Share Schemes

Employee share scheme rules

Many companies operate share schemes under which employees have the opportunity to obtain shares in the company, and are thereby entitled to a slice of the company’s profits in the form of a dividend. Share schemes operate differently from organisation to organisation depending on the objective which the share scheme is intended to achieve. In some companies, shares are issued to members of staff as rewards or as bonuses, whereas in others the company may give employees an option over the shares. This is basically a right to purchase shares in the company at a pre-determined price, and it is the employee’s decision as to whether he wants to purchase these shares or not.

Share schemes have a number of advantages:

Tax benefits

Some share schemes give employees who invest in the company a tax advantage and this increases the value of shares issued under these schemes to the employees. Depending on the rates of income tax which they pay, employees may prefer to take bonuses in the form of shares rather than in cash.

Improving staff morale

Particularly in large organisations it is easy for employees to feel disenfranchised and insignificant and this often results in little or no loyalty to the company. The existence of a share scheme within a company can be a powerful tool for motivating employees and for helping them to feel more involved. Employees who are given the option to “buy into” the company are likely to feel more valued and will be more committed to the company’s goals and vision. In the long term, improved morale and loyalty will cause productivity to increase.

Boosting performance

Share schemes and the rights to shares can be linked to performance in a number of ways. For example, shares which are given as part of a bonus package may only be issued if employees reach targets which have been set for them. Those employees who are issued shares will receive a larger dividend if the company performs well and profitability increases and so it is in their interests to ensure that targets are reached. Dividend payments tied to profitability helps the employer to more easily tie remuneration to the attainment of long term goals.

Defining an exit route

The challenge for many people who invest in small companies is what to do when the company has matured and when they no longer want to take so active a role in the day-to-day running. Finding someone to buy the business, or to take over as the majority shareholder, can be difficult and any owner-manager is likely to feel some degree of obligation to his staff to ensure that the incoming owners will continue the business.

A ‘management buyout’ is often an attractive exit strategy for the owner of a company, because he can be satisfied that the company is being taken over by people who know what they are doing and this is not only good for the existing staff but also means that any shareholding which he retains is likely to continue to generate a profit for him. An established employee share scheme under which senior managers have already built up a shareholding in the company over time is likely to increase the chances that the management will be positive about any opportunity to buy out the business from the owner.

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