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Business

USING SHARE OWNERSHIP TO ATTRACT AND RETAIN THE BEST EMPLOYEES

Will Cookson, Director, Harbour Key Ltd

Will Cookson, Director, Harbour Key Ltd

In the current market budgets for salaries can be limited and bonuses continue to attract a bad press, with the banking sector being a particular target for the media. This means that organisations need to find other ways to attract motivate and retain the best staff.

Both current and previous Governments have sought to remove certain perceived ‘tax planning vehicles’. The latest has been to curtail the use of limited liability partnerships, which have been in favour with asset managers and insurance brokers in particular.

Will Cookson, Director, Harbour Key Ltd

Will Cookson, Director, Harbour Key Ltd

One solution is to introduce shares and share options. Share plans can be utilised by both listed and private companies, regardless of size and how long they have been in business. These act as an incentive by encouraging employees to develop an interest in the growth and performance of their employer and make a contribution towards its future successes, for which they will be duly rewarded. Shares/options are also a means of attracting the best people where the business cannot afford to remunerate them at the market rate.

Employee shares can also provide a company with a means to finance. The business may be lucky enough to have key employees with access to personal finance who are willing to pay for their shares up-front, but that is not the norm. There are, however, other innovative ways to encourage employees to invest, for example using a combination of loans and matching growth shares.

Here we look at the pros and cons of different types of share schemes.

HMRC approved schemes

Share plans fall into two broad categories, depending on whether they are HMRC approved or not. Approved schemes offer certain tax advantages to both company and employees. They include the Share Incentive Plan (SIP), the Save-As-You-Earn option scheme (SAYE) and the Company Share Option Plan (CSOP), all of which are used more by listed companies (plcs).

Another approved plan is Enterprise Management Incentives (EMI), which was brought in by the Government to help small and medium-sized businesses compete with larger ones for the best talent. EMI plans are often based around a future sale of the company. On exit, the employee may be paying as little as 10% taxes from the sale of shares acquired under the EMI plan. The company may also be eligible to receive a corporate tax deduction on the gains the employee has made, which would be around 20%. This means that EMI actually generates a net tax repayment (10% paid by the employee, but 20% relief for the company).

Unapproved plans – shares or share options?

Unapproved share plans generally only provide tax benefits for either the company or the employee. Not surprisingly, they normally favour the employee. They may be based on share ownership or share options, and the choice between the two depends on the company’s growth strategy.

Share plans, which in essence mean share ownership, are considered a better way to tie in key individuals by making them a part-owner of the business. A share option is simply a right to buy a number of shares at a given price in the future, making options particularly good for incentive plans which are aimed at a future sale or floatation of the business.

There are many different unapproved share plans. ‘Growth shares’ and ‘deferred shares’ are examples of plans designed to minimise the up-front cost for the employee in terms of funding the share purchase and any taxation. The two plans mentioned favour the employee from a tax perspective.

The recently introduced ‘Employee Shareholder Status’ is a means of encouraging key individuals to become stakeholders. The scheme gives certain tax advantages for the employee in return for a removal of certain employment rights.

So-called ‘phantom share plans’ have also come back into fashion. These are effectively a deferred cash bonus, but look and operate like a real share plan, with the company gaining the tax efficiencies rather than the employee. They cut out a lot of the red tape associated with share ownership and enable private companies to produce a share price as easily and frequently as they produce management accounts. These plans can also be utilised by partnerships and LLPs as they do not rely on any existing share capital.

Business considerations

Introducing shares or share options presents the business owner(s) with a number of issues, including the need to allow for the scheme’s set-up and running costs and for valuations. Importantly, they need to consider how much to give away – for virtually unfettered control, the owner(s) generally needs to retain at least 80% – and also how to get shares into employees’ hands without an up-front tax charge. Other questions typically include:

  • Do the shares qualify for dividends?
  • With no market for shares in a private company, how do participants realise share growth?
  • What happens with ‘bad leavers’ and ‘good leavers’?

Some employees prefer cash to shares or share options, as they want the security of having the money in their bank rather than a ‘promissory note’ of potential future riches in the form of shares. However, one has to question whether employees who are primarily focused on cash in hand would really be drivers of business growth.

In my experience, shares and share options are an effective way of attracting and retaining both the best and those who can think as a business owner/employee.

Global Banking & Finance Review

 

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