When you’re a founder of a start-up, a CEO of a growing SME, or a HR leader anywhere, there are few things that keep you awake at night more than losing key staff. These are the people who know your business, have been through the tough times and are the ones willing to push the envelope with you.
And it’s not just their value that is walking out the door, it’s the cost of getting their replacement back through the door where things can really mount up.
Consider three facts. First, that it’s normal for a business to spend between 40 – 80% solely on employee salaries and benefits. Second, it can cost up to 213% of an annual salary to replace executive positions within a company. Finally, the number of employees voluntarily leaving their jobs has increased by over 88% since 2010.
So, your biggest cost is people. The most valuable assets we have are our people, and our people are moving around faster than ever.
Not surprisingly, this makes retention of talent a top priority for businesses across the board. It always has been and always will be, but in an increasingly competitive jobs market (particularly as remote working now expands the horizons of where you can hire from, and where people can work) HR leaders need to find that extra edge over their rivals.
Enter employee share plans and equity compensation; not just to attract top talent, but to retain it.
How do share plans support employee retention?
A share plan is an excellent and cost-effective way of retaining employees
Let’s start with the central question – does offering employees shares or stock options mean they stay at your company longer?
The simple answer is ‘yes’, but with one important caveat.
In one 2017 study, ‘Retention Effects of Employee Stock Options: Evidence from Bunching at Vesting Dates’, it was found that ‘the retention benefits contribute greatly to the total benefit of options, which exceeds the granting cost by 95-275%.’ In other words, a company at least doubles their return on investment through an employee share plan in retention benefits alone.
However (here comes that important bit), the same study found that the quitting rates of participants doubles shortly after options vest. Essentially, some people wait for their money and then jump ship. While those numbers are relatively low, it’s still essential not to ignore this fact (and we’ll talk about how to turn it around to your advantage in a moment).
So, employee stock options have a very significant impact on retention but are not a silver bullet in themselves. You have to take a more holistic mindset to get that competitive edge over our rivals – you have to make it part of a larger engagement strategy.
Why employee engagement is key to retention
We don’t want to just keep employees by financially chaining them to the wall – we want them to stay enthusiastically and be fully on-board with the mission. In today’s language, we want them ‘engaged’.
We’ve hit you with a lot of facts today, but let’s give you a combination of another few. In their State of the Global Workplace report, Gallup concluded that “85% of employees are not actively engaged or [are] actively disengaged at work”. In the UK, they found only 8% of employees are engaged, with Europe in general hovering around 15%. In the US, this rises to a relatively impressive 30% of employees are actively engaged in their work.
While it’s hard to conclusively connect the two, it’s interesting to compare those engagement statistics with the levels of employee ownership between Europe and the US. In European late-stage startups, employees own around 10% of the company, versus 20% in the US.
Why does all this matter?
Well, just focusing on retention, a team of engaged employees will see 59% less turnover than a team full of disengaged people. And this is nothing compared to when we zoom out and see that with an engaged workforce, companies are 21% more profitable than those with a disengaged workforce.
How to engage your workforce with your employee share plan
There are a number of ways an employee share plan can be leveraged to boost engagement
So, we know retention is vital, we know that employee share plans can be a cost-effective solution to retention but that it has to be part of a larger engagement strategy.
The question then becomes, how do you directly use your employee share plan to engage your employees? Let’s look at some simple tactics you can start applying right now:
- Show them the money with a digital equity administration platform
Almost without question, the biggest challenge company’s face when it comes to equity compensation is clearly communicating their benefits. Often, an employee will receive an email with some forms to fill in and then they never see their options until vesting day approaches.
With a digital platform with employee access (like ours at Global Shares) your people can access their equity at any time and make it real in their minds. Building a culture of ownership and showing the employee their tangible assets within the company strengthens the bond between employee and company. Using a transparent digital platform is crucial for awareness, and helps you encourage the correct behaviours when it comes to ownership of the company through consistent messaging.
On our platform for example, employees are able to see how many shares they own, outstanding grants they still have, the potential value of their equity if they choose to exercise their awards and they also have the ability to exercise options and accept grants through the platform.
If they can see the benefits, you’re more likely to benefit from the effect that has.
- Show the company’s future financial prospects through a Scenario Modeling tool
At the start-up and growing SME level, often the employees we are talking about are members of the senior management team. These can be the most crucial employees a business will ever have, making retaining them the top priority.
When it comes to leveraging your equity compensation strategy to engage these top, senior leaders, you need to provide more clarity on the company’s future prospects, and how their ambitions will fit alongside.
This is where scenario modelling comes in. You can use a scenario modelling tool (available on our platform) to see exactly how a new financing round will impact your company – how the valuations, investment, post-money, dilution and more. will all come together.
Whereas before you may have to sell the future to your top employees, with a scenario modeling tool they can see it clearly. This ability to visualise the future through hard data gives top employees the security (and enthusiasm) to keep ploughing forward.
- Ramp up engagement around vesting days
Research shows that we spend the final year leading up to a big birthday – at 29, 39, 49 and so on – evaluating where our life stands and whether we want to make a change or not. This evaluation can lead to some people deciding that they need to move jobs, and smart companies know this.
To combat this natural instinct, company’s in the know will meet and talk with their 39-year-old employee and ask them what they want from their future, and how the company can support them getting there. In this way, the company becomes a positive part of any change the person might make (and indeed gets a boost of loyalty).
While not quite at the same level, company’s need to think about vesting dates in the same manner. They must engage with those employees (particularly at the top level) around vesting dates to ensure that the company remains central to their plans and will be able to support their ambitions.
The most powerful engagement technique you have is one-to-one meetings. Use vesting days as a pivot to schedule individual reviews around, making the person’s upcoming vesting opportunity a part of the conversation. Encourage your line-managers (or division leaders) to promote the next share plan and equity options during these meetings and give them accurate information to do so.
Beyond these individual meetings, there are several options like interactive group workshops, sharing of past success stories, email nurture campaigns etc. to keep the employee engaged.
What you really need here is the right mindset; think about the efforts you will put into retaining a big customer whose contract is expiring soon – you should employ the same type of thinking when looking to retain a top employee through your share plan.
An efficient, cost-effective way of retaining employees
We’ve seen how even passive employee share plans are a cost-effective way of retaining employees, but the real value comes when you add on that layer of strategic engagement. By using modern tools such as Global Shares’ digital equity administration platform, you can engage your people at all levels of the business, give them clear reasons to stay and get them excited about the future.