Employers always need to keep their key staff because the health of the business often depends on them. In today’s tough economic climate, it is even more essential that staff turnover at the senior level is minimised to avoid disruption. Inflationary pressures also dictate that staff will want (and even expect) higher salaries year on year and, currently, many employers will find it difficult to pay increased salaries without jeopardising the core business. How can these two opposing pressures be reconciled?

Paying extra cash need not be the only solution. Help is at hand in the form of a share options. HMRC have a number of different “approved” share option scheme formats which would allow employers to remunerate staff using equity shares in a highly tax-efficient manner. The employer grants the employee an option to acquire a certain number of shares, which can be exercised at a particular time; the employee pays today’s market value for the shares under option at the time (in the future) he exercises it. If the value of the shares has increased between the date of the award and the date of exercise, this gain would be free of income tax and NICs. A reduction in the employer’s tax bill for remunerating staff in this way may also be available.

In general terms, share prices today are relatively depressed so the market values of shares are lower – meaning that granting options now makes these arrangements doubly attractive. An arrangement can be made only for certain individuals (like senior management) or for all staff generally if appropriate and, whilst there are limits on the benefits that can be provided, this could be the solution to retaining staff and providing extra motivation – after all, if through the employees’ hard work the company survives and grows in value, the employees and the company both stand to benefit.

Whilst it may sound like a legal minefield, we have significant experience of designing and implementing structures which provide real benefits to employees which take advantage of the detailed legislation. We give clear advice in understandable terms which will allow clients to plan their remuneration strategies effectively.

It should be stressed that this note is intended as a general update only and further legal advice should be sought on the matters raised.

Posted: June 1st, 2009 under Corporate Finance, Employment/HR.
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