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Home > Dorset Chamber News > Rewarding employee loyalty with share option schemes

Rewarding employee loyalty with share option schemes

Posted on: 04/05/2020

Whilst the lockdown has caused immense disruption and heartache, it has on countless occasions brought out the best in people. A number of business owners we speak to have highlighted how proud they are of their teams and staff and the way in which they have coped (and are still coping) in extremely challenging circumstances.

Finding ways to reward this loyalty will therefore be on the minds of a lot of employers. Inevitably cash always has an attraction but, as we pick ourselves up and dust ourselves down, cash bonuses simply may not be possible for some time to come. There are however other ways that staff can be rewarded for their commitment.

One such method is using share option schemes. Share option schemes are a tried and tested means of rewarding employee loyalty and can be structured as ‘exit only’ so that the employee concerned will only ever hold the shares for a moment in time before a sale of the company. This reduces many of the complications and risks that arise from issuing shares to employees prior to an exit. Certain share schemes, where implemented correctly, also benefit from favourable tax treatment, enabling future growth in the value of the shares to qualify for capital rather than income treatment.

Below is a list of some of the more common schemes available:

  • Enterprise Management Incentives (EMI) – this is a scheme benefiting from favourable tax treatment aimed at smaller trading companies, allowing share options to be granted to employees up to a £250,000 individual limit.
  • Company Share Option Plans (CSOPs) – CSOPs are similar to EMI schemes but are not subject to all the same qualifying restrictions and so may be available to companies and employees where an EMI is not. CSOPs are though subject to a far lower individual limit of £30,000, do not benefit from any special rules regarding entrepreneurs’ relief and are subject to greater restrictions than EMI options when it comes to the terms upon which they can be granted.
  • Unapproved options – whilst they do not benefit from favourable tax treatment, they are still used where EMI or CSOPs are not available.
  • Phantom share options – these are simply cash awards linked to the value of a company’s shares, which often look and feel like share options, yet are taxed like a cash bonus.

This article was co-authored by Mark Nixon and Lucy Gleisner. Both are Partners in the Corporate team at Trethowans with experience in share incentive schemes.

If you are looking for ways to reward employee loyalty and would like to discuss how share incentives could be used, please call Trethowans on 0800 2800 421 or contact us here.

http://www.trethowans.com

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