By Simon Chapman, Partner
In recent weeks and months there has been a significant amount of publicity regarding staff shortages in key sectors.
One way for businesses to attract, retain and incentivise key employees is through the use of tax advantaged share option plans. However, many businesses aren’t aware of how they work or presume they wouldn’t be able to implement them.
In this post, we outline the benefits or share option schemes and how introducing a scheme of this type could be a useful tool in retaining staff as the economy continues to rebuild.
What is a share option plan and how does it work?
It is an arrangement in which an employee is granted the right to buy shares in the company that they work for at today’s price.
If the value of the shares increases in the future, they can buy them at less than they are worth.
A share option plan for an employee can be agreed at any time. It can be for existing long-term employees or for employees that have only just joined.
There are different types of schemes:
- All-employee scheme in which everyone participates
- Or a scheme where certain key senior employees participate
What are the benefits?
There are numerous benefits for employers and employees with share option schemes – which can have long-term positive outcomes for both sides of the deal.
If the business structures the scheme correctly employees get certain tax benefits, which mean you don’t pay any tax today for the benefit of the share option.
When an employee sell the shares in the future, for example when the business floats, you make a profit on the sale of the shares – they only get charged capital gains tax rates which could be as low as 10 per cent!
For employers, share option schemes are designed to attract, retain and motivate employees.
The scheme can be a way of companies differentiating themselves in the crowded job market and putting the business ahead of competitors in the race for the best talent on the market.
For a lot of companies, it is a work incentive, because the harder the employee works, the more they will grow the value of the company and they will get a share of it when we sell or float.
Seek professional advice when setting up a share option scheme
Business owners will need to seek professional advice when setting up a share option scheme. It is a very complicated situation and important that it is launched correctly.
The professional advice is important from a legal point of view and a tax point of view – this is to ensure you get the correct tax benefits.
If the scheme isn’t set up correctly and it doesn’t work in practice, the employee potentially won’t get the shares or the business may receive a large tax bill.
It’s important to remember that it’s a share option, the employee isn’t a shareholder right away and they don’t necessarily have any rights to be a shareholder if the business isn’t sold or floated.
You can have schemes where you exercise the options and become a shareholder, carry on working, and the company pays a dividend.
Or some share option plans are exit only, the employee only gets to option or buy the shares just before the company is floated or sold – and that’s where they make their money.
There are certain excluded sectors that can’t operate share option schemes. Key sectors including law, accountancy and certain other trades come under this exemption.
But most other ‘normal’ trading businesses are able to do these schemes.
Which scheme you use depends on the size of your business and whether you want it to be for everyone or just a select few.
Incentivising for the long-term
By using share option schemes, companies are giving employees a vested interest and genuine investment in the future of the business.
This a long-term incentive which will see employees not entirely focused on their annual bonus, instead they will have shares accruing value over a number of years.
If an employee leaves the company then the share option lapses and they get nothing.
Share options schemes are a way of getting valued employees to stay and build the company, particularly as they won’t see any value until the company is sold or floated.
When recruiting staff you can mention it in contract negotiation – indicating that in, say, five years’ time those share options could be worth a large amount of money.
It doesn’t cost the business cash today, but provides value for the employee and locks them in.
Businesses can put certain conditions on the scheme too. For example, you may not know how a new employee will perform, so within the share option scheme you can put performance-based flexible conditions in.
Most business owners aren’t aware of how they could utilise share option schemes. They may be aware about them but think they are only relevant for listed companies. It’s not, it’s very relevant for private companies and there are some very attractive tax benefits.
For business owners that are out there in the modern job market and are competing for talent in a busy space can use share option schemes to set the apart and attract good people to drive the future of the business.