You will probably have key consultants or members of staff whose expertise are paramount to the future success of your business. In most cases these people will be rewarded by way of annual bonuses, commission schemes and/or attractive salaries. An alternative is to look at equity based incentive schemes, which whilst involve some complexity, do work well in terms of keeping your best people working alongside you. Here you can find some facts on the most common equity based incentive schemes.
An Enterprise Management Incentive (EMI) Scheme is a motivational plan for employees, whereby you grant the key employee the option to acquire an equity stake at a set exercise price at some point in the future (normally when the company is being bought by a third party).
Some facts on the Enterprise Management Incentive (EMI) Scheme:
This scheme can be used to give options to employees to buy shares in their employing company. Typically the options must not be exercised within 3 years of grant in order to qualify as CSOP options, and in order for their to be no PAYE charge the exercise price must be no less than the market value at the date of grant.
The cumulative value of options granted to an employee must not exceed £30,000 at the date of grant.
Employee enters into a 3 or 5 year contract to save between £5 and £250 per month in the scheme. At the end of the savings period the money is used to buy shares at a fixed price, which may be set at up to a 20% discount. These are not popular schemes for small companies, they are more popular in larger businesses.
In essence the employee gives up certain employment rights in return for tax advantages on acquiring shares in the employing company. The shares given to the employee must be worth at least £2,000 (no upper limit) BUT only the first £2,000 of value will qualify for an exemption from a PAYE charge. On a subsequent disposal, up to the first £50,000 of employee shareholder shares acquired are exempt from capital gains tax up to a limit (in terms of gain) of £100,000.
SIPs are a very tax efficient way of giving small numbers (low values) of shares to employees as a long term incentive. But they are required to be ‘all employee’ schemes (all on the same terms) so there would be no way of using the scheme to distinguish your target employee from the other employees of the firm.