What is an Employee Share Scheme?
Employee Share Schemes allow company ownership to be shared among employees. You can choose to reward one or multiple key employees or all staff in the company. Additionally, governments from across the political spectrum have accepted that employee share schemes can help companies become more productive and profitable as well as improve the workforce.
With so many different Employee Share Schemes to choose from, it’s important to focus on what you want the Employee Share Scheme to achieve. At Legal Clarity, our Employee Incentives Team can help you with this process as well as identifying which Employee Shares Schemes are best for the company and its employees. Get in touch with us today for further support.
How do Employee Share Schemes work?
Although there are many different types of Employee Share Schemes they all operate in one of the following ways:
- Direct share ownership – Employees buy or are given shares in the company which are registered in the employees’ names, making them shareholders of the company and, depending on the type of shares they receive, they may be able to receive dividends on their shares, vote on matters needing shareholder approval, and join in any future sale of the company.
Advantages of direct share ownership include:
- Simplicity – Owning shares directly is easy for employees to understand.
- Increased engagement – Due to the employees owning part of the company.
Disadvantages of direct share ownership include:
- Risk for employees – The employee will either have had to pay something for the shares or pay tax when the shares are acquired, meaning their purchase of shares could result in a poor investment.
- Increased number of shareholders – This can increase the costs of running the business and may lead to employee shareholders becoming aware of matters that the directors would prefer to remain confidential.
- Share options – Employees are given the right to acquire shares in the future at a price determined today. Depending on the scheme, the options may be exercisable at a fixed point in the future, when particular performance targets are met, or when particular events (such as a sale of the company) occur.
Advantages of share options include:
- It’s risk free for employees – There are no costs or taxes when an option is granted, so there’s no risk to the employee until the option is exercised.
- Easy to deal with leavers – If an employee leaves, the option can simply lapse.
- Flexible – Depending on the scheme, options can be granted to different employees on different terms.
Disadvantages of share options include:
- Harder to understand – Just having a right to get shares in the future may feel less real to an employee than becoming a shareholder on day one.
- May become worthless if the share price falls – If the value of shares in the company decreases, the price payable under the option may be more than the value of the shares. Such 'underwater options' are not a good incentive.
- Indirect share ownership – A trust is set up to acquire shares and hold them for the benefit of employees. These are two main types of trust:
- An Employee Ownership Trust (EOT) will hold all or most of the shares in the company, meaning that no individual employee has any right to the shares. However, the trustees as the majority shareholders, must ensure that the company is run for the benefit of employees as a whole.
- Other Employee Share Trusts (also known as Employee Benefit Trusts or EBTs). Such trusts often run alongside another Employee Share Scheme acting as a warehouse for shares over which share options are granted or to provide an internal market for employees to buy and sell shares in the company.
Advantages of indirect share ownership include:
- Risk free for employees – The employees do not need to pay anything to be beneficiaries of the trust and may only have a tax liability if and when they receive cash or shares from the trust.
- Easy to deal with leavers – If an employee leaves there is no need to buy any shares back, as the shares are registered in the name of the trustees
- Keeps shareholder numbers small – The trustee is the registered holder of all the shares in the trust making ongoing company administration easier.
- Flexible - Shares held in an EBT can be used in different ways over time.
Disadvantages of indirect share ownership include:
- Administration costs – Once the trust is established there may be ongoing administration costs, e.g. fees to any independent trustee or trustee company or internal administration costs if the trustee remains in-house.
- Hard to understand – Many people are unfamiliar with trusts so may not understand what it means to be a beneficiary.
What type of Share Scheme is the right one?
Every company is different, and as your business grows an Employee Share Scheme that was suitable at one time may no longer be the best fit. Some arrangements may help a business looking to recruit new employees, others may help to retain existing employees and improve productivity.
Answering the following questions may help you identify which Employee Share Schemes are best for your company:
- Why are you thinking about an Employee Share Scheme? Is it for recruitment, to retain existing staff, or is there a particular goal that you want to achieve?
- Is the intention to sell the business in the next five to ten years, or do you expect the company to remain independent?
- How big is the company now, and how much and how quickly is it expected to grow?
- How large is the workforce? Do employees usually stay with the business for long periods?
- What do the employees want? Would they value being a shareholder and receiving income by way of dividends now, or would they rather have share options they can exercise on a future company sale and receive a cash lump sum?
Benefits of Employee Share Schemes
- They help attract the best talent - Offering equity in your company to employees can help you attract the best talent, as it can help you build a compensation package that matches or improves on offers they may have received from other companies.
- They can help retain the best talent - When employees have a stake in the company they’re less likely to leave. This will help save money by not needing to replace staff as often.
- They help reduce cashflow pressure - Employee Share Schemes can avoid depleting cash resources by offering employees shares or options rather than top salaries and bonuses.
- They contribute toward increased productivity and performance - Workers with equity in their company are more likely to feel responsible for driving the value of their company and are also more likely to hold their co-workers accountable. This often increases business value.
- It helps enhance employee engagement - Employee engagement and happiness is more likely to increase in companies with Employee Share Schemes, as they feel included in the mission and success of the business.
Disadvantages of Employee Share Schemes
- The initial set up takes time and money - Employee Share Schemes take a lot of planning, administrative and financial support during the initial set up. However, our team of experienced Employee Share Scheme Lawyers can relieve that administrative burden. We’ll be with you every step of the way to help you create the best possible Employee Share Scheme for your company.
- They can dilute the stake of existing shareholders - Providing shares to the rest of your employees can dilute the stake of existing shareholders. However different types of share schemes can be given to different types of employees to offset this.
- Share prices can fluctuate - The value of shares can fluctuate depending on market conditions. Nevertheless, they represent a dynamic opportunity for strategic growth while allowing employees to develop resilience and adaptability surrounding their financial planning.
Why choose Legal Clarity?
We offer comprehensive advice on the drafting, establishment, operation and ongoing administration of Employee Share Schemes for UK companies of all sizes. Whether you’re a start-up looking to use EMI options to recruit and retain employees, a larger business looking towards flotation or sale, or a fully listed PLC or multi-national, we’re here to help.
We can advise on and draft scheme documentation for both Tax-Favoured Schemes (SAYE Schemes, CSOP plans, Share Incentive Plans and EMI options) and unapproved option arrangements (including Long Term Incentive Plans, growth shares, jointly owned equity and unapproved options) which may better suit the commercial needs of a particular company.
We can advise on the drafting, establishment and ongoing operation of EBTs, including where the trust should be based (UK or offshore) and the choice of trustees. We also have a particular specialism in the establishment and operation of EOTs.
We are also happy to advise trustees or other third parties who are involved in the administration and operation of employee share schemes.
Contact us for an initial no-obligation discussion.
FAQs
Are Employee Share Schemes taxable?
The tax treatment of Employee Share Schemes varies depending on the type of scheme. Tax-Favoured Schemes are usually subject to lower taxes than other Employee Share Schemes, but there will normally still be some tax to pay. Everyone likes to save tax if possible, but the most important thing is to identify the company’s commercial objectives in establishing an Employee Share Scheme. We can then work with you to seek to satisfy those objectives in the most tax efficient way.
Are Employee Share Schemes worth it?
This ultimately depends on what you’re looking for, the circumstances of your business and why you’re choosing to implement an Employee Share Scheme. However, establishing an Employee Share Scheme that is right for your company and workforce can lead to:
- Increased productivity.
- Heightened employee happiness and engagement.
- Enhanced business value.
- Attracting and retaining top talent.