Using Enterprise Management Incentives to develop your senior team - Ben Griffin of Azets
As business owners look at who takes over from them when they retire, they need to feel confident in the senior staff who are committed to the business. Whether owners are looking to sell or keep the business, it's essential to have people in place to take over.
Our recent SME Barometer report identified that two-thirds of SMEs find recruiting talent with the relevant skills challenging, especially those at senior levels. Therefore, businesses are investigating the incentives they can offer to boost employee attraction, engagement, and loyalty.
A share-based incentive is something open to SMEs which their competitors may not be able to match.
Why use Enterprise Management Incentives?
Enterprise Management Incentives (EMI) share options are a way of recruiting, motivating and retaining staff by offering shares in their company. EMI can be one of the most tax-efficient and flexible means to provide shares although, commonly, too little thought is given to matching EMI to the business objectives.
Whilst we should not underestimate the positive impact of an employee becoming a shareholder, the purpose of offering them shares is to generate extra shareholder value. Shareholder value may be the payment of dividends or maximising value on a share sale, but it can be less tangible such as preserving the company's cultural values or providing secure long-term employment.
EMI and succession planning
EMI can also be used to manage business owners' succession strategy but, when implementing an EMI plan for succession, consider your medium and long-term aspirations and check that your senior team are aligned with these. The key driver for any incentive arrangement should be the overarching commercial objective, but the team as a whole may not have verbalised those objectives.
Where EMI will deliver shares to the senior team, there is an opportunity to design a profit share scheme which pays dividends based on hitting performance targets. EMI is excellent in this situation as it allows owners to deliver a performance-based share class so they can tailor the shares to match the business objectives, in terms of both annual financial performance and long term exit plans.
How does it work?
EMI allows employees to acquire shares through the issue of a qualifying share option. A key condition is that the option must be over shares in the employer company or in the parent company of the group, but the option itself is then very flexible so includes:
- any class of shares as long as they are ordinary shares
- any option period or trigger event as long as the option is capable of being exercised within 10 years of grant
- any individually tailored performance conditions as long as they are not wholly discretionary.
There are value limits so no employee can have options over shares with a market value of more than £250,000 and the company is limited to options over shares worth a maximum of £3m (both value thresholds are assessed at the grant date only).
The benefits for employers
Tax and cash advantages include:
- Where options are directly linked to a company sale, the selling price is paid by the acquirer, so the options do not directly cost the employer any money compared to paying bonuses.
- Typically, no employer NICs are associated with EMI options, again a cash saving over paying bonuses (the net cost of exit-related bonuses will be deducted from the sale price of the company).
- Even though there is no income tax on the exercise of options, the option gain is still treated as though it were earnings so gives rise to a corporation tax deduction for the employer. As a non-cash expense, the deduction turns into an actual cash tax saving which the acquirer will pay extra for.
The majority of privately owned SMEs will be eligible to use EMI as long as they are not controlled by another company. If the individual is employed in a subsidiary, the option would need to be over shares in the parent company (though the option could be linked just to value in the subsidiary as appropriate).
Businesses with more than 250 employees and gross assets of more than £30m cannot use EMI.
The other conditions are around the nature of the company's business. Businesses would not qualify if their major activity was based around the following activities:
- property development
- holding or managing investments
- hotels and nursing homes
- legal and accountancy services
- financial activities (defined as businesses which provide finance to customers so fintech business would qualify)
- leasing (except the commercialisation of something the business itself has created such as licensing software)
For more information on employee incentives or anything relating to EMI please get in touch with a member of our specialist team.
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