Behind most successful business is not only a highly motivated leader but also a high performing team of individuals who have bought into the company’s mission statement and who are hopefully there for the long term.
For those business owners seeking success there is nothing more frustrating than finding that key person only for them to leave you.
The loss of a key person damages existing customer relations, results in a significant loss in productivity (as you battle to hire a new team member or retrain existing staff to cover or takeover their duties) and takes you away from your main goal of building the business.
The frustration is immense. So what are the solutions?
Firstly, let’s analyse what factors result in people leaving their job. Surprisingly it’s not usually just because of the money. The key reasons include the following:
- Poor relationships with their boss.
- Boring and unchallenging work.
- Relationships with co-workers.
- Lack of opportunity to use their skills and abilities.
- Failure to recognise the contribution of their work to the company’s business goals.
- A lack of autonomy and independence on the job.
- A lack of understanding of the meaningfulness of the employee’s job.
- The financial instability of the company.
- The overall corporate culture.
- Employee recognition- i.e. the money!!
As a business owner you should strive to build a strong mission statement, work with your team to find the right people and keep them motivated and fulfilled and develop a great corporate culture. If so you will go a long way to keeping your team together.
But what if there are one or two team members who are so important to the business that you can’t afford to lose them under any circumstances?
Well you could throw money at the problem and we have seen this done successfully on many occasions. For example a highly successful construction client has two quantity surveyors who were both paid in excess of £100K. They are earning far more than they could elsewhere and remain loyal to the company to the current day.
Beware however of bonuses and profit shares. They are fine but they have to be earned and are dependent on the success of the business. It just needs one glitch for earnings to drop and the team member could be off!
So what about shares in your business?
Firstly, we would not recommended a straight gift of shares in your company. The shares usually have considerable value. Think of this in cash terms as the tax man will. If the shares are worth £50K would you give £50K to this person to keep them? If you do there will be tax implications and who is going to pay the tax? More importantly, once the employee has your shares what guarantees have you got that he will continue to perform as before and if he leaves how do you get the shares back?
Giving away shares is hazardous from a tax and business perspective so please talk to us before doing this.
One way around this could be to set up special shares, such as growth shares, where the shares have little value now but are entitled to a share of the future growth in value of the company. This can be a great way to avoid the initial tax problems of giving away value and furthermore it protects your current investment. We have successfully carried this out for a number of clients. However there are capital gains tax issues as under the new rules Entrepreneurs’ Relief (ER) will probably be denied on any future sale of the shares (i.e. under current rules the employee pays 20% tax rather than 10% tax on the gains if ER is available).
Giving share options is another way. We favour the Enterprise Management Scheme (EMI) for owner-managed businesses.
The EMI scheme is great for incentivising employees. No shares are physically transferred initially, instead the employee is granted an option to acquire a fixed number of shares at an agreed value and time and is therefore incentivised to grow the business above this value. The option usually only lasts for as long as the employee stays with the company, and can be restricted so that it could only be exercised say on a future sale of the whole company.
There will be no income tax or national insurance payable in connection with the grant or the exercise of the option, provided the agreed share price is no less than the market value at the date the grant is made. From a capital gains tax point of view EMI shares have advantages too. In order to claim ER there are two exceptions to the usual qualifying rules:
- The shareholder does not need to own 5% of the company to claim the relief, in fact there is no minimum holding that needs to be disposed of for EMI shares to qualify for ER.
- The holding period starts when the option is granted, not when the option is exercised. That means that provided there are at least 2 years between the date of grant and the disposal, ER can be claimed. Effectively exercise and disposal can be on the same day, and quite often is in the case of company buyouts. That way the employee never has to put their hand in their pocket to pay for the shares but pays the agreed exercise price out of their sale proceeds.
A word of warning – there are stringent reporting requirements attached to EMI schemes and failure to comply will result in a loss of the generous tax reliefs.
We would always recommend that you seek professional advice when considering any transactions involving business assets to ensure you maximise the reliefs available and minimise your tax liabilities. If you would like help with incentivising your team please contact Jan Friend on 01634 731390 or at Jan@friendandgrant.co.uk.
The content in this blog is correct as at 11/06/2019. See terms and conditions.