In the current market, many of our clients are turning to shares and share options to help them bring in and retain the best people without having to ‘break the bank’ on salaries and bonuses. Employee share ownership has also been shown to encourage employees to develop an interest in the growth and performance of their employer and make a contribution towards its future successes.

Related: A guide to employee share schemes for small businesses

Share plans fall into two broad categories, depending on whether they are HMRC approved or not. Approved schemes offer certain tax advantages to both company and employees, although the Share Incentive Plan (SIP), the Save-As-You-Earn option scheme (SAYE) and the Company Share Option Plan (CSOP) tend to only be used by listed companies (plcs).

Enterprise Management Incentives (EMI)

EMI is a share option plan which the government brought in specifically to help small and medium-sized businesses compete with larger ones for the best talent. EMI plans are often based around a future sale of the company. On exit, the employee may be paying as little as 10 per cent tax from the sale of shares acquired under the EMI plan. The company may also be eligible to receive a corporate tax deduction on the gains the employee has made, which would be around 20 per cent. This means that EMI actually generates a net tax repayment (10 per cent paid by the employee, but 20 per cent relief for the company).

Unapproved share plans generally only provide tax benefits for either the company or the employee. Not surprisingly, they normally favour the employee. They may be based on share ownership or share options. The choice between the two depends on the company’s growth strategy.

A share option is simply a right to buy a number of shares at a given price in the future, making options particularly good for plans which are aimed at a sale or floatation of the business in the future. Share plans, which in essence mean share ownership, are considered a better way to tie in key individuals by making them a part-owner of the business.

‘Growth shares’ and ‘deferred shares’

These are examples of plans designed to minimise the upfront cost for the employee in terms of funding the share purchase and any taxation. They favour the employee from a tax perspective, while unapproved share options favour the company in terms of tax relief.

Companies may also consider ‘phantom share plans’. These are effectively a deferred cash bonus, but look and operate like a real share plan. They cut out a lot of the red tape associated with share ownership and enable private companies to produce a share price as easily and frequently as they produce management accounts.

Introducing shares or share options presents the business owner(s) with a number of issues, including the need to allow for the scheme’s set-up and running costs and for valuations. Importantly, they need to consider how much to give away – for virtually unfettered control, the owner needs to retain 80 per cent – and how to get shares into employees’ hands without an up-front tax charge. Other questions typically include:

• Do the shares qualify for dividends?
• With no market for shares in a private company, how do participants realise share growth?
• What happens with ‘bad leavers’ and ‘good leavers’?

Some employees prefer cash to shares or share options, as they want the security of having the money in their bank rather than a ‘promissory note’ of potential future riches in the form of shares. However, one has to question whether employees who are primarily focused on cash in hand would really be drivers of business growth.

In my opinion, while shares and share options can be a differentiator for the business in terms of recruitment, they should be primarily considered as a tool for attracting and retaining both the best and those who can think as a business owner/employee.

Further reading on employee incentives

• Innovating from within – Empowering staff at all levels of authority helps to contribute key ideas and strategies