What makes a successful employee share plan

Posted by RM2 at 14:26 on 1 May 2020

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What makes a successful employee share plan?

These are testing times for all of us, so perhaps it’s a good time to share some positivity - the story of one of our clients whose employee share plan arrangements achieved a number of successful outcomes.


A private company share plan that delivers liquidity

An Employee Benefit Trust (EBT) was originally established to acquire shares from some retiring shareholders. The EBT recycled its shares by granting Enterprise Management Incentive (EMI) options to key employees.


An all employee Share Incentive Plan (SIP) was also set up. The SIP repurchased and recycled shares from departing employees, and the EBT was also able to transfer shares to the SIP when required.


A share plan that encourages retention

Our client was a small business consultancy firm, with fewer than 50 employees. Their business required specialist knowledge, and relied on long-term relationships with clients, so it was important that their share plan focused strongly on long term retention of staff.


A Share Incentive Plan (SIP) enables tax efficient shareholdings for employees, with a zero tax rate delivered after five years. Employees participated in annual awards under the SIP for more than ten years, maximising the tax benefits, as well as building their shareholdings over time.


A share plan that requires “skin in the game” – but offers affordability

Employees were required to buy shares (“Partnership Shares”) under the SIP arrangement, to ensure that they recognised the shares carried value.


However, buying Partnership Shares offers an immediate saving as they are purchased out of pre-tax salary. The SIP was set up with a 12 month “accumulation period” which meant that employees could save monthly amounts over that period, with the savings used to acquire shares at the end of each year.


Additional free shares were offered to employees on a “matched” basis.


A share plan that delivers financial reward

Shares acquired by employees, both under the SIP and the EMI, paid dividends twice yearly, ensuring regular financial reward – and ensuring that employees remained aware of the value of the share plans throughout the period that the plans operated.


On the ultimate sale of the business, employees were able to participate in the sale proceeds, with all the associated tax breaks that come with tax-advantaged share plans such as SIP and EMI. Shares sold under the SIP were free of capital gains tax; shares sold under the EMI were subject to entrepreneurs’ relief.


Our client was delighted that the employees (who had done so much over so many years to create a successful business), were able to share in the ultimate financial reward.


Making your own share plan a success

If you’d like to discuss how to create a share plan arrangements that delivers similar measures of success in your business, contact us on operations@rm2.co.uk to arrange a phone call with one of our advisers.