Employee Share Schemes – from an HR perspective 

Having recently spent some time with the Expertise to Entrepreneurs Team at AAB, it was really interesting hearing about the different types of Share Schemes available to businesses and gaining an insight into how they operate.   

Whilst I’m certainly no financial expert, the topic encouraged me to think from a Human Resources viewpoint about the benefits available to an organisation if they were to introduce such schemes.  Regardless of size, businesses can potentially look at this option by way of an incentive towards attracting and ultimately retaining Key Talent within their business at all levels of seniority.   

Key Points to consider 

The main thing to consider from the outset is whether as a business owner are you comfortable giving up a portion of your business and what the return might be for the organisation. It is also extremely important to think about existing shareholders and what the impact may be to them if you extend an award to employees. It may well come down the stage the business is at in terms of size and growth opportunities and more recently, due to the pandemic some businesses have had no alternative but to consider share options as an incentive. 

Why are they beneficial and how can they reward staff? 

Not only are ‘Employee Share Schemes’ a tool to attract and retain key talent at all levels but they have become a popular remuneration and succession planning tool, particularly in startups, where companies may have insufficient cash funds to provide market-leading salaries and remain competitive or perhaps they operate within sectors where there might be a skills shortage. Businesses are effectively offering the employees a ‘Stake in the Business’ and this can help support aligning the employees’ interests with the overall business strategy as well as help incentivize employees to perform better, be more engaged and generally feel more valued and satisfied within an organisation.   

Types of Share Incentive 

There are two types of Employee Share Incentives, namely ‘Approved’ and ‘Unapproved’. As it might suggest, the ‘Approved’ option is the one that is the ‘HMRC registered scheme’, and can carry tax advantages where the ‘Unapproved’ does not hold any tax advantages. 

The schemes noted below are approved by HMRC, have certain conditions and qualifying criteria attached to them, and are aimed at being tax efficient:

  • Enterprise Management Incentives (EMI)  
  • Save As You Earn (SAYE) 
  • Share Incentive Plan (SIP) 
  • Company Share Ownership (CSOP) 

The following schemes are classed as ‘Unapproved’ Share Incentives and whilst they may be flexible, they are not overly tax efficient and are all discretionary: 

  • Share Award 
  • Unapproved Options 
  • Phantom Share Scheme 
  • Joint Share Ownership Plan (JSOP) 

Long Term Incentive Plans (LTIP) are another way of incentivizing employees, and these are often given to more senior members of a business and again there would be certain conditions or criteria attached to any awards given and the company can implement these on a discretionary basis often based on performance metrics. Most LTIPs span a period of three to five years before the employees would receive the full value of any reward so consideration needs to be given as to who could be awarded these and what the pros and cons might be in doing so. 

Ahead of launching any type of share scheme you will want to consider what you are trying to achieve by doing so, is your business eligible and which employees you might want to award shares to, so it is important to investigate the different scheme types available thoroughly ahead of moving forward. It may be that you create a flexible framework for share options and will reward different people in different ways so it’s important to explore all possible options and when launching and communicating with employees it’s important to be transparent about the motivation behind the offering and being clear about what happens when someone chooses to exit the business, whether voluntarily or otherwise. 

In a nutshell the offering of an ‘Employee Share Scheme’ can serve to complement and enhance the overall remuneration package and ‘Employee Value Proposition’ and in doing so it can be extremely beneficial for the employer in terms of tax efficiencies and having a team of employees who are fully engaged and really want to be there promoting your business and driving it forward to utmost success. 

To find out in more detail about schemes on offer and what might be right for your business, and you think you would like some assistance on analysing, implementing, or reviewing any existing incentive schemes, please feel free to get in touch with the team at AAB.