Using equity incentives to retain star performers and achieve the best possible exit
Any people-centric business must appropriately incentivise their team to retain the most talented individuals.
This is no more so that in the recruitment sector, where competition for top talent can be fierce and the cost of replacement is expensive.
Ambitious recruitment businesses should therefore consider implementing equity-based incentives, which can be awarded in addition to the more conventional performance bonuses and commissions. Doing so helps your star performers to feel more closely aligned with the company’s success as a whole, as well as incentivising them to remain with the business and secure the best possible outcome for shareholder on an exit.
The most common types of equity-related incentives are share options or growth shares, with share options granted under an EMI Scheme typically being the most attractive for individual and employer.
Show me the incentive and I’ll show you the outcome.”
Charlie Munger
Enterprise Management Incentive (EMI) scheme
EMI options remain the most tax efficient way a business can incentivise its key employees.
From an employee’s perspective, provided that the exercise price of the option is set at no lower than the market value agreed with HMRC at the time of grant, then no income tax or national insurance will be payable and the employee will instead be charged capital gains tax on a sale. From the employer’s perspective, subject to the satisfaction of certain conditions, an enhanced corporation tax deduction may be available and there will usually also be a national insurance saving.
The option can be linked to performance targets or can be linked to an exit, and the limitations around the types of exercise of performance conditions that may attach to the option are minimal.
Growth shares
Another potential incentive is the issue of a separate class of growth shares which allows the employee to participate in the growth of the company above a specific valuation “hurdle”.
By way of example, if a company had been valued at £20m, the growth “hurdle” may be set at £22m and the employee would only participate in a sale with a value of £22m or more. In contrast to the option schemes detailed above whereby the individual would typically only exercise their option and become a shareholder immediately prior to an exit, here the employee would be issued with the shares, and therefore become a shareholder of the company, at the outset. The growth shares would usually carry no voting or dividend rights; merely conferring the capital right which allows the shareholder to participate in the proceeds above the hurdle on a sale / exit. Growth shares may also be subject to satisfaction of performance targets, vesting conditions or leaver provisions.
The nature of growth shares means that you are not diluted in respect of the current value of the business, since the growth shareholders will only share in the sale proceeds above the hurdle amount.
Growth shares can be structured so they have a relatively low market value which means any tax impact on the employer and employee is minimal.
Growth shares may be used as an alternative to, or alongside, share option schemes.
Comparison
We have set out below a table summarising the differences between growth shares and EMI share options.
Conclusion
Incentivise top billers before someone else does.
We have significant experience of advising on a wide range of employee incentives, including those listed above.
If you would like to discuss any of the above in further detail, please contact:
Automated decision making (ADM) in recruitment is a key regulatory focus for the Information Commissioner’s Office (ICO). The ICO recognises that the increased automation of recruitment processes using AI brings potential benefits but also raises concerns such as people being incorrectly overlooked for jobs or being discriminated against.
Research shows that the average worker in the UK changes jobs every 5 years. In the fast-paced world of recruitment it is often more frequent. It is therefore particularly important for recruitment agencies to ensure that contractual terms prohibit departing employees from diverting key assets such as clients, candidates and staff to competitor businesses or new start-ups. This can be achieved through carefully drafted restrictive covenants.
The Employment Rights Act 2025 introduces new significant statutory rights for workers on zero and low-hours contracts, including reasonable notice of shifts, the right to guaranteed hours and payments for short-notice cancellation of shifts, with corresponding rights for agency workers. This article details the upcoming changes and their likely impact on the recruitment sector.
Our update is designed to bring you the latest news and legal developments relevant to in-house lawyers. If there are any areas you would like more information on or if you have any questions or feedback, please do not hesitate to let us know via our feedback form or get in touch with any member of our team.
Copyright in this publication is owned by Pannone Corporate LLP and all rights in such copyright are reserved. Pannone Corporate LLP is a limited liability partnership registered in England and Wales with number OC388393. Authorised and Regulated by the Solicitors Regulation Authority. A list of members is available for inspection at the registered office, 378-380 Deansgate, Manchester M3 4LY. We use the terms “partner” to refer to a member of the LLP.