24 November 2020
Employee equity incentives are a well-established part of the employee reward framework within the tech sector. For many employees and executives, share options and other forms of equity reward form a core and expected part of any remuneration package. This continues to be the case in the coronavirus world.
In what has typically been a high growth industry, employee equity awards come in many shapes and sizes. The form of incentive that is most appropriate for a business will depend on a number of factors, for example:
- its stage of development;
- who is being incentivised;
- the expectations of key stakeholders (eg existing shareholders, investors, and participants);
- KPIs and targets; or
- behaviours to be driven.
For most businesses all of these factors are likely to be impacted in some way by the coronavirus.
The most common form of equity plans that we see in this sector are share options. These are ‘tried and tested’ offerings, providing benefits to both the participants and their employers. They are well-recognised by investors and other stakeholders and provide an opportunity to make awards on a discretionary basis. Employers can choose who participates, on what level and can set tailored performance conditions.
Where possible, options are typically granted under a tax-advantaged plan, such as Enterprise Management Incentive (EMI) or Company Share Option Plan (CSOP).
Using these plans participants gains ought to be taxed under the capital gains tax (CGT) regime, which is currently* more favourable than income tax. Employers can usually obtain corporate tax deductions when options are exercised.
Where tax-advantaged options are not available, companies may choose to grant ‘non-tax advantaged’ options, which offer a relatively simple alternative, though don’t carry the same tax advantages for employees.
Alternatives to options
Companies may seek to implement something more bespoke, such as growth/hurdle shares (a newly created class of share with inherent rights attached) or partly paid shares (arrangements under which shares are acquired immediately, though are not paid for until a later date). Provided these are properly implemented, gains ought to be protected for capital purposes.
These forms of equity incentive are more complicated in terms of structure and will usually require amendments to the company’s constitutional documents such as its articles of association. Care should be taken in valuing shares with special rights attached and to make sure the arrangements ‘interact’ correctly with any shareholder or investment agreements in place. As a result, these more complex plans are typically used for more senior executives and may focus on the longer-term strategic objectives of a business or where the existing share capital does not deliver an effective incentive.
How RSM can help
RSM’s specialist share schemes team can assist with all aspects of your employee incentives, including:
- Share valuations
- Plan documentation
- Amendments to constitutional documents
- Employee communications
- Ongoing administration (annual returns) and advice
For more information on how we can help your business, please contact Saxon Moseley.
*Changes to capital gains tax
At the time of writing, UK capital gains tax seems to be firmly in the government’s line of sight for reform. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) has already seen a reduction in its available lifetime limit from £10 million to £1 million. Given the ongoing impact of the coronavirus on the public purse, further changes to CGT cannot be ruled out.