Why you should think about revisiting employee equity!

Enhancing employee engagement has never been more important in our ‘new’ world of remote working and isolation for so many and can be a key differentiator in incentivising teams to work together.

Now is the time to take stock and look to the future with an eye not just on existing talent but also future recruits.

What are the key ways to incentivise employees?

• Share based pay - Employee equity is a neat solution as, if structured properly, the tax rates are much lower than payroll taxes on cash salaries. Not only is this a motivational reward for hard work, but also promotes company loyalty as it is often linked to company performance and remaining with the business. An option is a one way risk and an employer can set flexible boundaries in what they require for the option to convert to shares e.g. future performance of the company and remaining in employment with them. This provides a level of security for both parties that a cash salary is unable to achieve.
• Growth shares - for smaller enterprises growth shares provide flexibility as there are no legislative proscribed tests to be met and they are very tax efficient. In a nutshell with growth shares a new class of share is introduced which has little to no value upfront but which can share in the future growth of the company. Growth is usually linked to ‘hurdles’ such as company performance or exit value. As growth shares do not participate on the current value of the company they can be acquired at a lower value than the current share capital of a business and provide a real shareholding from the outset for participants. Growth shares can also be considered where the exercise price of an EMI option is considered too high due to the company being at a later stage of maturity. Another use of growth shares is to reward consultants and NEDs who are precluded under any of the tax-advantaged share plans including EMI.
• Employee ownership Trust - for those looking to pass their business to the employees, an Employee Ownership Trust (“EOT”) can act as a vehicle to pass ownership to an Employee Benefit Trust (“EBT”) for the benefit of the employees. This can be structured in a way that the proceeds of the sale of the shares can be passed to the sellers free of any CGT and therefore protect the uncertainty of Government tax changes.EBTs can also be used to provide an early exit mechanism for existing minority holders or enable employee equity holders to ‘cash out’ where an exit is not seen so readily on the horizon. Companies can also utilise treasury shares to act as a warehouse/recycle function for employee equity without the need for running an EBT with independent trustees etc., however the company does need to have distributable reserves to be able to buy into treasury.

Time to start planning?

Ultimately now is the time to consider the opportunities provided by employee equity in a world where cash is tight and employee engagement is more important than ever. With the right planning it should be possible to secure low buy in costs for employees and high returns at favourable tax rates. What are you waiting for?