To some people, it may be obvious, but you may wonder why should shares be considered better than cash or other benefits? Evidence from various studies shows that share schemes work. There are various reasons.
For some companies, share schemes are selectively used to help align the interests of key staff members with the overall objectives of the company. In other companies, such as here, share schemes, including the Share Incentive Plan (SIP), help with company culture by encouraging everyone to contribute.
When staff is given a direct interest in the company, they have more reasons to care about the company’s performance. Employee motivation increases, which causes a boost in the company’s value. This is a win-win situation.
Attracting New Staff
Remuneration isn’t just about pay any more. Potential recruits look to see which benefits are offered by potential employers. Many companies offer medical insurance, critical health and/or other benefits.
A growing number of employers offer pension contributions. However, many clients find that these benefits do not get the same attention as employee share schemes.
A successful share scheme offers the promise of significant financial gain within a short period of time, which may be between three to five years. This is a more tangible benefit than an insurance policy or a pension plan.
We often come across companies who pay a fortune in bonuses, with most of that money going to pay taxes. The taxes on share scheme gains are typically taxed at a lower rate than cash bonuses or salaries.
The highest capital gains rate is 28 percent; however, the highest income tax rate is currently 50 percent. And for some, the actual tax rate may be as high as 60 percent if their income is between £100,000 and £112,950. The lowest capital gains tax rate is only 10 percent.
This comparison is made sharper considering that on top of income tax, both employers and employees must pay National Insurance Contributions (NICs). The employer rate is typically 12.8 percent (this will soon increase to 13.8 percent). At this level, the tax burden is burdensome, which is why many companies consider alternatives.
One main feature of employee share schemes, particularly the share option schemes, including the Enterprise Management Incentive (EMI), is that if an employee leaves, they will sacrifice part, or all, of their benefits. Many clients insist on including this restriction.
This means that as the benefits mount, participants in the scheme have a good reason to stay and help build the value of the company for all the shareholders. In other cases, clients may stipulate that the benefits can only be made available after a participant has served a minimum period, which is sometimes called a “loyalty” period. This is typically 2-3 years. The client may also use a performance target as the criteria. The Company Share Option Plan (CSOP), is a tax-efficient, government approved scheme that has a minimum statutory 3-year exercise program.
Succession planning is a major concern for many private companies. Many shareholders and directors are unsure of how to address this problem. With a share scheme in place, companies can allow the members of staff to hold a larger share of the company. This means they can effectively begin to take control.
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