How do Employee Share Plans reward employees and help future-proof business?

When it comes to incentivising your team one of the great advantages, so they say, of installing an Employee Share Plan scheme is that your staff will never leave you!  What is certainly true is that if there was ever a need to incentivise and engage your employees, then the time is now, to ensure that your business can be successful and ride the stormy waters of this global pandemic.

There are a number of ways that you can reward and incentivise your team, and sometimes a good old-fashioned immediate cash bonus will do. However, at a time where you are working hard to stabilise and future-proof your business, cash is king and likely to be extremely precious. Therefore, rewarding those in your team who can help you take your business to the next level without having to dig deep into your pockets seems like a no-brainer.

Enterprise Management Incentive (EMI)

EMI (enterprise management incentive share options) are the most flexible and tax-efficient way to help recruit and retain key employees to help with the business’ growth strategy. The global coronavirus pandemic has been a huge blow to the value of listed businesses and its not unreasonable to expect that most private companies could see their revenues fall by 20 to 30%. One of the biggest concerns has been the effect of the Coronavirus Job Retention Scheme (‘furlough’) on option holders; in order to have qualifying options you need to have either been in full time employment with the company (min. 25 hours) or spend 75% of your time working for this one employer.

Whilst there is no definitive answer yet on the impact of furlough, assuming that this is the holder’s only employment, then the 75% rule ought to still protect them even if they are currently working less than 25 hours. Certainly if you find yourself in a situation where you have option holders who are being made redundant then we’d recommend you consult the share scheme rules and performance conditions attached.

Calculating the market value of company shares

Whether you have an existing Employee Share Plan scheme in place or are considering installing one, the market value of a company’s shares is the underlying calculation from which the scheme rules and tax advantages are based. For companies who have already agreed the market value of their shares with HMRC, but have not yet granted options, if this valuation was submitted post 10th March 2020 it is possible to renegotiate this with HMRC (if there has been a fall in value) and HMRC have also extended the period in which the options need to be granted, extending the 90 day rule to 120 days.

Driving the right behaviours

Where options have already been granted it would be worth considering the merits of those options being surrendered and new options being issued, based on a current lower market value. And if you’ve been considering implementing an EMI scheme, then now is a good time to pick back up those thoughts! Like many, you may have had difficult discussions these past few months. Such as, communicating salary cuts or freezes and that employee bonus schemes will not be paying out. So, perhaps granting EMI options would be a good solution for your superstars; driving the right behaviours and being something cash-free that you can reward their hard work and commitment, whilst allowing them to exercise shares at a later event (typically on exit) free of income tax and NI.

And remember! Unexercised EMI options do not entitle the option holder to a seat at the table of shareholders and of course he or she would receive no dividends as an option holder, so when considering installing a scheme it’s really important that the recipient understands what they are being awarded to avoid years of confusion!

If you would like to learn more, please feel free to get in touch with our team.