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ESS help boost company performance, attract personnel and plan succession strategies, says DMCA advisory.
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Retain staff with employee share schemes, SMEs urged
17 August 2022
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10 minute read
Businesses should adopt employee share schemes (ESS) as a way to grow and retain staff but most are missing the trick with fewer than 1 per cent using them, said one advisory firm.
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Companies that implemented ESS had lower employee churn, increased sales and better productivity, according to research by the former Department of Industry, Innovation and Science, with SMEs benefiting most.
Director of DMCA advisory, Tania Tonkin, said that advising businesses to set up share schemes and seeing the benefits encouraged the firm to set one of its own.
When co-director Adam Griffiths left the firm Ms Tonkin said the firm’s ESS enabled three long-term employees to step up and join the business as shareholders and associate directors.
By offering these shares to the business’ employees at market value any adverse tax consequences for them were removed.
“Any employee at DMCA can become a shareholder in future,” said Ms Tonkin. “It means we can create an environment which makes it more meaningful to come to work every day and translates to better engagement and buy-in.”
The firm positioned its scheme so employees could make a part payment upfront with the balance funded from future dividends.
“Employees receive a benefit from receiving dividends on top of their usual salary as profitability targets are met,” said Ms Tonkin.
“The value of their shares is then a real investment in the business which increases in value as the business grows.”
It also put in place a shareholder’s agreement to document items such as how shares are valued in the future and what happens if an employee leaves.
Ms Tonkin said that the development of a “rock solid” shareholders’ agreement was the most important and time-consuming part of setting up an ESS as it needed to cover any situation that might arise.
She said that businesses should embrace ESS as a way to retain staff while growing a business.
“Having a scheme for employee buy-in makes for a more equitable environment – one where both workers, the C-suite, and all shareholders have aligned interests,” she said.
“It is possible if you keep it simple and don’t make it too complicated.
“It’s a really good way to tie people into the business and keep them on board.”
Ms Tonkin also said that the government should alter regulations to make it easier for SMEs to implement ESS.
“As the country recovers from the crisis of COVID-19, any reduction in red tape that encourages higher productivity should be actively encouraged,” Ms Tonkin said.
“Currently ESS programs can still be costly to administer for most employers and can have negative tax implications for employees if the shares are given to them at less than market value.
“I think just trying to remove some of that red tape would be ideal to make it a lot simpler and easier, to make it something people are able to do in their businesses.”
Ms Tonkin said having an ESS in place could ensure an SME or family business continued after the founders had decided to retire or move on.
“We often suggest business owners consider their own employees when planning to sell a business,” said Ms Tonkin.
“It’s a form of succession planning that ensures a business can preserve what has been built up over years, and it can often save jobs.”
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