Employee share plans – taking the first step
As summer holidays come to an end, business owners often start thinking about getting an employee share plan in place for a New Year launch. With that in mind, it feels like a good time to go back to basics and think about the first steps you need to take. We explore some of the fundamental reasons to set up a share plan for employees, with a quick summary of how to choose the best plan for your business.
What is an employee share plan?
A share plan is simply a method of allowing your employees to acquire shares in their company. There are a myriad of share plans available, some of them with significant tax advantages attached.
Before you decide which share plan to use, you’ll need to consider what you want your plan to achieve and which employees should be involved. The wide variety of plans means that you can choose a plan that fits your requirements and ensures employees are rewarded appropriately for their contribution, in any context.
Why use an employee share plan?
There are plenty of reasons to offer employees share ownership.
Share plans help employees to focus on long term goals, which can be very helpful for employee retention. An employee share plan can help reduce staff turnover, especially amongst key personnel. Maintaining a skilled and motivated team often leads to sustainable growth.
Share plans also offer a longer-term approach when compared to traditional cash bonuses, and are often significantly more tax efficient. Using shares rather than cash can be helpful in providing an incentive with the demand of constant financial outlays. A share plan will also ensure that reward is based on real growth in company value. Ultimately, different types of rewards will appeal to different people. It is important that you understand your employees in order to gauge what kind will work most effectively.
Enhanced employee engagement helps to create a shared vision of the future. By making employees ‘owners’, they often start thinking differently about the business. Their interests become aligned with shareholders as they are further inspired to increase share value.
Attract key hires
A share plan demonstrates you are keen to engage with and involve employees. This can really help to set you apart from your competitors. Using equity rather than cash can also be a great way of attracting key staff for cash-strapped startup businesses.
Employee share schemes can provide an excellent mechanism for slowly passing share capital into the hands of successors in a tax-advantaged manner. With most plans, it is possible to set strategic performance conditions which can help ensure that future owners are ready to take the reins.
Which plan is best for my business?
When deciding what type of share plan is most appropriate for your company, it is often helpful to consider who you want to benefit. For example, do you want to provide awards to the senior key people who have a direct impact on the organisation’s success, or would you like to provide an incentive for everyone?
Targeted Share Plans
When companies look to incentivise a key individual or a small cluster of central personnel, the most popular choice is the highly tax-advantaged Enterprise Management Incentive (EMI). The EMI is a share option plan which effectively promises the right to purchase shares at a fixed price. There are usually performance and/or length of service conditions attached to awards, so it is an excellent tool for attracting, motivating and retaining talent. It is also possible to link the exercise to a specific event (e.g. the sale of the company).
The tax-advantaged EMI is extremely flexible, but may not be available if certain conditions are not met by either the company, or the participants. The Company Share Option Plan (CSOP) is a very good alternative if EMI isn’t available.
Deferred payment arrangements help where a participant wants to be a shareholder, but cannot afford to pay in full for the shares straight away. Under a deferred payment plan, shares are acquired outright by the individual for a nominal amount. The remaining balance is treated as an unpaid loan that is settled over a specified period or at a pre-defined event, such as a sale or flotation. Bonuses or dividend payments might help to pay back the remaining balance.
Participants need to be aware this arrangement is not risk free. If the share value drops, the unpaid balance will be taxed as a benefit in kind. However, this is not the only risk, in the worst-case scenario (liquidation), the liquidator would call for any outstanding amount owed.
In this arrangement, participants acquire a special class of share that only has real value if performance conditions are met. The employees have to pay for the shares, but this is often inexpensive due to the restricted rights attached. This is a popular method amongst existing shareholders, as they can ringfence existing value in the company, so that employees only benefit from the future growth that they have helped create.
Share plans for all employees
Many companies will recognise that one of their most important assets is their people, and will seek to offer equity awards on a wider basis than just the senior management team. In order to do so, we usually recommend the HMRC tax-advantaged Share Incentive Plan (SIP), which must be offered to all eligible employees.
Working out which type of arrangement will help your company achieve its long-term objectives can be a complicated affair and we recommend seeking professional guidance. RM2 offers a free initial consultation to interested companies, so there’s no harm finding out!
To book your consultation or for more information on any of the content covered in this article, please contact a member of the RM2 team directly via firstname.lastname@example.org.