23rd November 2018
Incentives are tricky. They’re obviously an important part of engaging your employees and retaining key staff. But it’s not always possible to offer bumper pay packages, especially in the cash strapped early days of your business.
And while a big paycheque is nice, even that doesn’t go as far as explicitly aligning your employees’ interests with that of the business. After all, a talented individual can just as easily take those talents elsewhere.
Here’s where an Enterprise Management Incentive (“EMI”) scheme offers an excellent addition to your employee incentive package; either as a cost conscious startup or an established business keen to retain your top performers. As a bonus, EMI schemes are a great, tax-efficient way to reward your employees with share options.
So let’s take a closer look at the benefits and requirements of an effectively set-up EMI share scheme.
Let’s start with requirements. EMI schemes are an HMRC approved employee share scheme available to most independent small- and medium-sized companies, allowing employers to grant share options as a reward and/or to retain and incentivise key staff.
The scheme was introduced in 2000, and in that time it has become even more attractive. But it comes with a few requirements. HMRC has a few conditions, which can be broken up into what’s required from the company, the employee and the share scheme itself.
For the company:
For the employee:
For the share scheme:
Firstly, EMI schemes have no cash impact. You’ll need to professional advice to set the scheme up, but once that’s done you can give employees £250,000 worth of share options at no cash cost to the employee.
This is particularly valuable to entities such as bootstrapped startups. Share options offers an easy, affordable way to incentivise and retain key people without having to match corporate salaries.
A developer, for example, who could earn more at an established company can be offered shares instead of a pay increase. So while the employee accepts a below market salary, the rewards from the share issue are potentially enormous and for the business, it helps retain a valuable asset.
All of this is very tax efficient. EMI share schemes are certified by HMRC. Tax valuations is a highly specialist area, but notably, providing the valuation follows case law and HMRC precedent, HMRC will often accept a lower valuation for employee shares issued under an EMI scheme.
EMI share schemes are an appealing, simple way to reward your employees. But setting it all up comes with its risks. Getting it wrong could mean HMRC invalidating your scheme, leaving your employees with a big unpaid bill.
That’s the key thing to remember, after all: When EMI share schemes go wrong, it’s the individual, not the business that suffers.
That eventuality is easily avoided, however. With the right advice and insight, setting up an EMI scheme is safe, easy and, for your employees, immensely rewarding.
Propel can help you implement these schemes within your business. Get in touch with us to find out more.