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Enterprise management incentives: their advantages in a time of uncertainty

Coronavirus has disrupted the economic well-being of businesses of all sizes and sectors, in many cases necessitating pay cuts, furloughing staff or cutting performance incentives such as bonuses. Matthew Poli, head of corporate – London at legal practice BLM, looks at an alternative solution to maintain staff loyalty

In a time when many companies are in survival mode, it is now more important than ever to ensure they retain top talent.

While a drop in revenue might limit a fiscal reward for employee hard work over such a difficult period, businesses are increasingly looking towards enterprise management incentives (EMIs) as an attractive alternative remuneration package.

It is a route that clients should consider if seeking employee benefit schemes during this time. For keeping hold of leading talent, an EMI can be a key weapon in a business’s armoury, especially if it is concerned that key talent is looking elsewhere if they have been affected by business restructures or if other remuneration packages have been reduced or halted. Without the need for an immediate fiscal injection, it can help galvanise internal relationships, particularly in times of uncertainty like these.

For context, an EMI is an approved employee share scheme that is available to most trading companies – with the exception of those in banking, farming, property development, provision of legal services and shipbuilding – that allows employers to grant tax-efficient share options to key employees.

Unlike unapproved shares, an uplift in share value is not subject to income tax, and any subsequent disposal of EMI shares falls within the capital gains tax regime; therefore, any uplift in their value is subject to lower rates of capital gains tax.

Since the introduction of EMIs in 2000, there has been a host of changes to make the scheme more attractive and ensure those utilising the scheme have been provided with additional protections amidst the pandemic.

On 21 July, the government published draft legislation aimed at ensuring that employees whose working patterns were disrupted by Covid-19 will not be disadvantaged by EMI rules. Pre-pandemic, a qualifying requirement of the scheme is that employees should work no fewer than 25 hours per week at the business, or if less, at least 75% of their working time.

For options granted before March 2020, employees will now remain qualified if they were placed on furlough or unpaid leave, or were required to work reduced hours. This is, of course, important because a ‘disqualifying event’ would ordinarily result in the loss of the scheme’s tax benefits. It is worth noting that it is an obligation of the company and the relevant employee to retain evidence of the reduced hours due to Covid-19.

There will inevitably be cases where an employee’s contract has been terminated as a result of Covid-19, whether they were made redundant or perhaps contracted the virus. In the latter case, if the employee was unable to work for an extended period of time, or has died, the scheme rules will need to be checked to ascertain the impact of the event on the option. In such a case, the option holder or their estate should take advice about the impact on them of the option.

A key incentive

At BLM, we have spoken with a range of businesses on restructuring as a result of Covid-19, and much of that has related to employee restructuring. With a downturn in business, shrinking of markets and faltering customer confidence, businesses have needed to look more carefully at worker deployment.

EMIs, alongside other tax-advantageous schemes, should be considered as part of the positive side to a restructure. Whether or not an employee is affected by a restructure, it is important not to lose sight of the impact that will have on them and the way they view their employer. Even if an employee has been furloughed or placed on reduced hours or pay for genuinely business-critical reasons, it may be that they feel ‘hard done by’ or that they have been treated unfairly. In such cases, the employee’s loyalty and goodwill towards their employer could be eroded, making them vulnerable to leaving when the opportunity arises. It goes without saying that any restructure needs to be handled with care, but often the perception of events by those affected supplants the reality of the exercise.

Key, value-generating employees will need to be retained when the pandemic is over, and acting to secure them now is something all companies should consider. If a company qualifies for an EMI scheme, it can be a relatively simple and cost-effective measure to ensure that employees are tied to the company for the long term, and feel that they have a stake in its future success. The granting of a qualifying option can be used to offset the ‘pain’ of furlough or a salary reduction, and allows an employee to feel part of the company’s onward trajectory, irrespective of the short-term challenges it faces.

An EMI scheme should be considered as part of a Covid-19 strategy and as a means of managing the impact of the pandemic generally. While not something to be entered into lightly, such a scheme remains a cost-effective, cash-efficient way of securing key employees, driving value and growing a business in the time of coronavirus.

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