Staff turnover costs. When someone leaves a business it takes up valuable time, money, and often Intellectual Property. Not to mention the headache of covering for a gap in your resources, and the scramble to find someone decent to replace them! Matt Smith, partner at MitchelLake, can confirm:
"An average search, particularly for leadership positions can take three to four months, plus the new hires notice period which can be three to six months!"
For start-ups who can’t always afford to match the salaries of their corporate competitors, ESOP’s are a smart way to retain staff.
You might have heard of ‘the Great Resignation’ - it’s a term coined in the aftermath of global lockdowns, office jobs turned remote, and the general stresses of working during a global pandemic where markets are volatile and businesses are stretched.
The Great Resignation is as literal as it sounds - around the world, hordes of people who are fed up with the additional stress and responsibility that they have had to shoulder at work due to the pandemic are resigning. In the US alone, four million people quit their jobs in April 2021.
For startups in particular this isn’t great news. Generally, startups run a lean machine, they have long-term growth in mind but aren’t exactly flush with cash early on. This means the cost of losing people can be a stab in the guts, and the cost of recruiting and training new employees is equally unpleasurable.
If the thought of losing your employees during the Great Resignation is keeping you up at night, first consider what your company culture looks and feels like for your team. Happy, supported employees are significantly less likely to form part of the hordes of people leaving their jobs. The Great Resignation is generally made up of people dissatisfied and fed up with the culture or working conditions they find themselves within. Creating (or maintaining) a culture that has been creating intentionally, with the employees experience front of mind, is the most crucial thing companies can do to retain their staff,
Employee Share Option Schemes (ESOPs) are another way to engage and incentivise your team, boosting culture and innovation. ESOPs give your employees equity in your company, which equates to a direct interest in the success of the organisation and an incentive not to quit - so they also enhance resource security!
ESOPs are generally vested over time - meaning that the options an employee is granted (which are converted into shares in a company) are slowly accrued over usually 3 or 4 years. If an employee leaves an organisation before the agreed time period, their options stop being accrued.
A savvy employee will realize that the stock options in their current entity make their overall earnings much higher than a new salary. This is because each time their startup raises their option value goes up, and they earn this annually on top of their pay. As the years and raises add up, so does their pay. Leaving can be very costly. Combine this with the time-based vesting clause that requires an employee to stay with an organisation to receive their shares, and you have an employee that has a vested interest in the business, and a reason to stay.
The National Centre for Employee Ownership (NCEO) published the results from a survey that determined how 160 ESOP companies are dealing with Covid-19. These companies reported significantly lower employee turnover rates than US averages, including both voluntary and involuntary employment terminations.
Table source: National Center for Employee Ownership and Bureau of Labor Statistics
The findings demonstrate that ESOP companies fared better across multiple industries when it came to attrition rates. As we’ve said, employees are much more likely to stay with a company if they have a vested interest in doing so, especially during tough times like a global pandemic, when tapping out would probably be the easier option.
So for startups in the lurch right now, there has never been a better time to top-up the options of your existing employees or offer options to new talent and ensure you don’t feel the bite of ‘The Great Resignation.’
For an overview of everything ESOPs, you can download our comprehensive ESOP guide, or otherwise, get in touch!
This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.