When ownership becomes over exposure: the hidden risk in employee equity (Part 1)

This is the first in a two-part series exploring employee equity. Part 1 examines the risks of over-concentration in single-stock holdings - how exposure builds up quietly through overlapping awards and retention policies. Part 2 flips the lens, showing how all-employee plans like SAYE and SIP can act not just as long-term savings tools, but also as strategic diversifiers, potentially rivalling traditional retirement routes in flexibility and value.

You gotta roll with it…

When Rolls-Royce shares doubled in one year and surged over 2,000% in five, executives saw their paper wealth soar. Great news, until you realise their jobs and savings are now tied to the same engine. That’s the reality of concentration risk: when too much of your personal wealth is locked into the same company that pays your salary.

Equity incentives are designed to align, motivate and reward. And they do. But left unchecked, what starts as alignment can quietly morph into over-exposure - distorting behaviour, straining oversight and leaving employees dangerously tied to a single story.

How exposure creeps up

The mechanics are simple:

• Awards stack. Annual LTIPs and options overlap, compounding over time.
• Retention guidelines. FTSE executives are expected to hold 200-500% of salary in shares, with post-cessation holding periods.
• Strong performance amplifies the risk. If your PLC employer is thriving (whether due to market momentum, sector tailwinds or a punchy growth or recovery story) modest grants can snowball. For private companies, leverage, ratchets and valuation uplifts can transform routine awards into million pound windfalls, especially at exit.

The result? What began as a modest allocation soon resembles a single-name bet. And just when employees most need flexibility, dealing codes, holding periods and potentially poor liquidity, make diversification difficult. 

SIP shares: the quiet accumulator

The all-employee Share Incentive Plan (SIP) shows how easily concentration builds.

• £150 per month in partnership shares (maximum)
• A 1:1 employer match (£150 per month)
• Held for 10 years

That’s £36,000 contributed by the employee, plus £18,000 from the employer - £54,000 in total.

Now add growth:

At 10% annual growth, SIP shares alone can rival a decade of ISA savings all in one stock. For a mid-career employee, that's a sizeable holding, even before counting participation in other equity programmes.

If SIP dividends are reinvested, the total value could be higher still, compounding both capital growth and income.

The double-edged sword of concentration

Upside:

• Builds genuine ownership and loyalty.
• Signals “skin in the game”.
• Aligns pay with investor outcomes.

Downside:

• Double exposure: Job risk and wealth risk move together.
• Liquidity blocks: Hard to sell when prudence suggests you should.
• Behavioural drag: As the psychologists Kahneman and Tversky showed, loss aversion is powerful. Executives sitting on large paper wealth often prioritise protecting it, even at the cost of bold, value-creating decisions.

Designing for balance

The answer isn't to avoid equity, but to design it with foresight. Three levers could help:

1. Caps and automaticity

• Impose shareholding caps as well as floors (e.g. cap at 250% of salary) to ensure alignment without excessive concentration. Notably, the Investment Association’s updated Principles of Remuneration (October 2024) relaxed previous expectations around executive shareholding levels. The guidance encourages flexibility, allowing companies to tailor structures to their strategy.
• Use PLC trading plans, pre-agreed, rule-based selling programs to enable orderly sell-downs even in closed periods.

2. Liquidity

• In listed companies, maximise open-periods and streamline pre-clearance.
• In private companies, provide buy-backs, continuation fund cash-outs or secondaries.

3. Diversification

• Balance equity with cash or alternative uncorrelated instruments.
• Educate employees on diversification strategies and tax-efficient sell-downs (14% BADR or 24% CGT).

The bottom line

Concentration is both a feature and a flaw of employee equity. It’s the price of alignment but also a source of distortion if unmanaged. SIP shares illustrate this perfectly.

Boards should treat concentration not as a side effect, but as a design choice. The real question is therefore simple: do your employees own the company or does the company own them?

At Burges Salmon, we help companies unlock the full value of employee equity. From designing tax-efficient Share Incentive Plans to advising on growth modelling and dividend reinvestment strategies, we support businesses in building equity programmes that drive engagement, retention and long-term value creation.