Company shares as incentives – some key points raised at our recent ‘Breakfast Briefing’ seminar

11th January, 2018

On Tuesday 9 January, our Truro office hosted its fifth in the series of monthly breakfast briefings.

Overview

This particular briefing was based on the topic, ‘Incentivise Key Staff – EMI and other options involving share ownership for employees’. The morning featured the following presentations:

Presenter Topic
Martin Brown
Tax Director, PKF Francis Clark
Employees and shares – designing a long term incentive
Giles Dunning
Partner, Stephens Scown
Employees and shares – legal matters
Richard Wadman
Corporate Finance Director, PKF Francis Clark
Valuation of minority interests

The presentations were followed by an extremely interactive question and answer session, with most of the attendees posing questions for at least one of the presenters. The presenter’s slides from the seminar can be found here.

Key points raised

Some of the key points raised during the briefing echo, ’lessons learnt’ from one of our clients who put in place an EMI scheme as part of the preparation for a company sale.

These can be summarised as follows:

  • Make sure that all of the original shareholders/directors are fully in agreement with the targets and expectations, and fully understand why this is being undertaken – any dissent within this group would be very challenging
  • Take serious professional advice before undertaking this!
  • Select those members of the management team to take part very carefully, to ensure that they are all absolutely ‘bought in’ to the concept – it is recommended that this is kept to the smallest group as possible, made up of the most trusted team members
  • Trust and transparency are absolutely vital on both sides of this type of arrangement
  • Set very clear targets that will trigger the scheme
  • Get all the paperwork exactly right and ensure that the potential outcomes are very clear to everyone involved
  • Make it clear that this is an incentive for performance over and above the ‘norm’ and it is not a ‘right’ i.e. it will only happen if the criteria is met
  • Once in place, allow the relevant members of the scheme sufficient freedom to achieve the targets set to ensure that they are motivated correctly and are not too constrained by existing shareholders/directors
  • Basing the trigger on a future earn out deal is challenging, but this is fairly normal to try and achieve a good value for the business.

Whilst those points are in connection with an EMI scheme, their essence resonates across the range of potential (share) incentive schemes.

Consider tax as a wrapper only (but can significantly increase the value of incentive)

As Martin Brown stressed on occasions during the briefing, whilst ‘tax’ is an important consideration in the structuring of (share) incentive schemes, the commercial and strategic aspects of the arrangements should be the main drivers, i.e. what behaviour are you seeking to incentivise from the individuals, and how does this align with the owners/company goals.

Martin also pointed out, that if professional (tax expertise) is not sought on a timely basis, this can have a significant detrimental impact on the tax costs of the incentive and thus on its (post tax) value. Martin gave illustrative examples where the same gross receipts would default to be taxed under PAYE/NI but with an element of planning, could be taxed under as a capital gain maybe with Entrepreneurs Relief reducing the tax rate on that element to 10%.

One of the items in the delegate packs for the briefing was our brochure, ‘Share Schemes: Long terms staff incentives’, which provides an overview of the options (no pun intended) available to owners looking to incentivise staff through shares. In addition to this, it also contains a brief biography and contact details for Martin.

I understand that Martin intends to roll out these ’Breakfast Briefings’ across some of the other PKF Francis Clark offices, but in the interim, if you wish to discuss putting a share incentive scheme in place, please do not hesitate to email Martin directly.

Next up – 6 February 2018

Our next breakfast event is one that I am particularly looking forward to as it will be featuring presentations around the theme of the ‘virtual world’…Topics covered will be Blockchain, Cyber Security and Cloud Accounting.

More details and how to book can be found here.

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