Not a blog about the “F” word

“Furlough” – in such a short space of time it has become so much a part of our everyday vernacular.

Looking to the future however, and the world “normalising” (whatever that might look like), businesses might want to start to consider how to reward, repay (their loyal stoicism) and incentivise existing employees, and also how to attract good quality candidates to enable and facilitate recovery plans.

In a future world where Covid-19 has less impact and where preservation of cash will have greater significance, it may be that a stake in the equity of your business is the most valuable tool for creating and retaining your winning team going forward.

It is likely that (aside from certain sectors and products/services), many privately held companies will have experienced a decrease in value, such that granting options in a tax efficient manner to staff now or in the near future, might make good commercial and forward thinking sense.

One such idea is to put in place an Enterprise Management Incentive (“EMI”) scheme.

So, what is an EMI scheme? In a nutshell:

• A tax efficient share option scheme for small, higher risk, privately owned companies
• Options can be granted as part of a scheme to a selection of employees or solely to one employee
• Additional employees can be added to the scheme at a later date
• Options can be granted over existing shares (i.e. currently held by a shareholder) or over new shares but no shares are actually held by employees on the grant of an option, only the right to acquire shares at a later date
• The exercise of the options can be made subject to conditions (individual, company performance, or a mix of both) or may be exercisable on an “exit”(e.g. if the company is sold at a later date)
• Setting an exercise price that is less than market value at the date of grant has tax consequences when the option is exercised and thus when the company’s market value is lower and in anticipation of economic recovery, this may be a good time to put such a scheme in place
• A corporation tax deduction may be available to the employer company
• There is no income tax liability (on employer or employee) on the grant of an option
• There is no income tax liability on the exercise of the option if the exercise price was at least equal to the market value of the shares at grant.

Another “F” (the “Feel-Good-Factor”) – a stake in the business:

• Can make an employee feel valued
• Gives an employee “skin in the game” and the opportunity to directly benefit from their personal hard work and input

You are not using up cash you may not have on the promise of bonuses or pay increases. The scheme can include performance conditions which will provide clear criteria on when the options can be exercised and clear direction to the employee to participate in the growth plan for the business.

Whilst many good prospects could be on a flooded candidate market in a post lock-down world, an incentive scheme could be your differentiator to attract the best.

If you or your business require information regarding anything in this blog or generally about your business or any other corporate matter, please call Sarah Ward, one of our Corporate partners, on 07889 589596 or e-mail Sarah at sward@georgegreen.co.uk for advice and assistance.