Managing Your Cash Flow

Ten tips for setting up an employee share scheme

4 min read

24 March 2014

Robert Postlethwaite shares some tips for creating an employee share scheme.

1. Be clear about your reasons for doing it. Is it about financial reward for employees, if so does that mean a share in profits through dividends, capital growth or both? Or are your objectives more psychological, to foster a stronger feeling that your employees are part of a team?

2. Think about who it is for. Is it only for your key people or do you see advantages in spreading ownership more widely?

3. Consider whether you want individual share ownership or ownership by an employee trust. If you favour ownership that is limited to your key people, individual share ownership is likely to be the best approach. But if you want all your employees to be part-owners, it’s worth considering ownership through an employees’ trust.

4. Should employees have to pay for their shares? Most employees, including many at senior levels, will have no or limited funds to finance share purchase. You can address this by making shares free (although that may have tax consequences), by granting options (which fixes the amount an employee has to pay but can defer it for several years) or by using bonuses to fund share acquisition.

5. Decide whether part of the purpose is for you to sell some of your shares. Is part of the reason for introducing a share scheme to enable you to partially sell, or is the focus purely on creating additional shareholders. The answer will determine what form the share ownership arrangements take.

6. Look into the tax regime. The UK offers a number of statutory tax breaks to encourage employee share ownership, which can result in employees paying tax at rates as low as 10% on share-based rewards. 

Also, from April 2014 a sale of shares to an employees’ trust can be entirely free of capital gains tax and bonuses paid to employees of a company owned by a trust can be free of income tax (in each case subject some conditions, including that the trust must own more than 50% of your company).

7. Think carefully about what will work best in your business. Every company is different and although there are some kinds of share scheme that are common to particular types of company, you should never go straight to a standard solution.

8. Ensure that employees understand how their share scheme works. This is one of the most important tasks, but is often overlooked even though it isn’t difficult to do it well. 

Supply all your employees with a plain English guide at the same time as the scheme documents, and if you think that may not be sufficient consider also making a presentation to them. 

You should also then keep them regularly informed about the company’s financial performance so they can make connections between their work, company success and rewards for that success through share ownership. If they don’t understand these things, the share scheme’s impact will be significantly reduced.

9. Plan ahead. Think about what may happen in the future, for example of participants wish to sell their shares, if they leave or if you have new employees.

10. Don’t oversell it. If you launch a share scheme on the promise of big rewards which can’t then be delivered, you will have disappointed employees.

Robert Postlethwaite is MD of Postlethwaite, employee ownership lawyers

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