How to choose an employee share scheme that will drive business growth
This article was originally published on vistra.com
Fostering a growth culture and engaging with key employees are both vital factors in driving the continued success of any business. Structuring the right employee share scheme can help achieve these aims – helping to grow the business for existing shareholders, with the added benefit of allowing employees to join in the success.
This post explains the advantages of introducing an employee incentive scheme, discusses what arrangements are available in the UK and suggests some important steps to consider when designing and implementing a scheme.
Why should you consider an employee share scheme?
1. To retain and motivate key staff
With the battle for talent intensifying, giving key employees a clear incentive and sense of ownership of the business will help to warn off any potential suitors. A share incentive scheme can be linked to the individual’s continued employment with the company, with some value being forfeited if the employee decides to leave.
As well as helping to retain individuals, employee share schemes can help to motivate them to continue to grow the business. The benefit under a share incentive scheme can be linked to the company achieving a financial target, or even a successful sale. This will benefit both the employee and the wider shareholders.
2. To give employees ownership of the business
Incentive schemes, particularly those offering shares to employees, can make the individual employee feel a key part of the business. They will start to think like business owners with a genuine interest and stake in the continued development of the company.
Installing this mindset in key employees is often the first step in business owners being able to step back from the day to day running of the business, facilitating a smooth handover once they are ready to step out completely.
3. To make the most of generous Tax Breaks – share incentive schemes
Structured in the right way certain share option schemes can offer tax savings for both the employee and company.
The UK government have acknowledged the importance of employee share schemes in helping to drive the growth of private businesses. It continues to offer significant tax breaks for both employees and the companies implementing such schemes.
What employee incentive arrangements are available?
1. Employee Share Schemes
Several share schemes are available, some of the most common examples are:
Enterprise Management Incentive (or “EMI”) scheme – UK government-backed share option scheme. Confers significant tax benefits on both companies and the employees who can benefit from such schemes.
Company Share Option Plan (or “CSOP”) – where an EMI scheme is not available, a CSOP offers a tax-efficient alternative.
Unapproved Share Option Plan – offers a flexible option arrangement where neither an EMI scheme nor a CSOP are available. As no regulatory requirements, they offer complete flexibility to the company in setting the option terms.
2. Other incentive options
If the circumstances do not lend themselves to the implementation of a share option scheme, then there are some other incentive options available – including:
Growth Shares – creating a new class of share to be issued to employees. Holders will be able to participate in the growth in value of the company following the allotment of the “Growth Shares”. Gives employees the legal title to shares in the company, while ring-fencing the pre-existing value in the company for the existing shareholders.
Phantom Options – no shares allotted or option to acquire shares granted. A phantom option will track share price growth to calculate benefits. No dilution to existing shareholders, the gain realised by the employee is settled by cash payment from the company.
3 key steps to implementing an employee share scheme
Getting the design of your incentive scheme right is crucial. Speak to your advisors, who should analyse your instructions and desired end-result, before structuring a plan which is right for you.
Consult with both legal and tax advisors at an early stage – it may be that the incentive scheme can be structured to afford significant tax benefits to both the employee and the company.
2. Understanding and communicating your plan
The agreed share incentive plan will then need to be communicated to your employees. Work with your advisors to ensure that the benefits of the incentive scheme are communicated as clearly as possible to those who it will benefit.
3. Implementing the scheme
Your tax and legal advisors will then work to ensure that the documents are prepared correctly to implement the scheme.
Depending on the nature of the scheme, certain filings may be required at Companies House and/or HMRC once the scheme has been adopted. Your advisors will be able to ensure that these steps are all completed correctly.
The benefits of introducing employee incentive schemes are clear, however, many companies are still put off because of a misconception that they are costly, complicated or they unfairly dilute the shareholding of the existing owners.
These fears are misplaced. The variety of share and other incentive schemes available means that, by taking the correct advice, a simple scheme can be adopted and tailored to the needs of the company, its shareholders and employees.
To achieve the best results, it is crucial to get the design and implementation right from the start, and early engagement with your legal and tax advisors is always recommended.
At Vistra, we have a specialist team of legal and tax advisors who will be able to assist with all aspects of planning and implementing a share incentive scheme not only in the UK but also across the globe, meaning that you will have a single point of contact for the legal and tax advice needed.
Please get in contact with our team to get started.