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Employee incentives – frequent issues

Employee incentives – frequent issues

Employee share incentives can be a valuable tool in motivating, rewarding and retaining employees. They can also be tax efficient and in most cases, tailored to the clients’ goals and objectives. However, navigating the structures and plans available can be challenging and at times perplexing! The table below gives examples of some of the most common issues faced by our clients together with the most likely types of plans available:

Client issue Response Most likely plan types

We need to lock-in/motivate selected employees only

Discretionary share plans allow the Board to determine who participates, when and how much should be awarded

EMI, Employee Shareholder Scheme (ESS), Company Share Option Plans (CSOPs), Growth Shares, Nil/Part Paid Share Plans

We’re interested in tax efficient reward for our employees

While other areas of remuneration planning have been targeted by recent legislation, Government initiatives have enhanced tax breaks on employee share incentives with the tax cost now capable of being often reduced to zero or no more than 10%

EMI, ESS, Growth Shares, Nil/Part Paid Share Plans

We want to offer all employees a stake in the company

Direct all employee ownership can be delivered in a number of ways and through tax efficient share plans

Indirect ownership offers a different model – allowing employees a say in the running of the business and an opportunity to share in the profits of the business, but no long term direct capital stake

Share Incentive or SAYE Plans or all employee operation of EMI or Growth Shares. Indirect involvement can be created via an EBT or the Government’s new Employee Ownership Trust structure (which allows CGT free sales into the EOT and income tax free profit extraction of up to £3.6k per employee per annum)

We are unlikely to exit so share incentives are not appropriate

Internal markets can be created to give a genuine prospect of employees realising value from equity reward. Recent company law changes also mean much greater flexibility in a company buying back employee shares

Depends upon business drivers and aims for the incentives

We want to offer employees equity but don’t want to dilute current shareholder value

Share incentives can be structured to avoid any unwanted dilution through a number of mechanisms

Growth or hurdle shares (either on their own or in conjunction with EMI or ESS) or Joint Share Ownership Plans (JSOPs) all act as anti-dilution mechanisms

We want to incentivise key people to work towards an exit at a target value

Exit driven share plans can be designed to link reward levels to exit values, whilst also aligning shareholder and employee interests in terms of the timing of the returns

EMI, ESS, Growth Shares, JSOPs or CSOPs

We don’t want minority shareholders with unwanted rights

Having minority holders does not have to result in a loss of control – through ensuring appropriate voting, dividend and transfer provisions apply to the minority shares

Option based schemes and also direct share acquisition plans (i.e. Growth Shares/ ESS) can all be structured to avoid any such complications

By Justin McGilloway

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