When it comes to incentivising employees (we’re talking money or money’s worth!), there are many options to consider which cater to the different objectives behind putting a reward scheme or arrangement in place. Sometimes, the main goal will be to allow employees as a whole to share in the success of a business and encourage loyalty; at other times, incentives will be chiefly aimed at motivating and retaining ‘star’ performers. Sales and financial services are obvious examples of an activity and a sector, respectively, where commission and bonus structures tend to reward individual achievement. Incentivisation may also feature in succession planning by encouraging employees to take a stake in the employer’s business.
Larger organisations generally tend to have a ‘multilayered’ approach to incentives and may offer cash bonus schemes as well as share schemes and/or options, plus a host of benefits in kind (e.g. health insurance and pension contributions). An employee’s remuneration may, therefore, comprise various elements, with actual salary accounting for a significant, but not overwhelming, proportion of the total reward package. For listed companies and those in regulated sectors there may be additional factors to consider when determining an appropriate reward structure. These might include, for example, shareholder expectations in relation to performance and policies on variable remuneration that reflect EU requirements (and which may be applied by analogy to an international group’s Isle of Man executives).
‘Smaller businesses can often offer the greatest flexibility and opportunity for employee development’
For smaller employers, the balance to be struck usually involves keeping things simple (so as to avoid disproportionate expense and time administering, say, a bonus or long-term incentive plan) whilst still rewarding and incentivising staff effectively. However, smaller businesses can often offer the greatest flexibility and opportunity for employee development, sometimes resulting in the employee acquiring a significant ownership interest or even, ultimately, taking over the business. In determining the appropriate form of employee incentive, the tax and national insurance treatment will be relevant. Cash bonuses (usually treated as earnings) are generally subject to both income tax and national insurance contributions for both employer and employee. Other forms of incentive (such as shares) may be a more efficient way of delivering benefits to employees depending on how they are structured. For example, benefits arising from an approved Isle of Man sharesave or share incentive plan are exempt from income tax by virtue of an extra statutory concession. Such schemes would, though, require pre-approval from the Isle of Man Treasury and would need to comply with applicable legislation. Of the two, the former is the more common and with the opportunity to now save up to £500 a month in an approved sharesave scheme, these incentives are particularly attractive and readily taken up by employees. Other examples of share-based incentives include conditional share awards or awards of forfeitable shares, which may be more favourable than cash from a national insurance perspective and, potentially, from a shareholder/market perspective.
Ultimately, giving employees shares requires careful consideration: what rights will attach to the shares? What happens if the employee leaves the company? In what circumstances (other than the employee leaving) might the company want the shares back? Will the employee get the benefit of the shares immediately or will vesting be staggered or deferred? The reward scheme rules or shareholders’ agreement will require careful drafting and it is highly recommended that the employer take legal and tax advice to ensure the scheme meets its objectives. For smaller (unquoted) companies especially, proceeding in the absence of professional advice could lead to a real headache in trying to ‘unwind’ share transfers, particularly faced with an un-cooperative employee shareholder!
Despite this, the popularity of these types of arrangement continues to increase as they offer potential advantages to the Holy Trinity of employer, employee and shareholder. It is unsurprising, then, that the UK Government has been championing the “John Lewis economy”. For the moment, aligning the interests of all three stakeholders resonates with policyholders seeking to encourage growth in the context of responsible capitalism. In this regard, the share plan looks likely to become an integral part of future employee benefits.
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The guidance in this note is for information purposes only and is not intended to be exhaustive. It is not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Cains accepts no responsibility for any errors, omissions or misleading statements or for any loss which may arise from reliance on the information in this note.