Preserving cash flow with employee share incentives

Preserving cash has become a key focus in recent weeks. Many businesses are turning to share incentives as a non-cash way to reward the people who need to keep working and cannot be furloughed, or perhaps to top up those who have been furloughed. 

Many employers see a need to retain their talent for when the current situation comes to an end, but anticipate cash constraints over the coming months which could make this difficult.

How businesses are using share incentives to respond to the coronavirus crisis

Some businesses are negotiating temporary pay reductions and offering employees some form of equity as compensation, or using equity in place of their usual cash bonuses.

This can be a sensible strategy, but businesses need to ensure this is structured effectively to avoid unintended tax consequences – we strongly recommend that businesses seek tax advice before making any salary reductions or replacing bonuses. There is also the opportunity to deliver rewards in highly tax-efficient ways for employees, again helping to offset reductions in cash pay now.

Taking advantage of reduced share valuations

The current market conditions could mean lower values for shares in many companies. Share plans are a good way to incentivise staff to rebuild the value of the business, whether in the form of HMRC-approved options or growth shares. Similarly, if you’ve been considering share options or other forms of equity reward for some time, reduced valuations may make this an excellent time to implement the proposals.

Assessing the valuation impact on private businesses is difficult in the short term, and valuation comparators from distressed transactions may not always be relevant to non-distressed businesses. But public equity markets clearly indicate a move into a risk-off environment, and this can be expected to be reflected in private company valuations too, particularly where EBITDA in the current year is expected to fall or long-term prospects are diminished.

Be careful though, as current trends show that HMRC are tightening up their approach to share valuations, particularly those with highly geared equity or in close proximity to a transaction. Businesses should take tax advice before issuing any shares to employees or granting share options.

Have your current share awards ceased to be effective?

Falling share values and reduced performance expectations will mean that, for some companies, option re-pricing should be considered, and performance conditions may need to be changed. This will need to be considered in light of shareholder views, both in private and listed companies. Amending existing options and making changes to share rights has the potential to cause adverse tax consequences if you get it wrong. We understand that in the current environment you will be wanting to reduce costs but be aware that amending EMI options or other tax-advantaged plans can often lead to disqualification, and amending growth shares risking creating immediate tax liabilities. It's important that you seek professional advice before you make any changes, because the costs of remedying share policies at a later stage can be significant.

For private equity-backed businesses there is an opportunity to explore a variety of solutions where equity values are heavily underwater, meaning that ordinary equity ceases to be a realistic incentive for management. This can often be done in a tax-efficient way, and cash bonuses are not always the best solution.

For more information on employee share incentives, please contact

Fiona Bell Fiona Bell

Partner