Businesses that have worked hard to build their brand commercially and spent time and effort on the product, service, marketing and customer experience must consider how to reward the people behind the brand. Every great brand is dependent upon a variety of talent to help launch, scale and sustain its success , so the right incentive, reward and employee experience is important. There is no one-size fits all approach and a more curated offer is the most sensible approach to maximise engagement from a workforce.
Below, we take a look at the considerations employers might wish to consider and the actions that might be needed to help bolster brand loyalty within an organisation.
The concept of ownership has changed enormously in recent years. 'Generation Rent' see the prospect of home ownership as out of reach and a higher proportion of income than ever before spent on rent. Music and films are now mostly streamed, and books are viewed digitally or listened to as audio (the minority now owning hard copies). Cars are leased or rented by the hour and artwork and currency are going digital. The circular economy, cost of living crisis and sustainable environmental goals mean even our fashion items can be rented by the day. For those entering the workforce in more recent years, their employer might be one of the few places where they can become a co-owner, via an employee share scheme.
Employee share schemes are certainly complex but the benefits are significant. Talented staff then no longer see themselves as mere tenants in a business but as co-owners who can benefit additionally from the capital appreciation of value-add contribution and innovative enhancements they have designed, created, launched and sold.
Under this model, businesses pay a normal salary and may offer a cash bonus short-term incentive as additional variable pay for year on year above expectation performance. An equity incentive provides a medium to long-term reward for supporting attainment of the more strategic aims of the business and can help to retain and motivate over that longer period. At maturity, it can deliver very meaningful reward – perhaps allowing a junior member of the team to pay-off their student debt (or otherwise enabling social mobility), alleviating concerns about funding eldercare, enabling philanthropic gifting and much more.
What is the plan?
There are tax and legal considerations to consider that differ when looking to reward executive directors and employees or if non-executives, consultants and contractors are to be offered equity.
Eligibility for certain plans will depend upon whether participation includes all employees or is more selectively targeted on a discretionary basis. The profile of the business will also dictate which, if any, tax-advantaged statutory plans are viable having regard to the qualifying criteria.
For an independent entrepreneurial business with less than 250 employees, the Enterprise Management Incentives (EMI) will likely be the plan of choice if the other qualifying conditions can be met. This is a world-leading tax-advantaged share option plan that is flexible in design. Correctly structured, employees should only pay 10% tax on gains realised under this arrangement. Beware however that there is some devil in the detail and it can be easy to inadvertently lose the tax favoured status. Taking expert advice at regular intervals throughout the life of the plan is key. Recent changes to HMRC guidance on use of board discretion under EMI plans is just one example of a potential trip hazard.
Recent changes to the Company Share Option Plan (CSOP) mean businesses that have exhausted EMI limits or don't qualify for EMI should consider if CSOP will now meet their needs.
Private equity backed businesses might use a growth share arrangement to incentivise senior management in a manner that should provide reward in a form subject to the more favourable capital gains tax regime, rather than a cash bonus or non-tax-advantaged option which would have a higher tax charge as income earnings.
Buy one get one free
Larger employers looking for an all-employee plan might look to the 'BOGOF' of the share plan world in the form of the tax-advantaged Share Incentive Plan (SIP). This is a tax-advantaged plan that offers a modular basis for providing equity incentives. The employer can choose, year on year, whether to offer Free Shares, Partnership Shares (with or without Matching Shares) and if there are dividend payments then these can be reinvested in Dividend Shares.
A typical offer might be that for every Partnership Share bought an employee receives a Matching Share at no further cost (i.e. buy one and get one free). This plan has a five-year maturity period to deliver benefits tax-free, although there is currently lobbying afoot to have this period reduced.
Cash and culture
Equity incentives best support the medium to long-term retention strategy and commercial goals. For the nearer term objectives, it is important for businesses to get the basics right. That means thinking about how base pay offers are positioned relative to competitors and ensuring their workplace culture will appeal to a diverse workforce. In this regard, cash is not always king. Flexible working, ethical supply chain and progress towards carbon neutrality may be matters your future talent now scrutinise more closely when selecting their employer of choice.
Communicating a compelling total reward proposition that includes setting out the learning and development investment spent in training employees is important. That action can help them to understand the total value of their remuneration offer, as, without a total reward statement, it can be easy for employees to just compare baseline salary when lured by a role elsewhere and overlook all the other benefits.
A robust approach to job specification, roles architecture and pay banding can also be the foundation to mitigating risk when it comes to equal pay claims and is a way to bring some rigour to pay governance. Getting base pay wrong can not only create financial risk but also lead to significant reputational risk – being on the wrong end of a national minimum wage compliance failure can result in naming and shaming by HMRC. Customers and future talent will judge those businesses harshly and it is important to take prudent steps to ensure compliance.
Get in touch
For further information, contact Liz Hunter, Partner in Incentives.