An employee share scheme is a common method of providing employees with an incentive to help improve a business and its performance.

As employees normally have to remain with the business to get this benefit, share schemes can encourage loyalty and therefore assist with retaining your best people. They can also act as an incentive or reward to aid recruitment. HM Revenue & Customs' (HMRC) tax-advantaged (approved) schemes are a tax and National Insurance efficient way to offer employees shares in the company.

Employers often consider setting up an employee share scheme to:

• Motivate employees to become more productive;
• Align employees' interests with those of shareholders;
• Recruit or retain key employees;
• Compensate for lower salaries and relieve pressure on cash flow;
• Remunerate employees in a tax-efficient way;
• Increase loyalty and reduce staff turnover;
• Raise working capital; and
• Realise the owners' investment.

That said, share schemes are not always the answer for all businesses. Considerations before introducing any equity based arrangement should include:

• The effect on morale and retention if the share price subsequently falls;
• The immediate term costs of drafting and seeking approval of any arrangements with HMRC;
• The medium term costs of managing the scheme and keeping records;
• The longer term costs of dilution of share ownership - as more shares are issued each share you own will reduce in value in the shorter and potentially longer term;
• Confusion in announcing the new arrangements resulting in unrealistic expectations among employees of the financial rewards;
• Allowing shares in an unlisted company to come to fruition through an internal market for the shares such as an employee benefit trust; and
• Making best use of tax advantages for HMRC approved schemes.

Employee share schemes can involve giving free shares to employees, granting them options to buy shares at a specified price after a specified period of time, or allowing employees to buy shares, and sometimes matching these with free ones.

To tailor a share scheme to the needs and goals of your business, you can:

• Make the award of shares or grant of options dependent on reaching certain targets or milestones;
• Structure the scheme so that employees become entitled to shares only if you sell or float the company;
• Limit the scheme to certain key employees, e.g. those with the right skills to move your business forward;
• Require a certain number of years' service; and/or
• Run a combination of schemes or provide more favorable terms for key executives.

The type of share arrangements commonly adopted for senior executives are Company Share Option Plans (CSOPs) and Enterprise Management Incentive Schemes (EMIs).

For further information please contact the Cobia team on 0845 226 0580 or email info@cobia-uk.com