You’ve invested significant time and resources into setting up an employee share scheme, but is it delivering the results you expected? Understanding what success looks like and how to optimise your scheme can unlock its full potential for your business and your employees
But success depends on clear objectives, whether that’s recruitment, retention, or preparing for a lucrative company sale. Are your objectives being met? Find out in this guide.
Contents:
Linking success to exit strategies
For many SMEs, the ultimate measure of success is tied to the company’s exit strategy.
Unlike listed companies, SMEs lack a ready market for their shares, making a sale of the company a common way for employees to realise the value of their share scheme. In SMEs, share schemes are frequently tied to the company’s exit strategy, where achieving the intended exit value benefits all shareholders, including employees. Investors typically expect share schemes to be structured as ‘exit-only’, to align their interests with those of founders and employees.
Founders also frequently choose to tie share rewards to a company sale because this simplifies a scheme's operation and communications and ensures that rewards are only delivered when cash is available i.e. from a buyer. In such cases, success is primarily measured by achieving the desired exit value.
A review with your lawyer could help refine your approach to make sure your scheme supports your company’s exit goals while keeping participants engaged.
Retention: the cornerstone of a successful scheme
Retention is a critical success factor, particularly for fast-growing businesses. Does your scheme incentivise employees to stay for the long haul? Time-based vesting, leaver provisions, and exit-event rewards are powerful tools to drive loyalty. A well-designed scheme should link participant rewards to continued service, helping to keep employees committed to the company.
Many schemes include awards accruing over a three-to-four-year period to reward loyalty. Additionally, schemes may require employees to stay with the company until an exit event to maximise their benefits and be able to sell shares at the full commercial value. Leaver provisions are also included, with clear messaging on the consequences of leaving the company.
SAYE Schemes
Broad-based schemes, such as the SAYE Scheme (SAYE) and Share Incentive Plan (SIP), which are common in listed companies, include three-to-five-year periods to benefit fully from the tax reliefs. These plans can also be used by established private companies to enable the wider workforce to become shareholders on a tax-efficient basis.
Enterprise Management Incentive (EMI) Schemes
An evaluation of the Enterprise Management Incentive (EMI) scheme, prepared for HMRC by Ipsos MORI (2018), reported that 85% of respondents said the EMI had made positive difference to employee retention with 50% saying it had helped ‘a lot.’ Similarly, a HMRC report (2023) evaluating the tax-advantaged plans - Company Share Option Plan, SAYE and SIP - reported that 69% of the companies surveyed reported an impact on staff retention.
If your scheme isn’t achieving its retention objectives, it might be time to revisit its design. Working with lawyers can help align your scheme with your business needs and ensure it motivates your workforce effectively.
Communication: the key to engagement
Even the best-designed share scheme can underperform if employees don’t understand its value. Do your employees know how the scheme benefits them and how it ties into the company’s goals? Clear, ongoing communication is vital to keep participants engaged and motivated.
Implementing tools like online share portals can enhance engagement, allowing participants to see their share awards, track vesting points, and run ‘What if?’ scenarios to give an indication of potential gains. Ongoing dialogue between the company and participants, for example when new awards are made or milestones are achieved, can help ensure the scheme remains effective and valued as an employee benefit.
Learn how to effectively communicate these benefits to your workforce in our detailed guide: Employee share schemes: How to effectively communicate them to your workforce.
Performance metrics
Performance metrics tied to financial and operational goals ensure employee incentives align with your business objectives. Are you leveraging metrics like revenue, profitability, or personal performance to measure success? If not, it might be time to explore how these could be incorporated into your scheme
Employee share schemes can be structured so that participants benefit when financial targets are met, making performance metrics an essential measure of success. These metrics can reflect the company’s business plan, such as revenue, profitability and cash flow or, for individuals, the fulfilment of personal performance targets. For startups and scale-ups, raising additional funding is often a necessity for ongoing growth and development. For this reason, companies may make additional awards to senior employees with the metrics linked to securing new funding at certain levels of investment.
Exit based schemes
Exit-based schemes can also be subject to financial performance conditions. For example, participant awards might vest only if company sale proceeds exceed a specified amount. Upon achieving this level, participants share equally with other ordinary shareholders in the total sale proceeds.
Growth shares
Similarly, growth shares inherently include performance metrics, as participants benefit only once financial targets are met, typically sharing in exit proceeds above a threshold amount. This structure is often favoured by companies with ambitious growth plans and a clear exit strategy in the short to medium term.
By aligning rewards with financial performance, these measures ensure that employees are motivated to achieve a significant company valuation, tying their own success to tangible financial outcomes for the company and shareholders.
Optimising financial and tax benefits
Tax efficiency is one of the most tangible benefits of employee share schemes, but are you making the most of it? Properly structured schemes like EMI options can offer significant tax advantages for both your company and participants. For instance, corporation tax deductions during a company sale can substantially boost the overall value.
Typically, a tax-efficient scheme, will enable a participant’s gain to fall within CGT, at lower tax rates, instead of income tax and NIC. This means that participants can retain a larger amount of the gain and increasing the take-home value. With EMI share option schemes, Business Asset Disposal Relief may also be available to further reduce the tax charge. In contrast, tax inefficient schemes can trigger tax charges on participants at a time when they may not have the cash to meet the tax bill.
With the increase of employer NIC to 15% effective from April 2025, companies may decide to revisit using share schemes and awarding equity in place of cash, for example, bonuses, to reduce NIC costs and conserve cash.
It's essential not to overlook the valuable corporation tax deductions that employer companies can benefit from when operating employee share schemes, particularly in the context of a company sale. When employees exercise share options, a corporation tax deduction may be available, equivalent to the gain realised upon the option exercises. This potential tax benefit should be carefully considered and factored into the sale negotiations to maximise overall value.
How do I find out more on employee share schemes and measuring success?
If you’d like to find out more about employee share schemes and evaluating their effectiveness, watch our free webinar where we explore the various metrics and structures to align a share scheme with a company’s goals.
If you’re considering setting up a share scheme, our team can help ensure every step is effectively managed, from documentation to compliance. Properly implemented schemes, like EMI options, can offer significant benefits to your employees and business. Fill out the short enquiry form below or contact us on 0800 689 1700 and we’ll guide you in setting up a robust and legally sound scheme that supports your goals and reduces potential risks.
