Tax

Employee incentive structures that work

Dec 01, 2017
Tax-effective incentives may ease the burden on Northern Ireland businesses struggling to recruit and retain key talent.

In our most recent Quarterly Economic Survey in conjunction with Northern Ireland Chamber of Commerce, BDO Northern Ireland reported that recruitment difficulties were a major concern for local businesses with a staggering 81% of manufacturers and 71% of services businesses saying they had difficulty recruiting for positions in the second quarter of this year.

Recruitment difficulties – particularly in professional and managerial staff and skilled trades for manufacturers – place a burden on other employees and lower productivity. An inability to recruit and retain skilled employees also restricts business growth and lowers productivity. There is an apparent lack of appropriate skills and not enough applicants with the required attitude or motivation, according to our research.

Similar results were seen in the Future of Family Business survey, with the recruitment and retention of employees becoming increasingly difficult. An apparent shortage of appropriate skills, together with an uncertain future for EU nationals working in Northern Ireland and the potential impact of the national living wage, mean that some businesses are struggling to attract the right employees and retain the employees they have.

Employers are forced to be more inventive and generous in the benefits on offer as they work to retain key employees and attract the skilled workforce they require.

Incentivising employees

There are some basic points to consider when choosing which benefits to offer employees:
  • The benefit must be a real incentive (i.e. something the employee will be able to realise in due course);
  • The benefit must not be a disincentive for other staff;
  • The benefit should be capable of being withdrawn in the event of non-performance (if the employee leaves the business, for example);
  • The benefit will provide some tax advantage for the employee and/or the company; and
  • The implementation and administration costs must be proportionate to the incentive provided.

Many family businesses in Northern Ireland reported that retaining family control of the business was important. However, they are not averse to giving shares or share options to key non-family employees. In fact, many realise that they may need to offer
this type of incentive to attract key non-family employees.

There are numerous ways in which shares or share options can be used to incentivise employees, as outlined below.

Tax-advantaged shares scheme

An enterprise management incentive (EMI) scheme would typically be used to incentivise key management employees, although all qualifying employees can participate if the company so wishes.

In an EMI scheme, employees acquire the option to purchase a set number of shares in the company at a later date. Such a scheme would typically be used to incentivise key employees if it was anticipated that an exit event was likely in the future.

On a share sale, the employee would exercise her or his option to acquire the shares and immediately dispose of them. Provided they acquired the shares at the market value at the time the options were granted, the proceeds they receive on disposal should be liable to capital gains tax rather than income tax.

Growth shares

Growth shares are a separate class of shares and are typically used when a large number of staff wish to participate in the growth of the company, with a relatively low entry cost. Growth shares entitle the holder of the share to participate in the value of the company over a set hurdle i.e. the value of the company on the day the shares are issued plus an agreed hurdle. The growth shares have no entitlement to value on day one, as they only participate in the value once the company has overcome the hurdle. A low valuation can therefore be agreed with HMRC, allowing employees to subscribe for a number of shares at minimum cost. When the employees sell their shares in the future, the resulting gain should be subject to capital gains tax.

Awarding bonuses

Employees can also be rewarded with cash bonuses based on share valuations (also known as a phantom share scheme) or by reference to specific targets and objectives. The employee will be liable to PAYE and national insurance contributions on the bonus when paid.

It is important to have a share valuation mechanism in place if a bonus is to be paid based on the value of the company, or a method of evaluating performance if the bonus is to be paid based on performance targets. The benefit of this type of remuneration plan is that the employees can be rewarded while never actually owning shares or share options in the business.

Angela Keery is a Tax Director at BDO Northern Ireland.