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Employee Share Incentives: How they could attract, retain, and motivate employees

Attracting, retaining, and motivating employees is a main business goal for all businesses, especially SMEs. Across the UK, increasing turnover rates have been seen across various sectors; including the accountancy sector. According to Accountancy Age’s latest 50+50 report, in 2022, the average staff attrition rate (or churn rate) rose to 17.89% across the sector, compared to 14.69% in 2021. With this in mind,businessesare needing to think of different ways in which they can incentivise their employees as well as provide ‘work perks’ that help them to stand out from the competition in order to attract and retain the right talent. This is where we are going to talk about Employee Share Incentives. Including:

  • What they are

  • Why companies offer them

  • How business owners can decide whether they are a worthwhile investment

  • How business owners can mitigate the risks & valuation issues

  • The different options available

  • And why EMI Schemes are a popular choice

First things first...

What are share incentives? In short, they are a tax efficient way to offer employees a share of the business and provide companies the flexibility to tailor the plan to meet their business needs. Why do companies offer them? They are becoming increasingly popular with companies that want to engage their workforce, expand on talent acquisition, and retain key employees. They are also great for creating value for existing shareholders and work extremely well when a company has a strong employee-ownership ethos. For employee-driven talent markets, share incentives are pretty much a given. So for companies operating in these markets, it is vital to offer a competitive remuneration package in order to stand out when it comes to talent acquisition and retention.

Attention Business Owners 📢

As a business owner there are a few things that you should consider when setting up an Employee Share Incentive plan. Below you’ll find a 8-point checklist. Ask yourself these questions and depending on your answers, will factor in whether implementing an Employee Share Incentive plan is a good idea for your business. That’s right. Don’t just think about the employee angle. Your business is an asset. And the answers from this checklist will answer your fundamental question… “Is this the right decision for my business to achieve its goals?”

  1. What is the ultimate aim of offering shares to employees? Attract the right talent, motivate them to achieve growth or retain them or a combination?

  2. When do you want to offer shares to them?

  3. Who do I want to offer shares to? Everyone, key employees, certain departments?

  4. What are the terms? Worked with your business for X period? Met a certain target?

  5. What happens when an employee leaves? Do they keep some or all of the shares?

  6. Am I creating value or giving it away?

  7. Would a discretionary bonus to my employees work instead?

  8. How/when will your employees realise a cash benefit?

And, we wouldn’t provide you with a checklist without the tax considerations included 🙌 So keep in mind:

  • That there may be up front tax charges for your employees and company

  • That there may be tax on exit for your employees and company

  • Consider how this could impact due diligence if you were to sell your business

  • HMRC may challenge – especially on the valuations

Mitigating Risks & Valuation Issues When it comes to mitigating risks, first ask yourself “how is my tax knowledge on Employee Share Incentives?” Is this an area of tax in which you have sufficient knowledge in? Are you confident that you can go back to your client with an accurate answer and relevant actions as to the next steps? If yes, then you’ll know what is needed around NIC and PAYE risk as well as HMRC agreeing valuations.

But if this is an area of tax which you don’t have a full understanding of or know what the best option to recommend to your client, then it is important that you take the necessary steps to ensure that you are protecting yourself and your clients from potential risks. We always recommend that you seek expert tax advice if you are unsure of a tax area – there are over 17,000 pages of tax legislation and you can’t be expected to know everything.

Seeking expert tax advice provides you with the assurance that your clients are remaining tax compliant as well as the peace of mind that you’ve left no stone unturned for your client; enabling you to confidently propose the next steps and get your clients one-step closer to their goals.

And luckily for DTX members, you have access to a panel of qualified tax industry experts through your exclusive Tax Panel; made up of 10 experts who have 150+ years combined within the tax industry and can provide support on a range of tax areas.

Have a client in mind? Then reach out to us directly and we will pass your details over to our Tax Team and they will get in touch.

For the remainder of this blog, we will focus on EMI Schemes (Enterprise Management Incentive Scheme). Not only are they a very popular, tax-efficient strategy for businesses when it comes to incentivising employees, but this was also a heavily covered topic in our latest DTX webinar.

So it seems right to cover this topic in a little more detail.


EMI Schemes

In a nutshell, the EMI Scheme is the most tax-efficient way to grant options to your employees. Options are a better deal for employees than shares because the employee pays no tax when options are granted – only when they’re applied / actioned.

EMI Schemes have been primarily designed for growing companies as a way to attract, retain, and motivate employees so they can scale-up effectively.

To provide further context, let’s way up the pros and cons of EMI Schemes.

PROS

HMRC ‘approved’ Scheme

A tax-advantaged scheme!


Manageable

When the company is sold, the DD (Due Diligence) teams know all about what they’re doing.


Tax Efficient

No tax to pay when the option is applied/actioned, provided employees pay full market value for the options on the date in which the options are granted. So even if you grant the option today, but don’t apply/action them for five years, there’s no tax to pay on applying the option; this is the key difference between other options!

Corporation Tax Relief

That means tax savings! Something that is normally overlooked but can be extremely valuable.

CONS

Over-engineering

Sometimes they can be developed into something bigger, when a simple solution would achieve the same results.


Expensive

As employees would have to pay full market price in order to pay no tax, they can be expensive depending on the company lifecycle stage and value.


Qualifying Conditions

Unachievable qualifying conditions for employees in which the options are then made available to them.


Let’s dive deeper into this point as it is a key differentiator to other share options …

No tax to pay when the option is applied/actioned, provided employees pay full market value for the options on the date in which the options are granted:

Here are a few graphs to help visualise this significant benefit of an EMI Scheme.



As you can see by the above graph, as of ‘Day 1 Grant’ the fixed price of the share is £1. And despite the time, when the share is exercised or actioned, the price of that share stays the same despite the share market value increasing.


This next graph shows how the share option, costing £1, has gained £9 in terms of total market value over a three-year period. Despite the rise in market value, to £10 p/share, the employee only needs to purchase that share option at £1.

So the employee is able to purchase that share option for £1 despite the £9 gain p/share and pay no tax on that increase in value – as long as they pay the full £1.


So when it comes to selling those shares, with EMI schemes they have paid no tax up until this point, so the £9 per share gained over time is subject Capital Gains Tax (after deducting the Annual Exemption).


Key Takeaways

When it comes down to attracting and retaining employees, you need to do what you can to stand out from the competition. Not only this, but it’s also vital that the decisions you make are ultimately leading to your business's end goals and success.

The same is said for employee motivation, you’ve gotta do all that you can! But there are non-financial ways you can motivate your employees, such as enforcing a strong work-life balance, creating clear career paths, or even recognising them for their work; recognition goes a long way!

So to round up, Employee Share Incentives are a great way to attract, retain, and motivate employees but it’s important to find the right fit for you, your business, and your team.

What are your thoughts on Employee Share Incentives as a way to attract, retain, and motivate employees? We’d love to hear your thoughts!

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