Most businesses are on the look-out for the best employee benefits. Cash payments are flexible, can be easily targeted and are universally welcomed by employees, but how often have you heard it said that as soon as the money's spent the effect has worn off? And, of course, the cost of cash payments far exceeds the aggregate of what your employees receive.

Pay a cash bonus of £5,000 and your employees who are higher-rate taxpayers actually receive just £2,950 after tax and National Insurance contributions (NICs). But to give them that £2,950 you've paid £5,640 because of employers' NICs.

Equally, benefits can so easily become a 'right', an accepted part of the overall remuneration package that does little to encourage specific performance or support a true sense of working together.

But there is another way, one that helps overcome these drawbacks and engenders a true sense of sharing in the success employees help to create.

Like other benefits, employee share schemes also come in various shapes and sizes, each serving a different role (whether focused on recruiting, rewarding or retaining employees) and giving you flexibility in how you target their effect (see table).

Different schemes also have a different mix of tax advantages, so it's important to determine what you want your scheme to achieve and ensure you communicate the full picture to participants. Get it right and the results can speak for themselves.

The UK Employee Share Ownership Index complied by Equity Incentives Ltd, a subsidiary of law firm Field Fisher Waterhouse, tracks the relative performance of shares in companies whose equity is more than ten per cent owned by employees (excluding directors). As the ESO Index chart shows, the Index shows a strong correlation between employee share ownership and share price performance.

Figure 2. UK Employee Ownership Index

They found that:

• 34 per cent of employees were 'more interested' in the company and what it was doing;
• 28 per cent felt that being a shareholder increased their commitment to the company;
• 22 per cent said it made them thinks of ways to add value.
• Equally as important, 25 per cent said holding shares made them stay, rather than change jobs.

Tapping into the share ownership effect

Employee Share Schemes aren't just for big businesses or those in the financial sector. Latest Inland Revenue figures show that some 6,000 companies have introduced schemes. Your company's shares don't need to be 'quoted' to qualify for an Inland Revenue-approved scheme - some 60 per cent of current share-based (rather than option-based) schemes are in place in unquoted companies - and there are even ways to provide a means for employees to buy or sell unquoted shares.

'Closed' markets - such as those operated by ShareMark (www.sharemark.co.uk ) - enable employees and other eligible shareholders to have access to a 'marketplace' without the company having to go to the expense of a stock exchange listing, or having to make their shares available to external investors too.

The range of employee share schemes on offer means most businesses can find a scheme to suit their objectives, and there are a range of advisers able to help them through the requirements of setting-up and administering their scheme.

In many cases, the administration overheads are tax-deductible and, with NIC savings from the SIP, for instance, schemes can even be cost neutral. Schemes needn't be a drain on existing HR resources either, as their set-up and ongoing administration can also be cost-effectively outsourced to an external supplier.

Handling the maturity of your chosen scheme in a positive manner is also important - having encouraged employees to participate, you'll want to encourage them to retain some or all of their shares too.

A number of options might be open to employees, including holding scheme shares in an individual savings account (ISA) or personal pension. With the ability to rollover shares straight into a tax-efficient 'wrapper', employees can ensure their capital growth remains tax free.

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