into the various types of employee share schemes and their numerous benefits.
