The Benefits of Share Option Schemes – for employers and employees, by Director Phil Scott

Phil-editAt our recent NWFD Network event in Lancashire, event partners Moore and Smalley and guests Napthens presented on share option schemes.

The two main contributors to the success of these schemes is; making sure you have the right legalities in place – and this is where Keith Melling from Napthens helped out on the day, and making sure they are as tax friendly as can be – which was outlined by Tony Medcalf of Moore and Smalley.

There can be benefits to all parties of these schemes, whether it is to reward, retain and motivate staff or to be more tax efficient and avoid the cash outlay of more traditional incentives such as bonuses.

There are several types of schemes that employers can offer to staff;

  • Direct share ownership which involves potential cash input from the individual and them gaining the right to speak and contribute as a shareholder.
  • Share option schemes which mean that employees are offered the right to receive shares in the future – these are more of an incentive to staff to work towards and avoids certain issues, for example if staff leave the offer is simply lapsed.
  • EMI (Enterprise Management Incentives) which has no cost to the employee or employer allows for low tax bonuses.

The secret to the success of any of these options is having the necessary legal agreements in place.

It should be quite a straight forward agreement but this will depend on the makeup of the business. All agreements are looked at case by case so that situations are considered and documents are put together in exactly the right way to benefit the business.

Factors to consider and outline – often presented in a staff handout type document, include;

  • The price per share
  • The number of shares available per employee
  • Performance criteria or conditions for exercising share option
  • Qualifying period – number of years in role
  • Logistics around departing staff or sale of company
  • Share transfer restriction
  • Dividend policy

Critical documents needed in addition are articles of association and a shareholders’ agreement.

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