Recruit, reward and retain
Article Date: May 12 2006
Structuring the right remuneration package for senior personnel is one of the trickiest tasks a business chief must tackle. Give too much up front and you won’t incentivise performance, but pay out big bonuses and you risk reducing the company’s liquidity, which could even threaten its existence. Then there are all the variables of share schemes to consider.
Steve Ducat is staking his future on the first launch of a national newspaper in Britain since The Independent 20 years ago. Last December, he left his job running the finances for a £1 billion operation to join The Sportsman, a start-up venture designed to capture the explosion in sports betting. Funded by private investors like Zac and Ben Goldsmith, The Sportsman is setting out to help punters make more money off the bookies by covering all major sports, as well as minor ones like darts, which are attracting high stakes through online betting and digital TV.
The Sportsman launched at the end of March with an initial print run of 200,000 in time for the Grand National and with an eye on the World Cup, the year’s biggest betting event. Alongside Ducat as finance director, there are eight members of the publishing committee with options on up to 100,000 shares.
The initial market value for the shares agreed with the Treasury was 20p and the third round of finance recently closed at 80p. It’s expected that the company’s major backers will be looking to make an exit in three to four years. At a price of £40 million to £100 million, that would equate to shares worth between £2 and £5. Some of the shareholders are staff, ‘so if the company is a success,’ says Ducat, ‘it will be fantastic for everyone.’
Pick ‘n’ mix rewards
The prospect of such gains is powerful motivation for senior executives who are responsible for driving a business forward. For investors, the calculation is that by setting aside ten to 20 per cent of the equity, the remaining 80 to 90 per cent will become worth significantly more. Almost as importantly, this creates a powerful reason for top performers to stay until they realise the value of their holdings.
For smaller enterprises far away from the world of high finance, such share schemes can still offer a chance to recruit a calibre of executive that growing firms would not have thought possible without stumping up a high salary. As long as gross assets are worth less than £30 million, an EMI (enterprise management incentive) scheme can be set up that allows any gains on share options to be taxed as capital at ten per cent, rather than income at 40 per cent.
Nor should administering such reward schemes be too complex, says Duncan Brown, the director responsible for research and policy at the CIPD (Chartered Institute of Personnel and Development). ‘Smaller companies have always had the advantage of being able to strike deals off the cuff with executives. But they have then tended to run into trouble as the organisation grew, with executives on different incentives.
‘Off-the-shelf tools are now readily available that allow you to offer a pick ‘n’ mix of rewards using software to give you an accurate calculation of the outcome. You can use this flexibility to attract a management team of a quality that you might not normally expect to be able to afford.’
Expectations and aspirations
When working out packages for executives, with incentives in the short-, medium- and long-term, be careful about jumping to conclusions about what they want, warns
Esther Carder, a partner at Willott Kingston Smith, who specialises in advising companies in creative communications.
‘Talk to executives about their aspirations. They’re not going to turn down share options, since they can just sit on them on and be quids in, but are options going to keep them in the business?
‘We recently set up a package for two key execs. One loved the options, but the other one left within a year because it turned out that what she really wanted was the cash for a new kitchen and a new car.’
Carder advises, ‘Tailor the reward to the individual. Find out what motivates them. Money, power, status, family or interesting work? Creative directors, for instance, often have no ambitions at all to be part of the management team.’
