Growing Business asks if initiatives like the Enterprise Management Incentive scheme are a viable leadership tool, and provides some tips on aligning your employees’ interests with your own.
If the staff have a stake in the company, they’re more likely to be committed and to stay for longer,” says Neil Hutchinson, founder of internet marketing agency Traffic Broker. It’s a simple enough principle, but small business owners have traditionally admired employee share ownership schemes from a distance.
They’re regarded, rather abstractly, as a ‘good thing’, but also as potentially complex and better suited to larger rivals. And anyway, aren’t the reward-centric interests of employees inherently at odds with the profit imperative that management needs to focus on? Won’t employees be paralysed by the perceived extra responsibility?
Not according to Hutchinson. “It’s simply a change in mindset to help people commit and care about the success of the company rather than just their day jobs,” he says.
Employee retention was the key reason Hutchinson implemented an Enterprise Management Incentive (EMI) scheme in 2007. “People became company owners rather than just employees,” he says.
Hutchinson’s company is one of the fastest growing technology firms in the UK, with turnover projected to reach £40m in the next financial year. “The overall principle of the company is to grow as quickly as possible without giving away equity to external parties,” he explains.
Employees are an exception to this rule. Hutchinson eventually wants to give away 10% of Traffic Broker to staff, encouraging engagement and ultimately rewarding them for the company’s success. As well as improved morale and retention, he says the main leadership benefit has been enhanced company-wide communication and an overall sense of unity.
“Someone who works as a copywriter, for example, naturally becomes a little bit more concerned about how the search division is working, which is nothing to do with their day-to-day work,” Hutchinson explains. “I think we’ve got a culture now where people want to know lots and lots of things about the business. We’ve definitely seen improved commitment to the cause from employees.”
Initiatives such as ‘inter-team training’, where employees have timetabled slots to learn about other teams’ work, have been another indirect result. “It makes people constructively question decisions and the direction the company is taking,” he adds.
Ruled by none
If Hutchinson makes it sound like a no-brainer, how do you go about implementing a scheme of your own? Ashley Holden, partner at Herrington & Carmichael solicitors, notes that share schemes can take on any number of forms (perhaps that’s why they’re sometimes perceived as prohibitively complex to set up), but broadly break down into two categories: those that are approved by HM Revenue and Customs, and those that aren’t.
For the majority of entrepreneurs, the former will be preferable, and the most common revenue-approved scheme for small companies is the EMI.
Under this initiative, entrepreneurs can structure share options so that they are only exercised at an exit event. They’re ‘vested’ over an agreed period to align the new shareholder’s interest with those of the entrepreneur.
The company owner retains sole rights to dividend payments and voting, but employees can still benefit from a financially rewarding share of the business. Any number of employees can be awarded share options, provided the maximum value of options doesn’t exceed £3m in total, and there’s a limit of £120,000 per individual employee. The share option must also be exercisable within 10 years.
While there are a number of eligibility criteria (firms must operate in a qualifying sector, have gross assets of no more than £30m, not be under the control of another company and not have more than 250 employees) an EMI scheme is not arduous to implement.
“It’s not overly tricky, but if people start off on the wrong foot, it can be a problem,” warns Holden. “Entrepreneurs really need to sit down with their accountants and go through exactly what they want to achieve and how they want to go about it. It’s going to involve a number of meetings and a few days’ work, but it’s not overbearing.”
Hutchinson confirms that the administration was “fairly time consuming”, but “wasn’t that difficult”. However, he also emphasises the need for professional advice. “Don’t cut costs by researching it yourself,” he warns. “I’ve got a pretty naïve view of business because I’m still quite new to it all myself, but I’ve got a gut feeling that there could have been several complications, and it could have got messy down the line [if we hadn’t taken advice].”
Traffic Broker relied on a non-executive director, who is a former lawyer, to guide them through the process, but Holden says outside expertise needn’t make implementing a scheme prohibitively costly. “Baker Tilly estimates that for a relatively small company, £8,000-10,000 will set a standard scheme up,” he says.
“The hidden cost is the time. If accounts aren’t in order there could be a lot to add on to that.”
To issue shares to staff, you’ll have to get your company valued and pitch your case for how you think this should be done, and then issue all the shares within a certain date. The length and complexity of the valuation process will depend upon the state of a company’s records and accounts, according to Holden.
“If you’re a company where everything’s up to date anyway, it’s a lot easier than if you’ve got to do this first,” he says. “Usually, companies that are looking at this are the organised ones anyway.”
You’ll also need to decide how frequently to reappraise that value. If a new employee joins, the initial valuation won’t apply. Traffic Broker carries out this exercise annually, tied in with the financial year, when all employees who haven’t yet got shares have them issued.
“A lot of people will know how many shares they’re going to get by this stage, because we use it as a negotiation tactic when we’re recruiting employees,” says Hutchinson.