Increasing numbers of companies are turning to employee share schemes to incentivise their staff: where do you start and what are some of the key issues?
Employee share ownership is a powerful way of encouraging your employees to think like owners, helping to make your business more productive, profitable and resilient.
1. What is an employee share scheme?
Any arrangement that provides some or all employees with an interest in the shares of the company. This could be by way of direct share purchase, the grant of options or free share.
2. What is the most popular scheme for key employees and why?
The Enterprise Management Incentive (EMI) Plan. It is a tax efficient option that is flexible, simple to implement and easy to understand for both employer and option-holders. Most small companies will qualify but not all.
3. What are the other advantages of EMI?
It is easy to unwind of the option-holder leaves, and the option-holder has no financial or tax commitment if the option is never exercised.
4. Are there schemes suitable for all employees?
For a company wishing to involve all its employees in ownership, choices include a share incentive plan (SIP) or setting aside a a block of shares in an employee benefit trust.
5. Can you offer share incentives to non-employees?
Yes. Although EMI and the other advantaged employee share schemes aren’t available, options may be granted and direct share subscriptions are also popular, especially with non-executives.
6. Are there disadvantages to employee share schemes?
Poor implementation or failure to manage employee expectations can adversely impact on a scheme’s success. For example, if you granted options exercisable only on an exit but after years no buyer has been found, there is a risk of employees feeling demotivated.
7. What makes an employee share scheme successful?
A company that performs well, clear communication to employees and a scheme that participants think operates fairly and clearly.
8. Is there a one size fits all solution?
No, you should always take advice because no two companies are exactly the same in terms of business plan and the goals and motivations of employees and owners are never the same.
9. Are there any HMRC filing requirements?
Yes. You will generally need to tell HMRC about a new employee share scheme by 6 July following the end of the tax year in which you created it. Notification of an EMI option must be given within 92 days. There are also ongoing filing requirements.
10. How important is tax efficiency?
It is essential to design a share scheme that is intended to achieve your desired commercial goals, with tax efficiency coming second. Of course, if you can achieve both these goals, so much the better for your company and participants.