Employee Incentives- Giving staff a slice of the pie
We have seen time and again that companies without friendly, hardworking, incentivised and motivated employees find it very difficult to survive. Although there is a huge range of non-financial incentives, this update focuses on the financial incentives available to help motivate and retain key staff.
A company can issue shares directly to an employee at any time as part of their employment. Shares can be issued as a different class from the majority of the shareholders to allow different voting rights and dividend policies.
The value of the shares will be taxed as income of the employee, with the employer potentially also paying 13.8% National Insurance Contributions (NICs) if the shares are readily convertible assets (usually where they are readily capable of being sold or realised) . As important, it can be very difficult to get the shares back if the employee later leaves.
- Share options
Share options have all the economic benefits of shares but crucially are not shares until they are exercised. Unlike shares, the options are flexible and can be granted subject to metrics such as performance, length of service, etc. They are also non-binary which allows for some of the options to be granted rather than all of them.
An option exercised on exit is effectively a terminal bonus and again subject to income tax and possibly NICs. There can also be an added level of confusion for another looking to purchase the company which could reduce the price.
- EMI options
A more tax efficient method of remunerating employees as there is no tax charge on grant and no income tax or NIC charge on exercise where the exercise price is no less than the value of the shares at grant. Instead, the employee will be subject to Capital Gains Tax and should qualify for the special rate afforded by Entrepreneurs’ Relief at 10% of the gain, regardless of the percentage of the company held. EMI schemes are completely flexible with the terms of grant and exercise being set at the Board’s discretion. Also the valuation of the options can be agreed with HMRC in advance, who are likely to accept significant valuation discounts for minority shareholders.
The company may not have more than 250 employees or £30m gross assets at the date of granting the option, at which time the total value of the options may not exceed £3,000,000. There is a maximum life cycle of ten years and the company cannot be controlled by another company. EMI options are only available to employees or directors who spend at least 75% of their working time employed by the company and at all times own less than 30% of the share capital.
If you would like to discuss the opportunities available, please get in touch with Andrew Ball or your usual haysmacintyre contact.
Partner, Head of Hospitality
Tel: +44 20 7969 5530