The benefit of the Employee Share Scheme in difficult times
Employee share schemes can be an effective means of incentivising staff for the long term; giving them a stake in the future of the business so that they benefit if it does well. Since the crisis began in March, we have seen a surge in share schemes of various sorts, but why is this the case, and what have companies been implementing?
An employee share scheme is really all about giving the employee a share in the future success of the business. By having either real shares or share options in the company, the employee knows that if the company does well, then there should be an opportunity for them to convert that into cash, thereby benefitting from the growth of the company. This can lead to greater motivation as the employee’s interests are now more closely aligned with those of the business owners.
Traditionally, it is perhaps most common to see share options (a right to acquire shares at a future time at a price fixed today) being granted to employees of fast growing companies which expect a sale within the next few years, perhaps by way of a trade sale or venture capital backed deal. In this context, the Enterprise Management Incentive (EMI) tax advantaged share option scheme is often ideal, as it allows any growth in value after the grant of the share option to accrue free of income tax and NIC, with just Capital Gains Tax on the sale of the shares; Business Asset Disposal Relief (ER) would normally be available.
However, more stable businesses still use EMI share options. Now more than ever, with cashflow tight, businesses have been looking to incentivise their key team of people without paying them substantial salaries and bonuses right now. EMI can still work here, as long as we can foresee a growth in value in the company’s shares; this might just be down to a recovery from the current pressures of the pandemic. Of course, employees must be able to foresee being allowed to acquire and sell their shares, and if a future company sale is less likely then they may, for example, need reassurance that they would be able to exercise and sell on a future retirement.
Through the pandemic we have also seen companies look to give certain employees the ownership of real shares. These can give something more tangible to the employee, especially if the company pays dividends (which would only be paid on real shares and not on options). However, there are commercial complications of having minority shareholders, and real shares carry an upfront income tax charge unless the employee pays full market value; again, if company value has been depressed by the pandemic, now can be an efficient moment to get real shares to employees.
Share schemes need to be designed carefully for the individual company circumstances. However, where properly implemented, they can be a great method of incentivising key staff, with tax advantages and low cash costs.
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