Money, Money, Money
As ABBA alluded to, we work long hours and yet there is never enough money. The office of national statistics says Brits work longer than our European counterparts plus we top the leader board for unpaid overtime! Bearing this in mind is it any wonder employees would now leave their jobs, even if they enjoyed it, for the prospect of more money.
According to CIPD research, in 2011 pay became the most important factor causing employees to leave their jobs. In 2010 most workers in the same survey said that what they did and their job satisfaction was more important than how much they were being paid.
Mercer also conducted research last year which highlighted that employees are becoming increasingly disengaged. Worryingly, the group most likely to consider a job move was senior managers with over half surveyed saying they would consider a career move.
How do you keep your key people when you just don't have any additional cash to increase salaries or pay bonuses? The cost to the company of losing a key member of staff is not just the recruitment and salary of a new member of staff but all the time spent training that person. Outside your organisation your now ex-employee can also become a competitive threat.
Paying bonuses is a short term and very tax inefficient fix to appease disengaged employees. It is also an unwelcome drain on your precious cash.
Example: If you were to pay a bonus across 5 key managers of £200,000 (£40,000 each) they would individually receive £23,200 (£16,800 PAYE assuming 40% income tax and 2% NIC) and the Company would pay £27,600 NIC (at 13.8%) on the bonus. In total the Company has spent £227,600 for a net gain of £116,000.
Wouldn't it be better if you could increase the employees' reward whilst reducing the cost to the Company?
Why not offer employees the chance to become part of the ownership of the Company? Employee share schemes can work in a number of different ways but fundamentally they can lock employees in for the long haul, preserve cash and deliver employee rewards in a more tax efficient framework.
If you are looking for all employees to foster a sense of ownership and brand loyalty to your Company consider a Share Incentive Plan (SIP). This plan is suitable for around 30 or more employees and potentially delivers awards completely tax free. Yes that is zero tax. You can't get better than that! Under this arrangement the Company can gift free shares, the employee can purchase shares and any shares bought by employees can be matched (free) by the employer up to 2:1. In most cases the Company's NIC savings alone on any purchase share component makes this an extremely attractive incentive.
If you wish to be more selective in your awards and have discretion as to who receives an award and on what terms then you could consider the most popular government approved share option scheme, the Enterprise Management Incentive (EMI).
Using our bonus example, we have shown that if the Company pays a cash bonus the employees receive a combined benefit of £116,000 after tax for a cash outlay by the Company of £227,600.
By way of contrast, if the same 5 key managers are granted an EMI option over shares then the cash outlay for the Company is zero (other than the professional fees to implement the plan). The employees can also be positioned such that when they exercise their options to acquire the shares and then sell the shares the economic value that they receive is taxed within the Capital Gains Tax (CGT) regime, with a maximum tax rate of 28% and there is still no employer's NIC to pay. The net benefit for employees will depend on the price they are asked to pay to acquire shares and the price at which they are able to sell but let's take the following for example:
- Agreed value of shares with HMRC - £40,000
- Sale value of shares - £120,000
- Each of the 5 key managers receive 80,000 sale profits. The taxable amount (after deducting 10,600 CGT annual exemption) is £69,400 on which they pay just 28% CGT. This results in a net gain of £60,568.
- Plus a Corporation tax deduction when options are exercised.
The managers could satisfy the exercise price in effect out of sale proceeds by way of a cashless exercise facility and therefore would not have to find the £40,000 exercise price personally. (The net gain will depend on the individuals capital gains allowance and available capital loss position).
A combined reward for all the 5 managers after tax of £302,840 with no employer NIC or cash cost other than our (very reasonable) fees establishing and administering the plan for you. Just to make things even better, the Company also gets a £400,000 corporation tax deduction at the time the options are exercised based on the difference between £600,000 (combined employee share sale price) and £200,000 (start price).
If you have a Non-Executive Director (NED) award in mind then a Deferred Share Purchase Plan (DSPP) can be tax efficient. If an EMI option is exercise on or after 5th April 2012 and the shares are sold more than a year after the EMI option was granted, the employee is likely to be eligible Entrepreneurs' Relief thus reducing the employee's tax rate to an effective rate of just 10%.
If you would like to discuss any aspect of share schemes further please contact the RM2 team on 020 8949 5522. We are all happy to help!
1. Following legislative changes in the Finance Act 2013