Employee shares are becoming increasingly popular in life science companies. A survey conducted by MedWatch shows that employee shares are gaining traction in life science companies. According to the study, 24% of 670 respondents stated that their employer had introduced employee shares within the past year. Pharmadanmark observes a similar trend. Over just four years (from 2019 to 2023), the number of privately employed members of Pharmadanmark with stock options, has doubled, reaching nearly one in five members by 2023.
In this article, we will provide insights on how employee shares can effectively recruit and retain talent in your company.
What are employee shares?
Employee shares, also known as stock options or employee share programs, are shares that employees are given by their employer or offered to purchase at a price lower than their actual value.
The aim of employee shares is to align the employees’ interests more closely with the company’s success and long-term results.
Benefits of offering employee shares in life science companies.
The increasing trend of providing employee shares is likely linked to the high demand for and competition over the right talent in the life science industry. The competition for talent makes it worthwhile to invest extra in both current and future key employees.
It’s worth investing extra in talented employees.
Salaries in the life science sector are generally high. They are sometimes so substantial that additional motivating factors are needed beyond the base salary to make a job attractive or retain valuable employees. Here, employee shares have proven to be a financial incentive for employees in the life science sector to respond positively.
Therefore, Employee shares can be a decisive factor when an employee or candidate chooses between two jobs.
Here are some of the benefits that make them attractive:
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Ownership increases motivation
When employees become shareholders in the company, they often feel a stronger connection to the business. As the company performs well and the stock price rises, the employees share in the success through the increase in the value of their shares. It can increase their motivation to achieve results and contribute to the company's growth, as they are directly interested in seeing the company succeed. Conversely, the employee shares risk losing value if the stock price falls. -
Tax benefits
In some cases, employee shares are tax-free when granted. Additionally, there is a financial advantage in that they are taxed as capital gains rather than personal income. In 2022, the tax rate was 27% for incomes up to 57,200 DKK (and 42% after that). The capital gains tax is only applied when the shares are sold. -
Employee engagement and retention
One reason companies find employee share schemes attractive is that they are often subject to a vesting period. It means that employees are rewarded with stock options if they stay with the company for an agreed-upon period. In other words, the employees can only exercise the stock options at the specified time if they are still with the company. It creates long-term employee engagement and helps the company retain valuable staff for longer.
Employee shares can function in various ways. Here are the most common types:
Employee shares
In this model, the company provides employees with shares as a financial incentive. Alternatively, employees may purchase the shares at a preferential price.
When employees receive shares as gifts, there is no financial risk. However, they must pay taxes according to the relevant regulations for the arrangement.
Employees who buy the shares at a discounted price may incur a loss if the shares are sold for less than the purchase price.
Stock option agreement
During employment negotiations or discussions, the company may offer stock options. This means that employees gain the right to buy shares in the company at a later date at an agreed-upon price. It is a right, not an obligation, and employees can decline.
Stock option agreements allow employees to monitor the company’s performance and decide when to convert the options into shares. The timing is usually predetermined.
Warrant program
A warrant program is a form of incentive scheme in which a company allows employees to purchase shares at a predetermined price in the future. Warrants function similarly to stock options but differ in that they are issued directly by the company rather than on the stock market.
Convertible bonds
The company can offer employees the opportunity to lend money to the company through the issuance of convertible bonds. Employees receive periodic interest income from the convertible bonds. Later, when the terms of the convertible bonds are met, employees can convert their loans into company shares. This conversion gives employees a direct ownership stake in the company.
If employees choose not to convert their convertible bonds into shares—perhaps if market conditions make conversion unattractive—they must repay the loan to the company at the bond’s maturity date, along with the applicable interest.
Life science companies that successfully use employee shares.
How do employee shares impact the growth of life science companies, and do they have a tangible effect on employee retention?
It is easiest to assess this with examples from the business world.
In 2023, LeoPharma received the “Best Employee Share Program for Companies with Fewer than 10,000 Employees” award from the NGO GEO, Global Equity Organization. In 2021, they introduced an employee program that allowed employees to convert 3% of their monthly salary into shares throughout 2022. Seven out of ten employees in Denmark chose to invest 3% of their salary in LeoPharma shares, and 43% of employees globally participated.
The biotech firm Expres2ion, located in DTU Science Park, had to cut costs and lay off several employees in 2023 due to a lack of funding. It then became even more crucial for them to retain the remaining employees to safeguard essential knowledge within the organization.
Unable to offer the highest salary packages, the company’s management explored alternative methods to retain the remaining employees. As a result, they decided to introduce a warrant program, where personal KPIs are linked to employee shares.
Novo Nordisk believes in employee retention through the allocation of employee shares. To mark its 100th anniversary in 2023, Novo Nordisk granted all employees a stock bonus of 37 restricted stock units (RSUs), which the employees can convert into Novo Nordisk B shares in 2026, provided they remain with the company.
