Structuring Employee Share Schemes to drive your business’ goals

May 13, 2020

The key to the success of many businesses is ensuring that they can get the best out of their people. Employee share schemes work by giving employees an interest in the company they work for, through being awarded shares or share options. Structuring an employee share scheme in the right way can be invaluable in achieving a business’ goals as the scheme can be designed in a way that drives towards those goals. For example, if the main goal is the recruitment of employees, the incentives can be structured so that they provide a competitive advantage in the recruitment market. Alternatively, if the goal is to increase profits, the scheme can be structured so that the award is triggered once certain financial targets have been met.

Setting up a share scheme can have a number of additional advantages for a company, including:-

Raising funds without increasing debt;

Preserving cashflow;

Encouraging longer-term loyalty, particularly if the scheme means that the employee forfeits rights if they leave the company;

Creating an ownership mentality amongst employees;

Motivating or changing key employees’ performance by rewarding the change in behaviour;

Providing tax benefits for the company and/or the employee.

Employee share schemes come in a number of forms and they require careful consideration by the company to decide which scheme will work best for them. Share schemes will either be tax advantaged or non-tax advantaged. Tax advantaged schemes require the company to meet certain qualifying criteria and so may not be appropriate for every business.

As a starting point if you are considering implementing a share scheme, we have discussed some of the most common schemes below.

Tax advantaged scheme example – Enterprise Management Incentive (EMI) Scheme

An EMI scheme is a popular employee share scheme that currently offers favourable tax treatments. The scheme works by the company granting employees an option to acquire specified shares for a certain price, which may be exercised at a later date. When the employee exercises the option, they will be issued with the shares and hold equity in the company.

The current qualifying criteria to receive tax favourable treatment are that the company must:-

have gross assets of no more than £30 million;

have fewer than 250 full-time employees;

be currently trading;

not be a subsidiary of another company; and

only have subsidiaries which are under its direct control.

EMI schemes provide flexibility for companies as the scheme can be tailored to the chosen employee or group of employees and the circumstances. For example, the scheme can provide that the option is exercisable on a certain date in the future or on the employee meeting a certain performance target. Often, an EMI scheme does not cause the company or the employee to incur any immediate cost and can offer the following tax advantages:-

No income tax or National Insurance will be payable by employees on the grant of the option or the purchase of the shares;

Employees will qualify for Entrepreneurs’ Relief so that any uplift in the value of the shares when they employee dispose of them will be taxed at 10% instead of 20% provided they have owned the shares for 24 months;

The company can benefit from corporation tax relief.

Non-tax advantaged scheme example – growth shares

Another popular scheme for companies is a growth share scheme. This involves giving employees a special class of share in the company, whose value would be tied to the company’s growth from time to time. This can be done in a number of different ways, for example by linking the value of the shares to a financial threshold for the company, after which point the shares will receive value. The flexibility of growth shares also means they can be incorporated into other share scheme structures if desired and appropriate.

There are no qualifying criteria for growth share schemes as there are for EMI schemes and so any company has the potential to issue them. Growth share schemes are simple to implement as they only require an additional class of share being added to the company’s constitution.

Growth shares can be issued immediately to the chosen employees, which will give them a sense of ownership from the start. The shares will usually have a nil value attached to them when they are issued, and as such can be issued without any financial or tax consequences for the company and the employee at that moment in time.

Non-tax advantaged scheme example – Employee Benefit Trusts (EBT)

Another share scheme that can be used is an EBT, which is a form of trust body. The EBT is set up with the employees as the beneficiaries (the persons set to benefit from the trust assets). Certain of the company’s shares are then transferred into the trust and held on trust for the benefit of the employees.

This option offers flexibility for the company as the company is able to determine which employees will receive shares and when. An EBT will need to have a trustee appointed run it, and this trustee must independent of the company.

This is sometimes not a popular offer for existing shareholders in the company, as although the employees do not get the shares immediately, the shares still exist in an independent trust and therefore their existing shareholdings will be diluted.

As only a small number of examples of employee share schemes are discussed here, it should be noted that an EBT may be used in conjunction with a number of other share schemes in order to aid their implementation.

Non-tax advantaged scheme example – transfers from existing equity

Although not a share scheme in the typical sense, transferring employees shares from the company’s existing share pool can still be considered as a way to incentivise employees.

This option will reduce the legal costs associated with implementing traditional share schemes, but it will reduce the existing shareholders’ holdings by the number of shares transferred. In order to complete such a transfer, there will also need to be some form of consideration (e.g. payment by the employees) for the shares, which may be subject to tax.

The existing shareholders may like this option as they will usually receive consideration in return for their loss of shares, whilst also providing employees with an immediate interest in the business.

How can we help?

The above does not take into account all forms of scheme and is only a summary as opposed to advice. If you are considering implementing an employee share scheme and would like further information about the options available to your business, please contact our experienced Corporate team.

Please contact Yavan Brar on 01189 899713, Matthew Lea on 01189 898155 or Chris Gemson on 01276 854669.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

Yavan Brar

Yavan Brar

Managing Partner, Head of Corporate and Commercial

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