Equity schemes can help agencies fight the global talent war
British agencies are coming off poorly in the global talent war. But equity-sharing schemes could enable agencies to market themselves better to new staff – and keep their current talent happy, argues Nick Berry of Green Square.
We are in an age where employees expect more than ever / Unsplash
The advertising sector is facing its worst-ever recruitment crisis, according to the World Federation of Advertisers (WFA). The UK is at the sharp end of this crisis, and in the face of the recent turmoil in the economy and the deepening cost of living crisis, the situation has only been exacerbated since the summer.
As agencies search for solutions to this threat, there’s one means of rewarding and incentivizing staff that has been overlooked, and can act as an important pillar in longer-term M&A strategy: equity.
Before considering tactics to utilize, it is worth recapping why attracting and keeping hold of talent is the biggest challenge for UK agencies right now.
Brexit has led many people to reassess whether they see the UK as their long-term base. Many agencies have established a base in Europe and relocated headcount and relationship management to the continent.
Remote working has become the norm in many cases and geographical boundaries have largely been removed. While this increases access to talent, it also increases the competition for talent globally.
Most countries are in the grip of a cost of living crisis, and some staff seized the pandemic as a chance to relocate to cheaper and often warmer climes to work remotely while still commanding the same and sometimes higher wages.
These factors have resulted in the attractiveness of the UK waning to some degree. Furthermore, employees know their value more than ever. There is greater knowledge of what the competition is paying and a willingness to ‘jump ship’ for a salary hike.
Following a prolonged period of almost ‘full employment’ in the UK, people are less concerned with job security, and length of tenure is at an all-time low. A survey by Employment Hero at the start of 2022 showed that 77% of people aged 24-34 were looking to change jobs within the next year, which is a startling statistic.
Freelancing is often a more lucrative option than being on staff, while also providing the chance to experience a variety of environments. It is often perceived as less stressful with a better work-life balance.
More people than ever are setting up their own businesses, and they are often lured by the excitement and challenge of trying something completely different from their established careers.
There are considerable push factors for this in the marketing and advertising world, as highlighted by the WFS’s Media’s Got Talent survey, which noted “systematic industry issues including poor levels of training, poor client behavior, competition from tech firms, poor work-life balance for staff, a lack of flexibility and opaque career paths” as factors.
On top of all this, leaders and managers are stretched and struggle to define and foster thriving cultures in a world where the office is often no longer the center of gravity for the business, growth is restricted by clients demanding more for less and there is the ever-greater challenge of meeting creative and technical necessities in the ‘always on age.’
That represents a lot of complex inter-related challenges to tackle. But in the brave new world, the innovative and bold will survive and thrive.
Getting the basics right is essential. I’ve written previously about the importance of investing in processes and systems to allow people to be freed from repetitive admin, which in turn will allow creativity to flourish. This can have a huge impact on reducing stress and increasing job satisfaction. But further to having the foundations and tools for individuals to flourish, there’s an array of other operational and cultural actions that demonstrate an underlying commitment to staff.
Initiatives such as those listed below will improve the length of tenure and attractiveness of a company to existing and prospective employees...
Coherent, inclusive and open recruitment policies
Quality induction for new starters
Clear training and development paths underpinned by robust, ongoing performance management from team leaders who know how to manage
Proactively searching for talent from diverse and underrepresented groups
A strong environmental, social and governance approach to both reflect and uphold what matters to modern-day employees
Seeing investment in wellbeing as a way to drive performance as opposed to a cost to the business
Hybrid working patterns that allow for collaboration to nurture junior team members so they can develop and grow as opposed to being isolated and adrift from peers and experienced staff
The points above apply to all businesses, but in creative environments people are fundamental to both differentiation and ensuring innovation and continuity in client relationships. The radical empowerment of key people and aligning them to long-term business objectives is essential.
