Employee Share Option Schemes: Incentivising Staff

Monday 30 September 2019

For many companies, the market that they operate in can become saturated. Not only can this cause issues with competition for the sale of goods or services, but it can have a detrimental effect on the turnover of staff.

Restrictive Covenants often prevent those towards the top of the corporate structure from moving across to a competitor for a certain period, but they don’t prevent them from wanting to jump ship to begin with.

So what else could you do to reward hard work and stop key employees from leaving?

Employee Share Option (ESO) Schemes

One way could be to grant an option to purchase shares in the company as part of an ESO Scheme.

Under an ESO Scheme you grant all, or certain employees, the ‘option’ to purchase a specified number of shares in your company in the future for a pre-determined price (usually the market value of the shares at the date the option is granted).

A Share Option Agreement will be entered into between the employee and your company which will, amongst other things, set out when and how the option can be exercised by the employee.

There are a number of different forms an ESO Scheme might take, with the most popular scheme for SMEs and owner-managed businesses being an Enterprise Management Incentive (EMI) Scheme.

What are the advantages of an EMI Scheme?

One advantage of an EMI Scheme includes (subject to the satisfaction of certain criteria) tax reliefs for both the employee (relief from Income Tax and National Insurance Contributions in respect of the benefit received) and your company (in the form of Corporation Tax relief).

In addition, EMIs are discretionary and don’t have to be offered to all employees, so you can choose which employees you would most like to reward and incentivise.

What are the disadvantages of an EMI Scheme?

There are some pitfalls to be aware of in relation to EMI schemes. One being that HMRC needs to be notified of the grant of each option within 92 days in order to benefit from the possible tax advantages. In addition there are certain disqualifying events which, should they occur during the term of the option, would cause the Scheme’s tax advantages to be lost.

The most popular basis for ESO Schemes

Most schemes, particularly EMI schemes, can be granted on a performance basis or on an exit only basis.

The most popular of these being the exit only scheme whereby the option is granted for shares to be purchased upon the sale of your company. This means that the employee pays the set price for the shares and then immediately sells the shares. The intention is that they will make a profit on the shares, receiving a lump sum from the buyer.

How can an ESO benefit your business? 

Not only do Employee Share Option Schemes help encourage employees to stay with your business, but the Option Agreements can specify conditions which benefit your business.

For example, there may be a limit on the sum that the individual would receive and how much your business has to be sold for before the option can be exercised.

In addition shares won’t immediately be allotted or transferred to the employees, therefore the equity held by the main shareholders doesn’t immediately reduce, and the employees wouldn’t gain any voting or dividend rights, which can be a major benefit for your current shareholders.

For further information on Employee Share Option Schemes, please contact a member of our Corporate team today for a no obligation discussion.