Long term staff incentives. Increasing share ownership is proven to help retain and motivate key staff.
Increasing share ownership is proven to help retain and motivate key staff. There are also some potentially substantial tax savings available. However, there are also a number of challenges and ways to structure share participation.
For directors and senior management there is often a direct link between their actions and the value of the company. By giving the management team a stake in the company they are directly aligned to growing the value of the whole company for the benefit of all shareholders.
Properly structured share schemes align employee and shareholder interests and can be a powerful tool for recruiting, rewarding and retaining employees, giving them the opportunity to make substantial gains, often in a highly tax efficient manner and funded by external parties rather than the employer.
Things to think about:
- Focus on commercial needs, not the tax savings
- Which employees/directors will participate and will more join in the future?
- What is within their influence?
- What does ‘good’ look like for the company/the individual?
- What are the shareholders trying to achieve in the long term?
- What are your KPIs?
- Will the plan deliver a meaningful value of reward?
- How will the participant realise value from the award?
Share options are a popular choice for incentivising employees and, broadly speaking, allowing the option-holder to purchase a number of shares for a price set today at a point in the future. This has the benefit that there are no up-front costs and they don’t have to buy the shares if the price has fallen. A share option is not the same as owning a share – an option carries no rights to receive dividends, nor any right to vote. This can be an advantage for many private companies.
Share option schemes that don’t fall within any of the specific statutory arrangements are frequently referred to as ‘unapproved’ share options. They are potentially very flexible and open to all companies. Helpfully, there are no tax or national insurance contributions payable on a grant of unapproved share options. However, when an employee or director exercises the option and acquires shares they will be liable to income tax and potentially both employer’s and employees’ national insurance contributions on any gains made.
These are nearly as flexible as an unapproved option. However, the company, the recipient and the option itself must satisfy a number of qualifying conditions (e.g. a company must be carrying on a ‘qualifying trade’ and have fewer than 250 employees). EMI options are popular, largely due to of the generous tax reliefs available. Gains are generally subject to capital gains tax and there is enhanced access to additional tax reliefs meaning gains on EMI options are often subject to a tax rate of just 10%.
As with EMI, gains on qualifying company share option plans (CSOP) are exempt from income tax. As a tax advantaged plan, there are a number of requirements that must be met in order to implement a qualifying CSOP scheme. They tend to be slightly less flexible than an EMI and the reliefs are slightly less generous. However, there are no restrictions on the size of company that can implement a CSOP option and there are no excluded activities. Therefore, if your company does not qualify for an EMI arrangement for one of these reasons, exploring CSOP is often worthwhile. You can find out more in our CSOP brochure.
Arrangements to help employees buy new shares immediately have the advantage that the employee becomes a shareholder from the outset, with the benefit of feeling like an owner of the business. There are usually provisions that mean employees forfeit the shares in certain circumstances, e.g. leaving employment before a certain event.
It is not unusual for employers to simply grant directors and sometimes senior management the opportunity to buy shares, possibly at a discount. However, where an employee or director acquires shares in their employer there are a number of tax anti-avoidance provisions to consider. Therefore, even with a seemingly simple arrangement advice is recommended.
If employees or directors don’t have the funds available to buy shares immediately, they can be offered on buy now, pay later terms. Typically this might be repaid immediately before the shares are sold. There are both company law and tax issues that must be managed in much the same way as for any other purchase of shares. However, the biggest difference is that the employee is at risk of the debt being called up if the company gets into difficulty.
These typically give the holder a stake in the future capital growth of a company but with little or no interest in any of the existing value. They have a right to share in future sale proceeds if the company is sold, but only if the company value has grown. These are a popular choice for employers looking to incentivise employees and directors to focus on growing the company without giving away the hard work put in by the current shareholders.
Here at PKF Francis Clark we have a dedicated specialist reward team with many years of experience in designing the right solution for your business.
We can help
- Design plans focused on your commercial needs
- Advise on the tax treatment of awards
- Carry out valuations
- Implement share plans, either in house or in conjunction with your usual legal adviser