It is common practice for successful, high performing companies to provide shares to key employees. In many cases, the amount provided is quite a small portion of the business’ total share capital; between 10% and 20%, although the percentages can be larger or smaller.
However, consideration is needed to ensure successful division of equity. Businesses should think about:
1. Which employees are given shares in the company
Share scheme participation usually happens in one of two ways: shares are given to key members of the business only (such as those in executive positions), or shares are given to each employee. There is no right or wrong, but it is important for businesses offering shares to each member of staff to remember that it can sometimes be more beneficial to offer more to key members to reduce departure risk.
2. How much of the share capital is for employees, and how much each employee receives
Once again, there is no right or wrong here. However, of the average 10% - 20% of share capital that is typically set aside for employees, it is generally taken as standard that those in more senior positions will receive greater equity. For example, a senior executive may receive 3% ownership, while a software developer receives 0.1%. Shares should always be awarded by number, however, not by percentage.
3. How division of equity will affect the way an employee views the company
This can be a tricky area. Some employees — particularly those who show a strong desire to work for a small business and experience small business culture — may be happy to forfeit a highly competitive salary in return for part ownership of the company, leading to potential future rewards. However, this all depends upon the individual, and some employees may prefer a higher monthly salary.
4. Ways in which to divide equity in a tax effective manner
Under existing Government schemes, it may be possible for businesses to ensure that shareholding employees are liable for a tax rate of between 10% and 20% upon sale of shares only. In addition, it may be possible for a business to apply for Corporation Tax relief for any employee gains. Fortunately, the Government fully supports employee equity, and supports businesses in providing these incentives.
5. What type of awards are used to acquire shares
Finally, the Enterprise Management Incentive (EMI) and growth shares are both highly tax effective awards options for businesses to consider. Whichever type of award scheme is selected, businesses should aim to ensure that the scheme successfully motivates employees by offering greater rewards for extended length of service, but also that it remains simple to claim back equity upon employee departure.