Incentivising employees using shares – common concerns addressed

Incentivising employees using shares – common concerns addressed

Incentivising and retaining key employees is integral to any company’s success. One way in which companies can achieve this is through a tax efficient

Incentivising and retaining key employees is integral to any company’s success. One way in which companies can achieve this is through a tax efficient share plan in which employees acquire shares in their employer company.  Not only do such plans confer tax benefits for the business and employees, but they also offer a much more meaningful sense of participation, ownership and involvement than salary and bonus.

Share plans have received academic and Government support because they help companies engage employees as well as benefitting the wider economy through increased productivity and growth. While employee ownership is on the increase, outside of listed companies the number of businesses operating share plans is outweighed by those that do not offer employee share ownership.

What do professionals suggest? 

We sat down with John Dormer,  a partner with law firm Wright Hassall LLP to ask how he would approach some of the perceived blockers to such activity. As John specialises in employee incentive work and provides advice on the structuring, implementation and maintenance of management and employee incentive arrangements, we thought his advice was as best as they come!

We laid out the common issues we think would be on the tip of any businesses tongue and asked for his solutions.

“We want to incentivise key employees only and don’t want to have to offer shares to all employees”

There are a number of “discretionary” share plans which allow a company to offer selected employees shares or options rather than having to offer participation on an employee-wide basis. Under discretionary arrangements, business owners can decide who participates, when and over what quantum.

 

“We don’t want to just give equity away!”

 

Properly designed incentives ensure that employees benefit only when their performance justifies it and in a way that works for the business and shareholders.

 

There is significant flexibility in the design of share plans with scope to tailor arrangements to suit the company’s and shareholders’ goals.

 

Objectives vary from business to business but might include some or all of:

 

  • Rewarding employees for past performance;
  • Retaining employees and rewarding continued service;
  • Motivating employees to create growth;
  • Targeting specific objectives (either personal or corporate);
  • Succession planning;
  • Promoting a wider share ownership culture; and
  • Shareholder exit and aligning employee interests in striving for that goal.

 

“I think share plans benefit the few rather than the many.”

 

There are a variety of employee ownership models that can be designed for all employee participation. Tax efficient and Government backed Share Incentive and SAYE plans are already enjoyed by employees of many listed companies and represent the largest plans by employee number in the UK. Many private companies also operate discretionary plans on an employee wide basis to create an employee ownership culture.

 

Indirect ownership by employees via an Employee Ownership Trust (aka the “John Lewis model”) is also gaining some traction, fuelled by a desire for responsible corporate governance and tax breaks for shareholders who sell to an EOT.

 

 

 

 

“The tax breaks aren’t going to worth the hassle, are they?”

 

Share plans can offer significant tax benefits for businesses and employees. With careful structuring the returns to employees can be taxed at between 0%-20% and with the benefit of corporation tax relief for the business. This compares very favourably with bonuses and share incentives which are not structured with tax in mind where employee taxes can hit 47% and with a 13.8% National Insurance cost for the business.

 

Recent changes in HMRC processes have helped to streamline implementation processes and ongoing compliance. Provided that the arrangements are properly structured, the ongoing operation of plans should be minimal when compared to the financial and motivational benefits.

 

“We aren’t looking to sell the business and therefore employee shares won’t ever be of any value”

 

Even with no likelihood of a sale or other form of exit event, employee shares can still provide value to employees. Internal markets can be created to create liquidity in private company shares and enable employees to realise part of the increase in value from their shares. Additionally, dividends (with their small (and reducing) tax free annual allowance) can give the employees an opportunity to share in the profits of the business.

 

“By offering our employees shares existing shareholders’ value will be immediately diluted”

 

Share incentives can be structured to avoid unwanted shareholder dilution. One commonly used tool for doing this is through the use of “growth shares”. Under these arrangements, the current value of existing shareholdings can be protected by allowing the employee shareholders to only share in a proportion of future growth above current value.

 

“Having minority employee shareholders is a risk to existing shareholders”

 

Proper design and implementation should ensure no unwanted impact on existing shareholders. Areas to be carefully managed on behalf of shareholders/the business include:

  • votes;
  • dividends;
  • capital value rights;
  • forfeiture – ensuring employees who leave the business cannot hold a stake after ceasing employment;
  • transfer restrictions – ensuring that existing shareholders can control who can acquire the employee shares; and
  • drag along – ensuring that minority shareholders must sell their shares if a majority of shareholders wish to do so.

 

Final word

For many business owners there remain a number of perceived blockers to employee shareholdings. With proper design and implementation, however, all of these can be overcome with the result that the motivational and financial benefits of employee ownership can be properly enjoyed by all concerned.

We would like to thank law firm Wright Hassall LLP for the amazing knowledge – did you pick up some useful info? We certainly did. We would also advise reaching out to them for more personal advice to your situation.

 

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