UK: COMING UP FAST - A section for entrepreneurs - Building to last - Share options as a loyalty device.

UK: COMING UP FAST - A section for entrepreneurs - Building to last - Share options as a loyalty device. - DILEMMA: A company is worried that its best and more senior staff will leave. Should it give them share options?

by PATRICK DUNNE, who works with 3i.
Last Updated: 31 Aug 2010

DILEMMA: A company is worried that its best and more senior staff will leave. Should it give them share options?

ISSUES: Share options are often seen as a cheap, cash-free way for companies to attract and retain quality staff. However, the question you should ask is, will share options work as a loyalty award in your business? Fast-growth technology companies in Silicon Valley were swift to jump on the bandwagon, recognising the natural appeal of aligning growth in shareholder value with rewards for those who created it. But many have become disillusioned by job-hoppers, who move to where they see the biggest rises in stock prices, and then get out before the bubble bursts.

In private companies, share options can appear less attractive. Employees may be concerned about how they can realise the value of their options.

If a sale of the business or a flotation in the medium term isn't likely, you will need other mechanisms to enable employees to exercise and sell.

If the stock markets are down, if you are unloved by the market or going through a rough patch, the options may be 'under water'. Employees may be tempted to move elsewhere. But if your sector is generally doing badly, competitors are likely to be in the same boat as you.

Schemes are often perceived as unfair. A regular complaint is that some employees have received share options just for being there rather than because they earned them. You will need to think about how widely you will offer shares. Equally, it is important to consider how frequently you plan to issue equity. Regular fund raising or acquisitions increase the complexity and costs of a scheme.

ACTION: Have a clear purpose - is your scheme mostly loyalty elastic, to reward or to motivate?

- Try to make it fair but recognise it won't be. Use share options as a unifying force.

- Don't give them all out in big dollops - drip them out.

- Keep it simple. Straightforward schemes are easier to communicate and administer - and remember the tax consequences.

- Use them as a carrot to motivate but be realistic about how much people can make. Paint the vision of value but link it to growing the value of the business: 'If we can double the value of the business in three years, you will make £300,000.'

- Most of all think about it hard, monitor it and take good professional advice on how many of the company employees should be eligible, the size of the options, etc.

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