Employees in today’s turbulent market are familiar with the ever present spectre of redundancy. Ironically, for employers, an equally vexing question is how to motivate and retain key employees, whose value only escalates in difficult times.
Traditionally, one way in which employers have answered the question is by offering employees shares in the business. The rationale is that an equity stake assists with recruitment, retention and motivation of key staff, as well as aligning the interests of senior executives with those of the company’s stakeholders. Issuing shares can even reduce employment costs, as successive governments have introduced a range of tax incentives subject to certain conditions being met.
From an employee’s perspective, share ownership historically bred a sense of enfranchisement and loyalty. Now a seismic shift in attitude on this front is happening: employees in the banking and financial sectors, who have traditionally received significant proportions of their remuneration in the form of share options, have seen thousands of pounds wiped off the value of their pension pots, and it remains to be seen whether numerous Facebook employees will be thanking their employer for share options they were granted in lieu of hard cash.
Coupled with the fact that repeat rounds of redundancies have seriously eroded the concept of employee loyalty, and bearing in mind the current volatility of share prices, employers may now struggle to convince employees that share option schemes offer any kind of incentive at all.
Is the share incentive scheme dead Most certainly not. Listed companies in the UK operate such schemes and the expectation will undoubtedly remain that they should continue to do so in the future. Share incentive schemes also offer an important, but not the only, alternative for mid-sized businesses. In this sphere, however, employers must remain focused on the cost/reward balance share incentive schemes can be complex and costly. Great care needs to be taken in deciding whether they offer the most cost efficient means of achieving an agreed end.
So what do we mean by ‘share incentive schemes?” In simple terms, these are arrangements to provide benefits to employees in the form of shares, share options, interests in shares or other benefits derived from shares. That is where the simplicity ends. There are a vast array of share incentive schemes available, all of which have distinct rules, advantages and drawbacks.
The acronyms alone can be mind-boggling, including CSOPs, SAYE, SIPs, EMIs, LTIPs and EBTs. A detailed consideration of each of these is outside this article (and indeed outside most of our waking consciousness) but any employer considering this route must take specialist advice to understand the differences.
Key questions include:
- Does the scheme require HMRC approval?
- What are the tax benefits?
- Must the scheme be offered to all employees or can the employer be selective
- Can the scheme be linked to performance targets?
- Are there any qualification requirements in terms of type or size of business or number of employees involved
- Are there any applicable financial limits” and
- How complex is the scheme to operate How do I sell this as an incentive to my employees?