Times are tough and many companies are struggling under the weight of cashflow pressures. As a result companies are looking at alternative ways of incentivising their employees to get business back on track and negotiate the new economic climate that COVID-19 has thrown us into.
Many companies are taking advantage of the dip in the market, knock on effect on their business and reduction in share price, to award equity to their employees at an affordable rate. In particular we have seen an increase in companies offering growth shares as a way of aligning the interests of key employees with those of shareholders. Typically speaking growth shares allow holders to participate in the growth in value of those shares above a set financial threshold. Provided recipients pay the market value of the growth shares on acquisition, there will be no income tax or national insurance contributions (NICs) to pay and any future gain will be subject to capital gains tax (CGT). The COVID-19 related fall in share price, has for many companies meant that for the first time growth shares have become a viable and affordable offering as a means to incentivise key employees.
We are also seeing an increase in the number of companies wanting to implement enterprise management incentive plans (EMI Plans). Awards under EMI Plans take the form of share options (a right to acquire shares at a point in the future) as opposed to day one acquisition of shares when using growth shares. EMI Plans are also tax advantaged which means that provided they meet certain statutory requirements any gain in the value of the shares realised when the shares are sold will be subject to CGT rather than income tax and NICs. In addition, employees may also be able to take advantage of entrepreneur's relief to pay a reduced rate of CGT (currently 10%). With less cash buying power, EMI Plans are a useful way for companies to attract and retain talent in tough financial times.
Putting aside the establishment of new incentive arrangements, there is no doubt that COVID-19 has impacted on existing equity incentive arrangements, with many performance targets ceasing to be capable of being met and/ or ceasing to be relevant. This can of course present a challenge for companies, but it can also present an opportunity to revisit plan metrics to ensure they are still relevant and effective. Whilst it is always necessary to keep an eye on tax when amending performance targets and plan metrics (to ensure you do not trigger any unwanted tax charges for participants and/or employing companies) it can also be a way of reinvigorating and reworking incentive arrangements in challenging times. As such, it is always important to, where possible, build a level of flexibility into incentive arrangements to allow for metrics and performance conditions to be amended in circumstances where they are simply no longer relevant.
If you have any questions in relation to existing or new incentives arrangements please contact Stephen Diosi, Caroline Nye-Wilkins or Sakhee Ganatra.