As the economic fallout from Covid-19 (Coronavirus) becomes ever clearer, it is important businesses are aware of all the tools at their disposal that can help them survive these difficult times. One tool that has slipped under the radar and deserves greater recognition is share-based incentives. Share schemes help retain key staff and perhaps more importantly given the current circumstances, they incentivise staff too. Feeling they have ‘skin in the game’, employees are motivated to work at their best.
For employers, share-based incentives reduce drain on cash, freeing up finance for use elsewhere. They can also be more tax efficient than a traditional tax arrangement. Traditionally, they have been popular among start-ups though they offer significant benefits to established businesses too.
When scheme documents are well planned, employers are protected and the documentation is easy for an employee to understand. They are structured in a similar way to bonus arrangements, including targets focusing on financials, length of time employed or equity value.
Particularly popular are enterprise management incentives (EMI) which are a tax-efficient way to incentivise key employees with shares, potentially allowing an essential deferral of tax payable by the employee. Ultimately, with less tax to pay, the employer (and ultimately the existing shareholders) can give less away to achieve the same post-tax-paid outcome and the difference can be surprising. Another benefit is that options are flexible; they can be designed such that the employee incentive is maximised yet the business remains protected.
Of course, there are other avenues that can be considered, such as granting unapproved share options (if EMI options are not available) or granting actual shares.
At a time when few businesses are able to offer cash rewards, share-based incentives can offer an equally effective alternative, helping preserve cash while retaining key employees. Many small businesses have successfully reaped the rewards of these schemes. For those businesses facing unprecedented financial challenges, share-based incentives can offer a much needed lifeline.
Thomas Clark is a partner and specialist in employee incentives at Moore Barlow.
