We advise extensively in the field of employee engagement, option schemes and incentives and it is interesting to note current trends.

In early stage companies with high growth potential, Enterprise Management Incentive (“EMI”) schemes continue to be popular. These tax advantaged schemes, based on values agreed with HMRC, effectively give employees a one-way bet on the success of their company. If the shares over which they are able to exercise options have grown in value they are able to acquire the shares but without having to pay any capital gains tax (“CGT”) on the growth in value of the share. If they later sell the shares there is no income tax or NI charge, just an effective 10% rate of CGT on the overall profit they have made.

Our experience of introducing share incentive schemes in SME companies has been mixed. Such a scheme for a lot of employees can be complicated and time consuming. If employees have a very small share of an option pool there is not a great incentive effect in practice. In many such cases a well-crafted cash bonus scheme that works against clear targets will often work much better.

We continue to explore using employee benefits which come with tax breaks, but again these can come with a lot of administrative burdens.

We are watching with interest the continued steady growth of the number of wholly and partly employee–owned companies. Such companies are owned by employees holding shares directly or through an Employee Ownership trust which holds the shares on behalf of the employees. These companies tend to have a very distinctive participatory culture where employees are very much engaged in the overall welfare of the business. We expect this sector to continue to grow.

It is apparent that there is no one size fits all solution. The right kind of scheme needs to fit the culture of the company and be appropriate to the stage the company is at. It also needs to be well put together in terms of trust law, company law, employment law and tax law. What is clear is that having the right scheme in place can be very beneficial to a business, whereas the wrong scheme will, at best, be of no real effect at all.

For further help or advice, please contact Lupton Fawcett’s Corporate Director, Jonathan Oxley, on 01904 611411 or jonathan.oxley@luptonfawcett.law