So, if you decide to set up a share scheme, what should you consider before you start issuing certificates to your workers? Here’s a quick look at the perks and pains of share schemes.
Why do it?
Firstly, you need to ask yourself why you’re considering a share scheme. You could be doing it to:
- incentivise your workforce so that they are more invested in the company and its success;
- recruit or retain key personnel;
- reduce employment costs/employee remuneration;
- succession planning.
What scheme?
The most popular scheme for employers is an Enterprise Management Incentive (EMI). The relief is in the form of EU state aid to companies granting EMI options. However, the current approval expired on 6 April 2018, and the EU Commission has not yet extended the relief. Therefore, EMI options granted on or after 7 April 2018 may be treated as unapproved options. It is still worthwhile considering EMIs, however, as it would seem likely that contingency provisions will be put in place in due course.
A Share Incentive Plan (SIP) is also a fairly common mechanism. However, employees cannot be differentiated between, and if operated, a SIP must be offered to all UK employees. A SIP can include free shares, partnership shares or matching shares. Free shares can be given to an employee (up to £3,600 per year) and can be linked to performance. Matching shares provided that the company may agree to give additional free shares to employees who purchase shares.
An alternative is a Save as you Earn scheme (SAYE). This carries two elements; a savings arrangement and an option. The company must be listed on a recognised stock exchange or be independent. The employee saves between £5-500 per month (after tax) for three or five years.
These are attractive as they allow the employee to save without paying Income tax or NI on the difference between the price paid for the shares and their value.
Those mentioned are examples of the most common schemes, but more are available, and you should take specific advice on the scheme best suited for your company’s circumstances.
What are the advantages?
Providing company shares to your employees demonstrates that you’re serious about growing your business and want each employee to participate in that expansion.
It shows that you value your employees, and are in it for the long haul, rather than just short-term gain. Giving up a certain amount of ownership of your business (although still retaining overall control) builds trust and increases commitment from all parties.
You may get corporation tax relief on the cost of setting up a share scheme and the cost of providing free and matching shares. You don’t pay the employer’s NI on shares or options as long as all the relevant criteria are met. Taxation on share schemes, however, can get complicated, so expert advice from lawyers and accountants is crucial to ensure you stay on top of your obligations.
What are the disadvantages?
Logistically, providing employee shares can be a nightmare. Top of the list is administrative costs (both time and money). Before you decide to set up a share scheme, it’s important to talk the idea through with a solicitor to look at the pros and cons, what type of share option is best and how to set it up. It’s not just the short-term set-up costs you need to consider, either, but the long-term management and documentation.
The more shares you issue, the less control you have over your business. Remember that you’ll need 75% of the voting shares if you want to control important company decisions.
Remember that shares can go down as well as up. And if your employees’ shares start to drop in value, that could impact on morale. Not only are they seeing their investment decline, but it could indicate deeper problems within the company. Share value acts as a litmus for the health of a company. You’ll also have to ensure your employees have realistic expectations of the performance of their shares. Unless they work for Google, a few free shares in a company will not see them through retirement!
Share schemes are a great way to reward loyalty and stimulate growth. They have their downsides, but overall, they’re popular perks with employees and, done well, are fairly painless for bosses too.
For more information, speak to Karen Cole today.
Note: This is not legal advice; it is intended to provide information of general interest about current legal issues.