What is an employee share scheme?

Employee share schemes (also known as employee share plans) offer a highly effective way for employees to acquire shares in their company. Share plans are used for a variety of reasons, including to reward employees and as part of succession planning.

Awarding staff shares in a company can develop a real sense of ownership and may ultimately increase loyalty and engagement. Share ownership can help align employees’ interests with those of other shareholders, driving growth and increasing share value.

To find out more about employee share schemes, get in touch to ask us a question or download our employee share scheme factsheet:

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Sarah

20 years' experience helping companies implement employee share plans. Passionate about employee ownership.

Sarah Anderson

Director

How do employee share schemes work?

Exactly how an employee share ownership scheme works for your business will depend on your circumstances and overall goals.

Among other things, you’ll need to think about whether you are going to use shares or options, who should participate in the scheme, and what happens if employees leave. Take a look at our blog on first steps.

These are important and often complicated issues to resolve, but you do not need to have all the answers now. We will guide you through these questions, ensuring you find the right answer during the scheme design process.

What are the benefits of employee share schemes?

Share schemes are a practical way for companies of all sizes (at whatever point in the business life-cycle) to achieve a number of highly valuable benefits.

Attract top talent

Offering an equity stake to key recruits shows that you respect their value and consider them to be a valuable part of the business. This also shows potential employees that they will directly benefit from the hard work they put in to help the company grow.

Boost employee engagement

Today, employee engagement is more important than ever before to the success of an organisation, especially during a company's growth. Engaged employees are more productive, experience greater job satisfaction are more committed to the business. Employee share ownership can significantly boost engagement and gives employees a sense of real ownership in the company’s successes.

Retain star performers

Losing skilled employees and star performers can result in a significant cost to your business. Not only are you losing an employee’s skills and experience, but the disruption to the company can be a drain both financially and on your time. Share ownership gives employees a stronger connection to the business and increases their sense of reward for the work they do, significantly boosting employee retention.

Increase productivity

The most productive companies are driven by an efficient and highly motivated workforce. The challenge facing many employers is how to generate these high levels of productivity in a fair and economically viable manner. Share ownership is one of the most effective ways to incentivise employees, offering a reward for key employees and giving employee shareholders a direct financial stake in the success of the business.

Facilitate succession planning

If you are approaching retirement and are looking for a transition that allows you to relinquish control with a level of assurance, then partial or full employee ownership could be an excellent option for you.

Using share ownership arrangements as a vehicle for succession can help protect your legacy and ensure the company you've created has a promising future. By partially or fully transferring control to the management team and/or employees that helped to build the company, you are able to make sure the core values of the company remain intact.

Reward your team

Rewarding your team with equity not only preserves scarce cash but also ties people to longer term outcomes, such as a sale of the company. It can also be a lot more tax-efficient for the company and the employees.

How to set up an employee share scheme

Choosing and implementing an employee share scheme takes a lot of planning. We are here to guide you through the process, so you can get the right scheme in place for your business and employees.

1. Identify your objectives

The design will flow from your objectives, so the more precise you are the better. Do you want to focus people on an exit? Do you want to reward all employees as a team? Do you have just one key recruit in mind? We will ask you lots of questions to tease out your objectives.

2. Choose a share scheme

We can guide quickly to the front-runner. At this stage you may wish to contact our team for a free, no obligation consultation on 020 8949 5522 or make use of our extensive suite of resources to help you decide on the scheme most suited to your business.

3. Design and model your share scheme

At this stage you will need to decide on any rights and conditions to attach to shares, such as performance conditions and leaver provisions. Don’t worry: we’ll recommend features for you. A key decision is the amount of equity you want to set aside for share schemes. We’ll help you with an indicative valuation and some equity modelling.

4. Implement your employee share scheme

Once the design and modelling are complete, we then agree a share valuation with the HMRC, update your Articles of Association, prepare Board minutes and prepare your scheme documentation.

5. Communicate your share scheme

Communicating information about your share scheme to all the participants is vital its success. As standard, we will provide all clients with easy-to-follow notes explaining your scheme. We can provide further help and guidance on how to effectively promote your scheme if you wish.

6. Administration

Once your scheme is implemented it will need to be administered to ensure it remains compliant. We have the most experienced Operations team for share schemes in the UK, so you can be confident that your scheme is in capable hands.