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A powerful way to do this is through equity participation. Equity is often regarded as a ‘sacred cow,’ not to be touched by those who have it. But owners and leaders need to think bigger than this and use all the tools at their disposal to drive success in these testing times. When implemented correctly, utilizing equity can embed a truly shared and vested interest.
At Green Square we see that owners holding on to too much equity can have the opposite effect to that which they are striving for, which is to reduce reliance on themselves, spread responsibility and maximize the value of the business.
We are lucky in the UK to have long-established government-approved share option schemes for small- and medium-sized private businesses, such as Employee Management Incentive schemes (EMI).
Of nearly 6m businesses in the UK, the vast majority are small. The government recognizes the importance that share schemes have for them and it’s currently reviewing EMI rules, saying it aims for “the EMI scheme to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively. The review will also examine whether more companies should be able to access the scheme.”
As explained simply by Ifty Nasir, chief executive officer of Vestd, with a share scheme management platform, “in a nutshell, when people feel they have a stake in something, there is a greater level of commitment to the success of the business as a whole and their contribution to it. This applies even if they’re not in the office with a manager looking over their shoulder.”
Furthermore, and as a key aspect of where we support clients preparing to sell, it has been a long-standing priority of buyers to know the ‘second tier’ of management will share some reward from the initial payment, along with those that founded the business. And even more importantly those people will be incentivized to drive growth in profits post-sale during an earn-out period. This will be alongside the primary owners and shareholders, or as part of a smooth succession plan.
Every business is different and there is no hard and fast rule for the level of equity to distribute, but acquirers like to see between 10% to 20% of equity in the hands of the ‘second tier.’ This is a meaningful amount and shows that the business has a trusted layer of resource and expertise beyond its founders.
Further to share option schemes, there are other approaches to consider. Employee Ownership Trusts (EOTs) are growing in popularity for businesses that wish to retain their independence or don’t fit the profile for acquirers in some shape or form. Employee ownership is achieved when a trust is established to hold shares on behalf of employees. This offers significant tax advantages for those handing over their shares when all the criteria are met.
In larger agencies that are part of a network, the group entity is often publicly listed. The share prices of the main networks including WPP, IPG and Omnicom groups have been in steep decline over the past 12 months or so. The dramatic rise and fall of S4’s share value has also been well-documented over the past couple of years. This represents an opportunity and a challenge for these larger groups when it comes to using equity to attract and secure talent.
The goal when issuing share options is for the capital gain to be as large as possible for the beneficiaries. Therefore, with share prices depressed, this is a great time to consider offering share options to staff. If such options have carefully-planned vesting schedules, this could lock in key people and provide much-sought stability for the agency and a tangible goal for the employees. This could and should both drive growth and consequently result in significant returns for the beneficiaries over the next five to 10 years.
In other situations, groups such as S4 and Next 15 have used equity as a key part of their acquisition strategy through offering some of the value to the sellers as reciprocal shares in the group. In these circumstances the shareholders that sold to the group when the shares were at a much higher value may well now be feeling short-changed. But hindsight is a wonderful thing, and no one could foresee the current turmoil in the markets – a far more powerful factor on those prices than the performance of those companies alone.
Not only does this act as a motivational challenge among the businesses acquired to date, but it also means that if future deals utilize a similar structure, the volume of shares required to achieve the required value would be much higher – creating a significant imbalance.
The same would apply if other staff within group companies were now offered share options. This could lead to some interesting internal politics, but ‘top-up shares options’ could be offered strategically to iron out inequalities and level the playing field, while also motivating and driving growth.
Distributing equity won’t solve all the problems that businesses are facing right now, but we are in an age where employees expect more than ever. It is a powerful tool to help encourage and reward commitment, accountability and growth.
It won’t be right for every business, but when implemented correctly long-term value can increase and can get you to your desired destination faster.
Founders need to warm to the idea of having a smaller percentage of the pie, being outweighed by creating a much bigger pie – which is good for everyone.
Nick Berry is a partner at Green Square.