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Baker Tilly run through how having share incentives rewards and motivates your staff Providing the opportunity to share in the growth of your company can be a powerful tool in attracting and retaining the best people to move your business forward. And, as Baker Tilly explain, the wealth of tax breaks available adds to the appeal of implementing a shares scheme.
One of the biggest challenges facing fast growing businesses is competing against longer established companies, to attract and keep hold of the high calibre individuals that are going to drive growth further. Your business is flourishing and growth is set to continue, but the loss of a key individual is enough to damage momentum, or even to stunt growth completely.
An obvious solution is to offer your staff an equity stake in the business. Share incentives come in a variety of packages: options to acquire shares, gifts of shares, or opportunities to buy shares at a discount. These packages can be delivered in a variety of ways, often through tax favoured approved schemes.
However, these approved schemes are often too prescriptive to meet the needs of small and growing businesses. Yet the alternative, unapproved arrangements, while providing greater flexibility, offer no real tax advantages.
The good news for high growth businesses is that the government recognises the difficulty for smaller enterprises to attract the right skills. The Enterprise Management Incentive plan (EMI) was introduced in 2000, designed with growing business in mind. Available mainly for qualifying unlisted and smaller listed companies, the plan is extremely flexible and offers significant tax advantages, more so than most other forms of share incentives. There is no one standard form of EMI - arrangements are tailored to meet the requirements of your business. However, given that the benefits can be significant, your business must meet a number of criteria to qualify. The main features of the EMI plan and the criteria are listed opposite.
Tax breaks are not the only issue to consider when choosing your plan. To maximise the success of any share incentive, the company’s objectives must be aligned with the interests of the existing owners as well as employee expectations.
What are you looking to achieve in offering the share incentives – to recruit, retain, motivate or a combination of these factors? Do you want the scheme to affect employee’s behaviour by making share awards conditional on reaching performance targets, or a sale of the company within a given period? What are your competitors offering? All of these will influence the design of your scheme.
EMI plans offer flexibility on all these areas – you are free to choose the exercise price (from nil cost to above market value), the terms upon which rights may vest and the duration of any vesting period.
Unlisted companies will also need to negotiate an agreed share valuation with the Inland Revenue, to quantify the value of awards and determine tax liabilities.
You must also consider existing shareholder interests. Where shares are to be newly issued, the question of dilution is probably the most pressing and you will have to agree with existing shareholders on what is the maximum number of shares that can be distributed. If the company is AIM listed or anticipating such a listing, institutional investors may seek to impose maximum limits – 20% of unissued capital is generally at the top end of what is acceptable although this is a matter for negotiation. Finally, and probably most importantly, you must address how gains will eventually be crystallised - unless there is a clear means to realise profits there’s little incentive for your staff to acquire the shares. If the terms of the plan provide that rights vest on sale or flotation, the incentive to realise a cash value is there. In other cases, unlisted companies will need to look at alternatives. The most common way of addressing this issue is to create an employee trust, funded by the company, through which employees can buy and sell shares.
Given the range of issues to consider, it’s advisable to seek professional advice before entering into any arrangements. Equity packages on top of basic remuneration are common practice these days and therefore offer no immediate competitive advantage. The key is exploiting one of the favourable regimes available under a well-designed plan – which can mean significant rewards for participants, while at the same time enabling your company to meet its objectives.
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