There are lots of ways a business can incentivise their employees such as pay rises, bonuses, health care, discounted gym memberships and many more. But how do you ensure that key personnel stay and work with you to achieve your end goal?
Offering shares is an increasingly popular way companies choose to incentivise their key team members as it offers them a chance to own and directly benefit from the company’s growth. Care must be taken in the way in which shares are issued as there can be tax implications for both parties, however, there are various tax efficient methods in which a company can issue these shares.
Below are two popular tax efficient approaches:-
EMI Share Option Schemes
EMI schemes work by granting employees options which become exercisable (converted into actual shares) upon certain events occurring. EMI schemes can be:-
- exit only, meaning that the employees can only exercise their options upon a sale of the company; or
- performance based in which options can be exercised upon various targets being met, such as length of service or financial targets being achieved.
A downside of EMI schemes is that the employee has to pay the exercise price (the value of the share at the time the option is issued) when they convert their options into shares. This is less of an issue when it is an Exit only scheme as the exercise can usually be structured so that the funds from the sale can be used to pay the exercise price and the employee receives the difference.
Issue of Growth Shares
Growth shares are a special class of shares which on issue entitle the holder to a stake in the future growth in a company. This is achieved by the growth shares only having rights once a certain threshold or target has been met.
One of the most common scenarios is to issue growth shares which only have a right to a share in the proceeds of a sale above a certain target threshold. A simple example is:-
A company has ordinary shares held by the founding shareholders and is currently valued at approximately £800,000. Growth shares are issued to the two employees and the threshold is set at £1,000,000. The company is later sold for £1,500,000.
The first £1,000,000 is shared on a pro rata basis to the founding shareholders.
The remaining £500,000 is shared on a pro rata basis between the founding shareholders and the two employees holding growth shares.
Growth shares are tax efficient and are flexible in respect of what rights can be attached to them, although typically they do not have voting rights.
The benefit of growth shares is that there is only a small upfront payment due from the employee on the issue of the growth shares as at the time of issue the growth share will only have a nominal value. Unlike EMI options, growth shares can be issued to individuals who are not employees such as consultants or non-executive directors.
If you wish to explore either of the above methods or other avenues for incentivising your employees further please contact us to discuss your specific requirements.
For more information about incentivising your key employees, or any other similar topic, please contact Angharad Lawrence on 029 2034 5511 or by email – alawrence@berrysmith.com
