Barriers to Innovation – Skills shortage

Skilled workers are crucial to building a successful and growing tech company, so being able to attract and retain the right people requires the right measures, as Bishop Fleming’s Ben Herbert explains.

To generate the right environment for innovation and creativity necessitates having the right culture that allows people the freedom to experiment. And in the world of innovation, having the right team is paramount.

Labour market

Although there are many barriers to innovation, finding (and keeping) key staff is a current and very real issue.

The November 2019 labour market data from the Office for National Statistics shows unemployment in the UK at just 3.8%, a 45-year low. The level of unemployment is thought to be even lower when looking specifically at skilled labour. 

The latest vacancies figures show roles within the ‘Professional Scientific and technical services’ sector to have increased by 26,000 between March and June 2019 alone.

Market pressures within the job market are making it harder to find and retain those key employees. 
It is critical to understand what motivates them to minimise spend and maximise success. 

Where once the key consideration was salary, applicants are now placing much more emphasis on the overall package, including flexible working, holiday entitlement, benefits, culture, corporate social responsibility, green credentials etc. 
 

Share options

Share options are one weapon in your armoury. 

For the right individuals, share options can be highly motivating and, crucially, can help retain those who will help your business to innovate and grow.

These work through the employer granting workers options over a certain percentage of the company’s shares. 

These options can then be exercised by the worker at a future date, subject to certain conditions, or on sale of the company. 

Typically, an option allows the employee to buy shares at an agreed price, based on the value of the business when the option is granted and to benefit from growth to a higher value later. 
 

Example

Innovate Ltd is worth £0.5m and attracts, motivates and retains key staff by issuing share options over 20% of the company.

The options are exercisable on sale of the business and the exercise price (the cost of the shares under the option) is the current market value (£100k being 20% of £0.5m). 

4 years later Growth PLC, a large multi-national company, makes an offer to purchase Innovate Ltd for £5m. 

The employees exercise their options, paying £100k. The entire share capital of Innovate Ltd is then immediately sold to Growth PLC for £5m. 

The original shareholders are happy as they have been able to attract and retain key staff, allowing the company to grow, transforming their investment from £0.5m (100% holding of £0.5m) into £4m (80% holding £5m).

The option holders are also happy as they have been able to grow the value of the business, knowing they would share in the value they have helped create. They have received value of £0.9m (£1m proceeds for their 20% shareholding less £0.1m exercise price paid for the shares).
 

Share option types

There are broadly two tax categories of share options: approved and unapproved. 

HM Revenue & Customs (HMRC) approved share options are generally very tax efficient compared with the more inefficient unapproved schemes.

Enterprise Management Incentive (EMI) share options are a particularly flexible HMRC-approved share option scheme than can be tailored to suit the employer’s commercial objectives. 

For any share scheme to work effectively, it is important that the scheme (EMI or otherwise) fits in with your commercial objectives, rather than buying an off-the-shelf generic option scheme. 

To summarise, employee share option schemes allow businesses to:

• Attract and retain the best people.
• Align interests by giving employees a sense of ownership in your company.
• Reward those who help you grow the business by enabling them to share in its success.
• Benefit from a more committed and engaged workforce: businesses with shares schemes tend to outperform businesses that don't share ownership with employees.

Additionally, the tax implications of an approved option scheme, such as EMI share option, are more beneficial to employees than the alternatives.

If we can be of any assistance, please do contact me or your usual Bishop Fleming contact.