Whilst Stephen Hester, chief exec of RBS, did the right thing and waived his entitlement to his £1m bonus, how would you like the opportunity to reward your key employees with the potential for significant future windfalls without any flack (in fact, more likely with a whole heap of praise from your happy employees!)?
Mr Hester’s ‘bonus’ was actually in the form of a share option rather than cash. So he was entitled to acquire shares in RBS at a fixed price in the future – at which time the expectation (hope!) was that the shares would be worth a whole lot more – giving him a potentially significant cash windfall when he sold the shares at their then market price.
Share options aren’t limited to listed companies. They can also be used for private limited companies. Like yours.
The key advantages of share option schemes are:
- You are passing a potentially hugely valuable ‘bonus’ to your employees with no cash outlay for your company – it is put simply a piece of paper with a right to acquire the shares in the future
- Key employees can be tied-in to the company as the share option scheme can specify at what point the options can be exercised and the shares acquired e.g. 2,3 or say 5 years from the date of grant or, very commonly in fast growth SMEs, only on a sale of the company to a third party or a floatation on the stock exchange (an ‘exit only’ scheme)
- There can be significant tax savings for the company and the employees if structured right in granting share options compared to paying cash bonuses (especially if you qualify for the EMI option scheme).