Giving employees a stake in the organisation in which they work can be a powerful tool in achieving real staff engagement.
Here, Rodger Cairns, partner at law firm Shepherd & Wedderburn and an expert on share schemes and employee remuneration, tackles the subject.
A share represents a tangible interest in the business and when employees see the link between effort and reward, the results can be remarkable. However, any scheme has to fit the specific circumstances of the business and be designed to offer the potential of real advantages to employees.
If employee share participation is something that is of interest, it makes sense to do it as tax effectively as possible and there is a variety of HM Revenue & Customs ‘approved’ arrangements that can be used, many of which were made more generous by legislative changes that came into force earlier this year.
The HMRC-approved Share Incentive Plan (SIP) is used by many companies to distribute shares. The SIP allows the company to award shares free of charge to employees and enables those same employees to buy shares via payroll. The SIP also offers tax advantages if certain conditions are met. The Finance Act 2014 raised a number of the thresholds for SIPs, thus increasing the opportunity for employees to benefit from participation. The Act also doubled the maximum monthly saving contributions allowable under the other HMRC-approved “all employee” arrangement Sharesave Schemes.
Enterprise management incentives (EMI) continue to be an effective way to reward executives in smaller businesses, although there is no reason they can’t be offered to the entire workforce where appropriate. As long as certain conditions are satisfied, income tax is not payable on exercise of EMI share options. Instead, participants will pay capital gains tax on disposal of shares, based on any gains above exercise cost.
There is also normally a Corporation Tax deduction available on the implementation and operation of employee share schemes.
However, implementing a scheme is rarely sufficient on its own to deliver the engagement and productivity benefits. The key to aligning employee effort with company objectives is by communicating the advantages of the plan, how performance is delivered and how each employee contributes to the results.
Finally, it is worth noting that HM Treasury recently released a consultation on a new employee shareholding vehicle that it hopes will be a straightforward structure that can be used to facilitate the operation of share incentive schemes and internal share dealing markets. Any simplification of the various processes surrounding share participation by staff is always welcome, although – as is often the case – the devil will be in the legislative detail.
Rodger will be leading the fourth in our series of employee ownership expert adviser briefing breakfasts and will be focusing on share schemes. The event takes place on 10th September at the Apex Haymarket Hotel, Edinburgh between 8am and 10am.