How to Reward Employees with Equity

Callum Ritchie December 29, 2025

Attracting and retaining talented employees is one of the biggest challenges facing growing businesses. While competitive salaries and bonuses remain important, many companies are increasingly turning to equity-based incentives to motivate key people and align them with long-term success.

Rewarding employees with equity can help create an ownership mindset, encourage loyalty and focus your team on building long-term value rather than short-term results. However, equity rewards come in many different forms, each with its own legal, tax and commercial implications.

This page provides a high-level overview of how businesses commonly reward employees with equity in the UK, the main options available and the key factors to consider when deciding what might be right for your company.

What does “equity” mean in an employee context?

In simple terms, rewarding employees with equity means giving them a stake in the company’s success. This can involve:

Giving employees shares in the company
Granting options to acquire shares in the future
Offering cash rewards linked to company value, without issuing actual shares

The aim is to allow employees to benefit financially if the company grows in value or achieves a successful exit, such as a sale or IPO.

Why do companies reward employees with equity?

Equity incentives are commonly used to:

Attract talent where cash salaries alone may not be competitive
Retain key employees by encouraging long-term commitment
Motivate performance by aligning rewards with business growth
Preserve cash by deferring rewards until value is created
Support exit planning, ensuring management and employees are aligned with shareholders

For many businesses, equity incentives also help foster a stronger sense of ownership, accountability and engagement across the team.

Common ways to reward employees with equity

There is no single “best” way to reward employees with equity. The right approach depends on your company’s size, structure, growth plans and workforce. Below is a high-level overview of the most common approaches.

Share options

Share options give employees the right to buy shares in the future at a fixed price. Employees usually only benefit if the company grows in value above that price.

Options are popular because they:

Encourage long-term growth
Do not make employees shareholders immediately
Can be structured around time, performance or exit events

In the UK, some option schemes (such as EMI and CSOPs) can be particularly tax-efficient if certain conditions are met.

Direct share ownership

Some companies issue shares directly to employees, making them shareholders from day one.

This approach is straightforward and transparent, but it also means:

Employees gain shareholder rights (such as voting rights unless amended otherwise)
Robust leaver provisions are essential
Valuation and tax issues must be carefully managed

Direct share ownership is often best suited to smaller teams or senior employees where long-term involvement is expected.

Growth shares

Growth shares are a special class of shares designed to reward future growth only. Employees benefit from increases in value above a set threshold, but not from the company’s existing value at the time the shares are issued.

They are commonly used to:

Protect existing shareholders’ value
Incentivise senior hires or leadership teams
Align rewards closely with future performance

Growth shares are more complex to set up and usually require bespoke legal and valuation work.

Phantom share schemes

Phantom share schemes do not involve issuing real shares. Instead, employees receive a contractual right to a cash payment linked to the company’s value or growth.

These schemes are attractive where companies want to:

Avoid diluting share ownership
Keep governance and decision-making simple
Reward employees without making them shareholders

Because payouts are cash-based, they are typically taxed as employment income.

Which approach is right for your business?

The best equity structure depends on several key questions:

Do you want employees to become actual shareholders?
Is tax efficiency a priority for you and your employees?
Are you rewarding employees only, or also consultants and advisers?
Are you focused on retention, performance, growth or exit alignment?
How important is it to keep your share structure simple?

Many businesses use more than one approach over time, adapting their equity strategy as the company grows and its priorities change. Our article titled “What is the Best Share Scheme for my Company?” delves into the different schemes and options available to reward employees with equity.

The importance of getting the structure right

Equity incentives can be extremely powerful, but only if they are implemented correctly. Poorly structured arrangements can lead to:

Unexpected tax liabilities
Disputes with departing employees
Complications during fundraising or a sale
Misalignment between shareholders and employees

Taking legal and tax advice early can help ensure the scheme supports your commercial objectives and works as intended.

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.