I would like to incentivise my staff. How can I use simple, tax efficient share options?

The high cost of staff turnover

Retaining and motivating key staff is more important that ever before.  A performance related cash bonus has only a short term effect; it is estimated that the motivational benefits of a pay increase, or a bonus, last as little as 5 weeks.  Bonuses and benefits all cost hard cash, are taxable as income, and attract NI.  Team building events as a motivational tool have their place, but they are not everyone’s cup of tea.

Whilst the direct costs of recruitment and training are increasing all the time, more significant is the indirect cost of staff turnover.  Outgoing employees have their minds elsewhere and will inevitably slacken off.  Your key customers may follow them when they leave.  Some customers will fall prey to your competitors; others may simply use staff changes as an excuse to move on.  Yet further indirect costs are incurred as a result of the significant lead time (usually measured in months) before new employees become productive.

The cost of staff turnover is particularly high with senior employees who are not only vital to your business, but who can be difficult and costly to replace.

Why share options?

Share options provide an effective means of attracting, retaining and motivating key employees.  Share options offer the following benefits:

• Options give key employees a genuine stake in the business and therefore an incentive to ensure that it grows.
• As with shares, options create a sense of ownership, and an emotional bond between the company and the employee.
• However, unlike shares, options can be created so that they simply lapse if the employee leaves.
• Options can also be designed to take effect only when the company is sold.  This means that there will, in practice, never be any more shareholders.

The incentive effect of options can be compounded by rewarding employees only where the company’s value increases.  Options can also incorporate individual performance targets.

Options are simpler than most people think, and apart from the initial set-up costs, options are virtually cost and hassle free.

What is involved?

DFA Law provides a share option service to suit most businesses.  We carry out a full evaluation of available schemes, followed by a clear recommendation of the right one for you, normally in conjunction with tax advisers.

We will produce an assessment of the benefits and the costs, enabling you to make an informed decision.  We can then provide all documentation and regulatory approvals, so you don’t get tied up in red tape.

If necessary, we can present your scheme to your staff, giving them a clear understanding of the way your scheme operates, and clarifying the benefits to them.

For further information and a free quote, please contact our Corporate and Commercial team on 01604 609560 or email us at info@dfalaw.co.uk