What share plan is best – five questions to ask!

If you’re just starting to think about rewarding employees in your company with shares, it can be difficult to decide what’s the best plan for you.  There are a variety of plans to choose from.  Some plans are tax efficient, and you can tailor many of them to you and your business.

Here are a few pointers to get you on the right track.

Do you want to offer your share plan to all your employees?

If you want to share ownership with all the employees in the company, the Share Incentive Plan (SIP) might be the plan for you.  As well as being very equitable, SIP is incredibly tax efficient – ultimately it can deliver zero tax rates for the employees and the business. 

However, you can offer other plans to the whole workforce if you want to do so. For example, Enterprise Management Incentives (EMI) and Company Share Option Plan (CSOP) can be offered to all your employees.

You can also arrange for employees simply to buy new shares in the company.  However, using the plans above may help make share ownership more affordable or more tax efficient for your employees, depending on how much the shares are worth.

Do you just want to include a few key staff?

If that’s the case, you won’t be able to use SIP, as it’s an all employee plan.  But EMI and CSOP are both discretionary share plans.  That means you can include just a handful of people – or even just one key person.

You can offer different people different levels of equity under EMI and CSOP as well, so you can differentiate between roles and seniority, if you wish.

Do you want your employees to own shares directly?

If you want employees to benefit from dividends (or even voting rights), SIP will work for this as it enables employees to acquire shares.

EMI and CSOP are share option plans.  Options are just a promise to employees that they can buy shares in the future at a price set when the option was awarded.  They do this by exercising their right to the option.  Private companies will often grant options that are only exercisable if the company is sold, so that employees can then share in the sale proceeds. 

However, you can allow employees to exercise options and buy shares before a sale if you wish to.  For example, you could allow employees to exercise options after a certain time period, or if they have achieved certain performance targets.

Do you want to protect the value you’ve already built in your business?

If you’ve been running your business for a long time, it might already be very valuable.  You might want to protect that existing value, and make sure that employees can only share in future growth.

If that’s the case, you might want to consider Growth Shares (sometimes called Hurdle Shares).  You’ll need to create a new class of shares, which have special rights attached. This will ensure that if the company is sold, your original shares will be given priority over the Growth Shares.  Often that means that the original shares will be paid out first up to a certain amount (the Hurdle).  Sale proceeds that are received over and above the Hurdle will be shared among the original shares and the Growth Shares. 

As well as protecting the value you’ve already built up, Growth Shares can be an excellent way of motivating key employees, as they’ll only benefit if there is a significant growth in value in the company.

Do you want your employees to take over the business?

You might be interested in creating wider employee ownership – like John Lewis – but you might still want to get value for your life’s work. In that case, you could consider selling your company to your employees via an Employee Ownership Trust (EOT). 

The EOT is a special trust that can buy a majority (or all) of your shares in the company. It then holds the shares on behalf of all the employees.  You can protect your legacy, do the right thing by your staff, and you don’t pay capital gains tax on the sale.

How can we help?

RM2 has been advising private company owners on all types of employee ownership for more than 25 years.  Whatever your situation, and however many questions you might have, we’re confident we can help you.

Contact us on enquiries@rm2.co.uk to arrange a call with one of our specialist advisers, and we’ll help you find the right share plan or employee ownership solution for you and your business.