One issue facing any company is how to retain existing employees and how to keep them motivated. It is great to find someone who has the right skills, drive and determination to work in your agency but what can you do to keep them motivated and help prevent them from leaving, perhaps doing so to work for a competing agency? There are certain incentives that a company can offer to its key employees to help deal with these issues.
There are several different incentive options available (e.g. bonuses; shares and options for shares) but choosing the right one is best will depend on a variety of factors. One important factor to consider is which option offers the best tax treatment for the company and, ideally, the employee too.
You should ensure that tax advice is obtained before any final decisions are made as to which incentive option is chosen as tax rules frequently change and so what seems like the best approach at one time can quickly change.
One popular incentive is a share option scheme and, in particular, an enterprise management incentives scheme otherwise known as an EMI scheme.
EMI options issued pursuant to an EMI scheme are flexible and can therefore fit in with a company’s plans as opposed to the other way around. As no money has to be paid by the company to an employee on the issue of an EMI option it can often solve the issue of enticing an employee to join or stay at a time when the company may not have the cash available to pay a different type of incentive, such as a bonus.
EMI schemes are flexible and can therefore fit in with a company’s plans.
Issuing EMI options to employees seems like a good idea but what are the requirements associated with them? Below are some of the frequently asked questions about EMI schemes which should help give you some basic information to consider in determining whether it could be right for your business and employees.
1 Does my company qualify?
If your company is an independent trading company with gross assets of no more than £30m and has less than 250 full-time employees then the answer is most likely, yes.
2 Does the employee need to have a certain type of share under an EMI option?
Yes – the shares must be fully paid, ordinary shares for EMI option purposes. The shares can be issued by the company or transferred by an existing shareholder to the employee.
3 Who can EMI options be granted to and are there any restrictions on how many can be granted or held?
Any employee who works for a company for at least 25 hours per week (or 75% of their working time) can be granted EMI options. Each employee is limited to holding unexercised options of no more than £250,000 and a company cannot grant EMI options of more than £3 million worth of shares at any one time.
4 Do EMI options have to be exercised in a particular timeframe and, if so, what is this?
Yes, EMI options have to be exercised within 10 years of being granted and where an option holder dies, his EMI option must be exercised within 12 months of death. Because of this flexibility EMI options can be used in a variety of different scenarios e.g. sale of the company, hitting specific targets or a specified period of time.
5 Do I have to allow an employee holding EMI options to retain them even if they leave?
No, and it would be usual for the EMI options to contain wording which specifies that the options will lapse on the holder leaving their employment with the company.
The benefits of EMI options for both company and employee are dependent on certain conditions being met both when the EMI scheme is set up and when it is registered and so companies should ensure that they obtain the necessary tax and legal assistance to avoid losing the tax benefits associated with it.
Michael Budd is Partner and Head of Company Commercial at Longmores Solicitors.