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What are you doing to help motivate and retain your key staff?

2nd December 2014

Look at the balance sheet of a company in the Creative, Media and Technology sectors, what is the most important asset? Property? Data? IP? Cash? These are important items but ignore the key asset of employees at your peril. 

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History has shown that companies in the industry without friendly, hardworking, incentivised and motivated employees find it difficult to survive. This only gets more challenging as a company grows and Founders/Directors find they have to concentrate on the more strategic elements so their day to day operational involvement diminishes. As a result quality senior management become some of the most important people in the business.

We recently ran a number of seminars on attracting and retaining key staff looking at ways to incentivise employees from training and development to company culture and bonuses. Here we focus on some of the financial incentives available to motivate and retain staff.

Equity
With increasing recruitment fees, significant time and money spent on training and the stability and comfort gained, retaining key operational staff such as CTOs and Operations Directors is critical to the success of a company. It’s often the case that such employees want a share in the equity and consequently the long term success and growth of the company and it’s important to identify who should have equity participation and ensure the second tier is nurtured. This can be facilitated by shares or share options.

Shares as long term incentives
A company can issue shares directly to an employee at any time as part of their employment to give a participation in capital growth. Shares can be issued as a different class from the majority of the shareholders to allow different voting rights and dividend policies. But instant issue of shares has two key disadvantages:

  • An immediate tax charge on the value of the shares for the employee as income, and 
  • It’s difficult to recover shares if the employee later leaves.

Standard share options
Share options have all the economic benefits of shares, but crucially they’re not shares until exercised. Unlike shares, options are flexible, can be granted subject to relevant metrics such as performance, length of service, margins achieved etc. and they’re non-binary so some options can be granted rather than all. 

But once again there are a number of disadvantages which can ultimately act as a disincentive for employee and employer:

  • Tax - an option exercised on exit is effectively a terminal bonus and subject to income tax and NI. 
  • They can add a level of confusion and if someone’s looking to purchase a company this could reduce the price. 

EMI share options – what can EMI offer that share options can’t?
EMI share options are more tax efficient than shares and standard share options. There is no tax charge on grant and no income tax or NI charge on exercise unless the option is granted at a discount. 

Instead the employee is 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 share option schemes have a number of conditions associated which include:

  • The company may not have more than 250 employees at the date of grant of the option
  • The company may not have more than £30m gross assets at the date of grant of the option 
  • The total value of unexercised options may not exceed £3m
  • Options granted under the scheme have a maximum lifecycle of 10 years 
  • The company can’t be controlled by another, so in a group situation options will have to be given in the parent company rather than the subsidiary
  • Options are only available to employees or directors of the company who spend at least 25 hours each week (or, if less, 75% of their working time) employed by the company and own less than 30% of the share capital. 

As with standard share options, EMI scheme are flexible with the terms of grant and exercise being set at the Board’s discretion. But unlike standard share options, the valuation of the options can be agreed with HMRC in advance who are likely to accept significant valuation discounts for minority shareholders.

In circumstances where an EMI option is not appropriate there are alternatives and we can advise on the best scheme relative to the company’s circumstances and implement accordingly. We can set up option schemes for companies, including all the agreements and agree a valuation of the shares with HMRC and have an excellent track record of agreeing low valuations with HMRC for venture capital backed businesses.

If you would like to discuss any of these issues further please contact Natasha Frangos, Head of Creative, Media and Technology.

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