7. Ongoing support

We try to be as proactive as possible when it comes to monitoring your scheme’s performance. We can help improve any equity-based arrangements. You and we are always learning.

How long does it take to set up an employee share scheme?

Most employee share incentive plans can be set up within 12 weeks. Generally, the key factor governing progress is the timing of the client’s internal decisions, such as the dates of board meetings. If shareholder approval is required this may extend the timescale, particularly if there are large numbers of shareholders. If you have a particularly tight time frame give us a call to discuss as we may be able to accommodate your requirements.

How much does it cost to set up an employee share scheme?

Again, this will depend on various factors, including the type of scheme and the complexity of the existing share structure and timescales involved. We will agree pricing at the outset so you can effectively budget for the creation of your employee share scheme.

What are the tax advantages of an employee share scheme?

An employee buying shares in a business through an Enterprise Management Incentive (EMI) scheme will not need to pay Income Tax or National Insurance as long as the shares are not being offered for less than their market value (at the time they were initially granted).

You may also qualify for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) if you sell your shares, allowing you to reduce your Capital Gains Tax liability.

Employees receiving or buying shares through a Share Incentive plan (SIP) will not pay Income Tax or National Insurance if the shares are kept in the plan for more than 5 years

If you choose to have a Company Share Option Plan (CSOP) the shares are not subject to Income Tax or National Insurance if the shares are kept in the plan for 3 years.

What voting rights do employees have with an employee share scheme?

Employees who hold options do not have any rights.Once employees have exercised their options and acquired shares, those shares may carry full voting rights, restricted voting rights or no voting rights, depending on how you wish your employee share scheme to operate.

Which employees should be included in an employee share scheme?

An employee share scheme can be open to all employees or only to certain key employees. It is common to offer share options to people in certain key roles, to high performers and to those who have completed a number of years’ service with the business.

What happens to an employee’s shares if they leave the business?

Employees in privately owned companies will normally be required to sell their shares if they leave the business. However, other options can be put in place if you wish to allow employees to retain shares in certain circumstances, for example, when they retire.

What is an Enterprise Management Incentive scheme?

An Enterprise Management Incentive (EMI) scheme is a structure that allows companies to offer selected employees the opportunity to buy shares in the business at a specific time and set price per share.

An EMI allows conditions such as performance and continued service to be built into the scheme, so that rewards will only be distributed when appropriate.

A company that qualifies to set up an EMI scheme can grant any individual full-time employee up to £250,000 worth of tax-advantaged share options and can grant up to £3 million worth of these shares in total.

To set up an EMI, a company must:

  • Be permanently established in the UK.
  • Be independent (i.e. not majority owned or controlled by another company).
  • Have gross assets of less than £30 million.
  • Employ fewer than 250 people full-time
  • Hold more than 50% of the share capital of any companies it acts with
  • Exist solely or mainly for the purpose of carrying out a qualifying trade (read more about qualifying trades).

What is a Share Incentive Plan?

The Share Incentive Plan (“SIP”) is a tax advantaged employee share scheme that must be offered to all eligible employees of a company on the same terms. Under a Share Incentive Plan, shares can be awarded to employees through one (or a combination) of the following methods; Free Share, Partnership Shares and Matching Shares.

Free shares can be given to participants without any tax charge (usually, an employee who is gifted shares will be subject to income tax and, potentially, National Insurance Contributions, on the value of the shares s/he has received).

Partnership Shares can be bought by employees out of pre-tax salary. For each Partnership Share bought, an employee can receive up to two further free (Matching) Shares.

Each participant can receive shares worth up to £9,000 p.a. under the SIP.

Once awarded, the shares are then held on behalf of the participants within a Share Incentive Plan Trust. After a five-year period, the shares can be sold and no Income Tax or National Insurance Contributions (NICs) will be due. For as long as the shares are held in the trust, they will also be free of Capital Gains Tax.

Download free Fact Sheets for more information

EMI
Key Employee Share Schemes
All Employee
All Employee Share Schemes
Trust based
Trust Based Schemes

Speak to us about employee share schemes today

For advice on the many different types of employee share scheme and how each can be tailored to match the needs of your business, please get in touch.

Call – 020 8949 5522 Email – enquiries@rm2.co.uk

Relevant resources

Case Study

A central London venue implements a Share Incentive Plan

Webinar

Watch our webinar "Employee share plans for private companies"

Fact sheets

Download a fact sheet about any employee share scheme

Book

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