Employee incentivisation schemes: motivating your employees through the COVID-19 crisis and beyond - Kuits Solicitors Manchester
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Employee incentivisation schemes: motivating your employees through the COVID-19 crisis and beyond

Employee incentivisation schemes: motivating your employees through the COVID-19 crisis and beyond

28th May 2020 - Published by Kuits corporate team

In these unprecedented times, many businesses are looking at ways to conserve cash resources and keep costs down as much as possible in order to see them through to the upturn – and, as yet, it is still uncertain as to when this will come.

So, how can you incentivise and motivate key employees to help you through this? Increasingly so, cash is not always king.

With valuations potentially impacted, it could be a good time to look at some form of equity incentive to motivate your key employees to help you work through this together.

Here, corporate partner Kirsti Pinnell explores the role employee incentivisation schemes can play in employee engagement.

Main alternatives to cash incentives for employees

A cash bonus tied into “SMART” performance targets should never be overlooked, but what about the employees you deem to be key in building and growing the business and helping you come through these unprecedented times stronger than before?

There are various forms of incentives/options to provide to employees, but we generally consider the following with SME clients:

  1. Shares: the employees could be “given” shares now;
  2. “Growth” shares: these give the employee(s) a share in the future growth of the value of the company; and / or
  3. Options: the employees could be granted an option/right to take up shares in the future. As an enterprise management incentive (EMI), this is also the most tax efficient (and actually tax beneficial) form of option for an SME and its employees.

Enterprise management incentives: key questions answered

To help us advise you on the most appropriate form of incentive and how best to structure it, we would usually consider the following questions with you:

  1. Should the incentive tie-in with performance and what SMART targets can be applied? Best to keep it simple: once set, it’s not always that easy to change!
  2. What rights should the shares have: these can be flexible, but voting and dividend rights enhance the value of the underlying shares – it’s the capital return rights on a sale that are usually key.
  3. How important is it that the employee has a feeling of ownership “now” in the company? A small stake doesn’t actually confer many rights in practice.
  4. What happens if the employee leaves? This form of incentive might help them think twice about leaving, but doesn’t stop it happening.
  5. What are your plans for the company going forward? Do you envisage an exit in ‘X’ years’ time and what kind of value do you want to create to achieve that?
  6. What is the company’s business, net assets and number of employees, to confirm if it qualifies for the granting of EMI options?

The “tax tail” of employee incentivisation schemes

Whilst the tax tail shouldn’t necessarily wag the dog, in simple terms if an employee receives shares in a company and pays less than market value for those shares, income tax will be payable on the difference, as it is equivalent to a benefit obtained through employment.

EMI options enable a valuation to be agreed upfront with HMRC to quantify this risk. Any gain on exercise of the option above the market value at grant (and on sale of the resulting shares) will be subject to capital gains tax, rather than income tax, and should qualify for entrepreneurs’ relief. A corporation tax deduction may be available to the company.

If you are would like advice on formulating the best incentivisation and motivation strategies for your key employees, please contact corporate partner Kirsti Pinnell on 0161 838 7847 or email kirstipinnell@kuits.com

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