18 October 2023
A recent survey of middle market businesses undertaken by RSM UK found that only 18% of companies offer employee share plans to incentivise and reward employees.
This is in part due to misconceptions about share plans and how they operate, as well as perceived complexities for businesses who offer these arrangements.
Amidst announcements of cost-saving measures, could equity plans offer a solution for more recruitment businesses seeking to attract, incentivise and retain their top talent?
How share plans can help
Offering targeted incentives to key employees
There are a number of HMRC tax-advantaged share plans that can be offered to key employees allowing for bespoke performance and vesting conditions. Retaining and motivating employees in a recruitment business can present different challenges from many other sectors. The ability to tailor these share plans to the particular needs of a business and its people is a key strength.
This includes the Enterprise Management Incentive (EMI), a share option plan offering qualifying companies the ability to grant options worth up to £250,000 per person (measured at the date of grant). Gains in value from the grant can benefit from capital gains tax treatment.
Whilst already popular, HMRC have made a number of administrative changes to the EMI which can simplify its operation and address a number of common issues we see arising on corporate transactions.
For businesses that have either outgrown, or otherwise do qualify for, EMI, HMRC’s alternative Company Share Option Plan (CSOP) offers the potential for qualifying businesses to incentivise key employees with share options and capital growth.
The CSOP has benefited from significant changes, with the limit on the value of shares that can be granted increasing from £30,000 to £60,000 (also measured at grant). This is widening the scope for the classes of share that can be used, making it possible to use non-voting shares or special classes ‘growth’ shares.
Some companies may not qualify for any of the HMRC tax-advantaged plans. However, there are a number of alternatives that can be considered that offer similar outcomes in terms of rewarding employees and driving behaviour. For example, non-tax-advantaged share options, nil or partly-paid shares, growth shares, and joint share ownership plans can all offer recruitment companies a way of implementing an effective and tax-efficient share incentive plan.
As part of all-employee remuneration packages
Many employers offer a form of HMRC all-employee equity plan, such as a Save As You Earn (SAYE, also known as Sharesave), or a Share Incentive Plan (SIP). These must be offered on an equitable basis to all eligible employees.
The SAYE is a longer-term retention tool that provides employees with an opportunity to contribute savings on a monthly basis which can be used at the end of a three or five year savings period to purchase shares. Income tax relief is generally available provided the shares are acquired at least three years from the initial grant. The price employees pay to purchase shares can be discounted by up to 20% of the market value at the start of the savings period. It allows for tax-free bonuses, based on bonus rates set by HMRC.
The SIP offers the ability acquire up to £9,000 shares per share, via:
- free Shares: Free shares worth to £3,600 per tax year;
- partnership Shares: Shares worth up to £1,800 per tax year can be purchased from pre-tax pay. Employers therefore can save on employers’ National Insurance; and
- matching Shares: Employers can offer up to 2:1 additional shares for each partnership share acquires.
Dividends paid on the shares can also be reinvested. SIP shares are held in a SIP trust, and the most beneficial tax treatment (including, for example, capital gains tax free disposals) typically applies when shares are held in the trust for at least five years, again encouraging long-term retention.
Employee equity plans can be used as an effective means of succession planning.
This could include developing a new generation of leadership through targeted performance conditions, encouraging behavioural change as ownership is transferred.
Alternatively, an increasing number of companies now choose to adopt an employee-ownership model, via a HMRC Employee Ownership Trust (EOT). The most famous example of this ownership model is likely John Lewis. However, ‘people businesses’ such as those in the recruitment sector have been behind a significant proportion of the growth in EOTs in recent years.
EOTs offer shareholders wishing to exit the business (whether in full or in part) a way to sell a controlling stake in the business to a trust, which holds shares on behalf of employees, free of any capital gains tax. Employees can benefit from income tax free (though not NIC free) bonus payments of up to £3,600 per year.
How RSM can help
When structured and communicated effectively to employees, share plans can form an important part of the overall benefits and remuneration package in any recruitment business, encouraging long term retention and aligning employee and shareholder interests. They can be particularly effective in the recruitment space where commission-based short-term reward can be complemented with a share plan to align key employees with long-term value generation.
At RSM our specialist share plans & reward team can assist with all aspects of your share plan needs, including design, implementation, employee communications, and ongoing advice and compliance.
For more information, please contact Kerrie Willis or Martin Cooper.