Staff take a piece of the action

There’s a lot of hype about shares and share options and a debate about whether recent changes in tax legislation are behind the high level of mergers and acquisition activity. Let me try to put all this in perspective. The first thing to say is that shares or share options are just one form of financial reward for people to come to work and give their all. The working environment, the projects they work on and the people they work with are often far more important than any financial reward they may receive. Having said this, we all need to live and salaries, profit-sharing and shares are all financial mechanisms that can be used.

The starting point is to make sure that your company has a strong vision about itself and its brand in the future. It also needs to be clear about its market positioning and its offer to clients. Once this process is completed, your reward strategy is a key tool in moving forward. Put simply, a good leader tells his or her people what he or she wants and rewards them for achieving this. If winning awards is important, offer financial or other sorts of incentive for achieving this. The same would apply, for example, to achieving high levels of customer satisfaction, or winning new clients.

There’s no doubt that shares and share options have always been a big incentive for senior people who manage staff and clients and generally have a big influence on the success of their consultancy. Much of my time is spent persuading founders that 55 per cent of a big cake is worth more than 100 per cent of a small cake. Show me a business where the founder still has 100 per cent of the equity and I’ll show you a business that has little future beyond its founder.

This whole area of succession planning can be quite painful, but it is certainly worth it in the long run, since, frankly, very few people are interested in buying a business with one single shareholder. The argument that says, “I’ve taken all the risks and, therefore, I’ll keep all the equity” is an understandable, but short-sighted one. Running a successful business is about surrounding yourself with people who are better than you in particular skill areas. These people may not be able to do your job, but they are essential nonetheless if you want to build a successful company. A design leader will always need to surround himor herself with marketing and financial expertise, for example.

There are two big questions you may be asking. “How many people should receive shares?” and “Do I give people shares or share options?”

The issue of who gets shares is very much a personal one and there is no simple answer. In my view, all other things being equal, the bulk of the shares should be set aside for your key people who can influence the success of your business – these are typically people who handle large bits of client business or who have a significant impact on winning work, product quality or profitability. While a good salary and a good profit-sharing scheme will encourage short-term performance, shares can act as a powerful long-term incentive and compensate key people for the personal sacrifices they make for the business. There is no doubt that these people often perform better if they feel that they are part of the business.

There is obviously risk attached to shares – their value is not guaranteed, but tax changes now mean that individuals could be paying as little as 10 per cent tax on their share gains. This makes shares much more interesting as a reward mechanism.

Clearly, everyone in your business has an important role within it. For example, the position of receptionist is a hugely important one, since this is often the first point of contact for clients. Whereas some share-ownership will enhance loyalty and commitment, the things that are often more important are: job variety and autonomy, experience, environment, people, social events, salary and annual profit-sharing.

Having said all this, I would add that when a business is sold, it is important that everyone enjoys some benefit and not just the shareholders – after all, everyone has played a role and is part of the same team. This can be achieved by setting up something like an employee benefit trust whereby everyone has a small stake in the business, or by issuing bonuses or shares at the time of sale.

The issue of shares versus share options is another interesting one. A share option is giving someone the right to buy shares at some point in the future at today’s market value.

The downside of shares is that they can be expensive for staff to purchase and problems can arise if people leave the business. The beauty with share options is that no cash changes hands and the options generally lapse if someone leaves the business. Also, unlike shares, there is no immediate dilution for existing shareholders. The new Executive Management Incentive scheme, introduced by the Government in the last Budget is an excellent scheme, since it enables shareoption holders to enjoy the same low rates of Capital Gains Tax as if they had been shareholders. The risks for both employers and employees are low and the cost of setting up are reasonable.

Careful planning and thought is required before embarking on any of the above courses of action, but your starting point must be a clear vision of where you and your company are going and what you are trying to achieve.

Ian Cochrane is chairman of management consultancy Ticegroup