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Recruitment and Retention: Share incentives as a solution?

A shrinking pool of key employees

Hybrid working, Brexit induced labour shortages and the ‘great resignation’ all make for a challenging market for businesses looking to recruit and retain key employees.

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Businesses are facing fierce competition for talent and employees have arguably more bargaining power than ever, there are fewer of them, they are re-evaluating what is important and many can work from virtually anywhere.

The rising costs of employment

A 1.5 % rise in employers NI contributions, a 6.6% increase to the national living wage and pay rises more generally (which some media outlets are reporting as being the highest on record for 9 years) are all adding to businesses’ salary bills.

This comes at a time when the costs of running a business are set to increase through inflation, a predicted reduction in consumer spending and increased fuel costs amongst other factors.

The cash flow impact of increasing employee costs is a particular issue for start-up and early stage businesses.

How can businesses attract and retain the best employees without pushing short term budgets to unsustainable levels?

Many businesses have found employee share incentives are an effective solution to challenges around employee retention and salary costs. Share incentives are a proven way of improving employee engagement and retention and, where correctly structured, increase employee reward without the cash and tax costs to the business of additional salary. They are particularly important for businesses at an early stage of development, for example in the technology sector.

Typically, a share incentive scheme (often called a Long Term Incentive Plan or LTIP) will award an employee an option to acquire shares in the employing company at a future date. The option will be exercised, and shares acquired, when performance or other targets applying to the business or the particular employee are met over a period of up to 10 years. Exercise of the option is often linked to the sale of the company or other corporate event where the employee will be able to realise the shares so the employee is not putting any cash at risk without an exit for their shares. This type of award incentivises the employee to achieve milestone targets and remain with the business until an exit is achieved without the business owners giving shares away immediately.

For SMEs, Enterprise Management Incentives –often called “EMI schemes”- are a type of LTIP which has been designed by the Government to provide tax effective share awards for smaller companies. EMI schemes are particularly important as they offer a high level of flexibility, whilst providing enhanced tax benefits for employees and the business where conditions set out in the legislation are met. Where all the relevant EMI conditions are met (including that the price paid on exercise of the award is not less than the share value when the option is granted), gains made by employees on exercise of an EMI award will be free of income tax and NICs and there will be no employers’ NICs payable by the business. The employing company will also benefit from a corporation tax deduction for the amount of the gain on exercise.

EMI options can be offered to selected employees, thus enabling a business to target the benefit to where it is most needed.  EMI schemes can be designed for each business individually, with option grant and exercise conditions linked to the specific circumstances and performance metrics of the business. Although the legislation sets out minimum conditions that have to be met for EMI tax treatment, our experience is that these can usually be met by most trading SMEs.

LTIPs and EMIs are examples of the share incentives that can be offered to employees and demonstrate how it is possible to invest in employees now, incentivise them to remain in employment whilst encouraging the achievement of performance targets that will support the growth and development of the business. They could be the key to attracting and retaining those individuals who are key to your business in this challenging climate.

How we can help

Walker Morris’ Employment and Tax teams have the breadth and depth of experience to assist businesses in identifying and putting in place the right share incentive scheme for them and their employees. We have particular experience in designing and implementing EMI schemes for businesses in many sectors. For any advice on how best to move forward, please get in touch.

Andrew
Rayment

Partner

Employment

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Nicola
Parkinson

Director

Tax

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Nicola's contact details

+44 (0)113 283 4455

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