How can family-owned businesses attract and retain key employees?
29 July 2024
Employees are frequently considered a business’s most valuable asset and can be instrumental in its success. Ensuring employee satisfaction, particularly through a remuneration package, is crucial. A well thought-out and measured package aids in recruitment and retention and helps to align the interests of the employees with the company, fostering growth and profitability. This is just as true for family-owned businesses (FOBs) as it is for any other business.
An increasingly common way to incentivise key employees is to enable participation in the business’s ownership by way of equity incentives. Whilst some FOBs are happy to use equity incentives, some either cannot or prefer to keep the shares within the family.
For such FOBs, there are alternative options where cash can effectively replicate the long-term rewards that equity incentives offer. Phantom share schemes and cash-based Long Term Incentive Plans (LTIPS) are options worth considering.
Phantom share schemes
Phantom share schemes can be customised to fit specific requirements, ideal for companies reluctant to award actual shares to employees or those that are wary of minority shareholders. Employees would receive either phantom shares or phantom share options, and a cash bonus is paid based on the value (or increase in value) of real shares (the value of which the phantom share mirrors) when (1) performance targets are met, (2) the company is sold, or (3) the employee leaves on good terms.
The tax implications of phantom arrangements mirror those of a regular cash bonus. Whilst no tax is payable on the award of a phantom share or grant of a phantom share option, any payments are subject to PAYE deductions. These payments should also be fully deductible for corporation tax purposes.
Long Term Investment Plans (LTIPs)
Due to their versatility, LTIPs are difficult to summarise. Typically, they are long-term plans to reward key employees upon meeting certain targets with payments made on a deferred basis. The rewards, which could be in the form of cash bonuses, shares or share options, may be gradually given over time or delivered as a single reward at a predetermined future date.
For FOBs, LTIPs are often structured using cash to maintain the company’s ownership structure. The company can design the LTIP using bespoke metrics to calculate the rewards, such as financial, strategic, personal performance, or even non-financial metrics such as ESG achievements.
Conclusion
Whilst phantom share schemes and LTIPs may not offer the same tax efficiency as tax-advantaged share schemes like Enterprise Management Incentive (EMI), both schemes are highly flexible and can be structured to reward participants when bespoke targets are met, often measured by reference to a formula. Such formulas can be designed to, for example, keep certain investments separate from other factors within the valuation and this is particularly useful for FOBs.
Both schemes are straightforward to establish and manage, with no annual HMRC filing requirements (unlike schemes such as EMI). However, care should be taken to model the outcomes from a cashflow perspective and consider the cost of valuing the business at regular intervals depending on how the plan is designed.
This article was first published in July 2024 in Kent Life.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2024.