Business Support  

How share-based incentives can help small firms in tough times

  • Explain benefits of share-based incentives for smaller firms
  • Identify the different options available when arranging share-based incentives
  • Explain how to get the documentation right
 How share-based incentives can help small firms in tough times

As businesses struggle to survive Covid-19 and as unemployment starts to rise, the issue of retaining key employees becomes more important than ever.  To do so, it is important to think outside the box. 

Share based incentives are not only a great way to incentivise key staff but to retain them as well.   

This is especially true for those businesses that can no longer offer cash rewards – whether attractive salaries or bonuses.  

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Advisers should be aware of all the options available.

Opportunities for small firms

While used regularly in large listed companies, share based incentives have sometimes gone under the radar in smaller private businesses. 

However, there is a notable uptrend as businesses increasingly see them as an excellent incentive.

You would be forgiven for thinking that share-based incentives are a one way benefit, but that does not have to be the case as they can be of huge benefit to both employees and employers alike. 

From an employee perspective, share-based incentives can be the carrot at the end of the stick helping to maximise performance, focus minds and ensuring employees feel they have skin in the game.

From the perspective of the employer, they reduce drain on cash which could be used on other critical projects, ensure retention and can sometimes be far more tax efficient than a traditional cash arrangement.

Indeed, share-based incentives have always worked well for cash strapped start-ups. Given the current circumstances, they could soon see a much wider appeal.

Not complex to arrange

You might think that share-based incentives are complex to arrange and can leave businesses in difficulty if, for example, an employee leaves. 

But this does not have to be the case.

Well drafted scheme documents can leave employers well protected and be structured much in the same way as a bonus arrangement to include targets which focus on financials, length of time or equity value.

Importantly, well drafted documents should be easy to understand, making them an easy sell to the employee. 

Enterprise Management Incentives Options

Most people will have heard of Enterprise Management Incentives Options (EMI options), and quite rightly so, as these are some of the most popular arrangements available. 

Designed for traditional owner managed businesses, EMI options provide employers with a tax efficient way to incentivise key employee with shares.

Whereas cash and some other share-based arrangements would usually be taxed on an income basis, granting EMI options to an employee can, if structured correctly, allow an essential deferral of tax payable by the employee.

Tax may only be a payable on sale of the option shares, and then on an efficient capital gains basis. 

An employer will usually grant EMI options to be purchased at market value on the date of grant, a value which can be pre-approved with HM Revenue and Customs giving added certainty.

Furthermore, as HM Revenue & Customs may accept that a small minority shareholding has a discounted value, the approved market value at the date of grant may be lower than you may think.