A growing number of employers are recognising that when employees share in the company’s success, they are more motivated and invested in their work, and that this will in turn benefit the company.
Indeed, several academic studies support the positive connection between employee share ownership and company performance.
To foster this link, employers set aside a small amount of equity to allow their employees to become shareholders in the company, alongside any founder and external investors.
2014 has seen several important changes to the employee share ownership industry which now makes it easier than ever for companies to offer their employees the chance to join such schemes.
A new regime of electronic self-certification (rather than the previous HMRC approval process) and an increase in monthly savings limits for employees, means not only is it quicker for companies to set up employee share ownership schemes, but it is a more attractive proposition for employees looking to make greater tax-efficient savings.
When deciding to operate an employee share ownership scheme, first you should decide what form your plan should take. It could either be a small plan for a number of key employees (a “discretionary” plan), or one in which all employees may participate (“all employee plan”). This decision will largely rest on the company’s aims and objectives and investor outlook.
Beyond this, employee share ownership schemes fall into either “HMRC approved” or “unapproved” plans (until April 6, when self-certification comes into being and plans will either become tax-advantaged or non tax-advantaged). Both have benefits, but it is only HMRC approved plans that offer tax-relief on savings.
The important thing to remember when setting up an employee share scheme is that you don’t have to be an expert in how they operate or what processes the company will need to go through.
There are a number of share plan administrators and advisers who will work with you to either set up the scheme on your behalf or advise you on how to do it yourselves, depending on how much you want overall control.
Nonetheless, once you have decided on what type of scheme you should offer, generally the following steps will have to be taken from inception to implementation (please bear in mind that each scheme may require additional, or alternative steps):
- Company will hold initial discussions internally and with advisors
- Recommendations are provided to the Board
- Board meeting to approve & instructions given to legal advisors to proceed
- Rules of scheme drafted by legal advisors
- Shareholder approval
- Articles of Association and any Shareholder Agreement reviewed by legal advisors
- HMRC provisional approval (until self-certification is introduced on April 6)
- Planning of communications strategy and development of marketing materials for employees
- Setting of initial value of shares
- Invitations issued to eligible employees
- Share scheme becomes fully operational
Once the scheme is in operation, it is vitally important to ensure it is communicated with employees and that the following takes place:
- The scheme is branded, so will be recognised by employees
- A helpline is set up to answer employee queries
- Recruit employee share ownership ambassadors in the company to promote its benefits
- Get regular feedback from employees via surveys
- Put the company’s daily share price on the intranet
- Share best practice and network through a membership organisation
- Consult regularly with HMRC and visit its webpage for further advice and tips
John Collison is head of employee share ownership at ifs ProShare.