Generally favoured by, but not limited to start-ups and tech companies, employee share options are a way to offer your employees a portion of your company’s potential. You offer your employees a grant, which gives them the option to purchase a certain amount of shares in your company, for a certain price. Let’s say, £1 per share with a period of 3 years before they vest, i.e., how long they have to wait.
You’re a startup, with a revolutionary idea – three years later, the share price is £10 per share. The employee still only has to pay £1, and they can sell them for the full price, £10. That’s a lot of profit. Besides, employees usually don’t have to put down their own money to pay for the shares – they pay the cost out of their profits from the sale.
That’s it. It’s a pretty simple idea when it comes down to it. Let’s take a look at why they are so important.
Employee ownership
This is a phrase that is tossed around a lot, but it’s usually left to people’s imaginations as to why it is such an important benefit of staff equity schemes.
Employee share options mean that your employees will think like owners. After all, they are owners – even if their options haven’t been vested yet, they are still going to earn a portion of the company’s potential. Just like you – like managers and owners – the better the company does, the greater their reward. They are going to be far more likely to weigh their decisions according to what will help the company best.
Imagine two employees. One has share options, her name is Mary. The other does not, his name is John. Both are accountants. One day, one of their colleagues comes up with a better way to input data – it’s more manual, and is a bit harder to do, but it’s more than manageable and it cuts costs significantly. So, it’s better for the company but it takes more work. Which employee do you think is more likely to implement the new process, Mary or John?
Mary, of course. You could issue a memo, and make the new process mandatory, but how often does that really influence employee behaviour? More importantly, how often does it influence behaviour without grumbling? Mary wants to do it, because the better the company bottom line, the better value her share options are. That’s why share options are so beneficial – they’re positive reinforcement.
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More benefits
That’s not the only benefit, though – not only will your employees be thinking like owners, but studies have shown that employee ownership is linked to better employee morale and motivation, all the way to reduced absenteeism.
Share options are also a great way to improve employee retention. Most share options vest over a number of years – in most plans, employees receive a part of the grant each year over a number of years. (For example, they receive a third of their grant each year for three years.) This gives the employees a great incentive to stay with the company for longer – if they leave early, then they won’t receive the full value of their award. At an up-and-coming startup, that could mean leaving a lot of money on the table.
Douglas Kruse, a professor at the Rutgers School of Management and Labor Relations, presented testimony to the Subcommittee on Employer-Employee Relations, reviewing numerous empirical studies on employee ownership firms. He found that ‘Employee ownership is associated with greater employment stability, which does not come at the expense of lower efficiency’. According to Kruse, it is also linked to higher rates of firm survival.
In conclusion, employee share options are a great way to make your company thrive. You make your employees happier, and they work harder and with an ownership-focused mindset. And it’s a feedback loop. The better your employees work, the more your company grows, which means the employees make more money and work even better, and so on.
But like any plan, you need to make sure you have the best staff equity scheme set up – which means you need the best equity compensation software, as well as the support staff to launch your plan and keep it running smoothly. At J.P. Morgan Workplace Solutions, we have 14 years of award-winning equity compensation management experience.
Contact us for a no-commitment demo today.
This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
