Why do companies give employees shares?
Last updated: 17 April 2024
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I spotted some recent research from HMRC on Tax Advantaged Share Schemes (TASS). The report surveyed the opinions of employers, employees, and intermediaries, to evaluate the ways in which TASS is being used.
The research covered a range of schemes, including the Enterprise Management Incentive (EMI) scheme, which is the most tax advantageous way of sharing ownership for UK companies.
HMRC identified that there is room for improvement in the way that EMI schemes are communicated, set up, and administered, which would increase uptake.
In this article I’ll explore HMRC’s findings to understand the benefits and drawbacks of the way businesses are currently using EMI, before looking at how their usage can be improved.
EMI is the most popular TASS initiative offered by the UK government, and for good reason - the benefits to employers and their teams are significant.
The full range of these benefits is only realised when the scheme is implemented and communicated effectively. This is one of the key reasons that HMRC commissioned the research into TASS.
The objectives the research were to:
In pursuit of these, HMRC identified a number of positives and negatives in the way that EMI schemes are currently being used.
1. The employee engagement effect
HMRC found that employees were more engaged, motivated, and loyal when they received options under the EMI scheme. This is consistent with the results of our employee equity survey, which found these to be some of the key benefits of the scheme.
If employees have a slice of the action, they are more invested in the performance and success of the business as a whole. Ownership changes attitudes and behaviour, in a positive way.
2. The recruitment effect
Employers commented that attracting and retaining employees - especially those who are highly skilled - was easier with EMI in place. In certain situations, offering a potential key hire equity can help to bridge the gap between the salary offered and the new recruits expectations, allowing employers to remain competitive.
3. The culture effect
The impact of sharing ownership on company culture is huge. As well as increased motivation, share schemes also build a collectivism that supports camaraderie and builds stronger teams. This kind of alignment is increasingly important for remote-based teams.
In the interviews HMRC conducted it was also identified that employees who are rewarded with EMI options felt a greater sense of job security, which is a key determinant of a healthy work environment. Employees commented that they felt that they were seen as “more than just an employee”.
1. The communication breakdown
From the research it is evident that employers and employees both share concerns around how EMI schemes are communicated within their organisation. For employees, their view is that communication from their employer is minimal. For employers, they often rely on intermediaries to handle communication with their employees.
Ultimately, the full benefits of EMI can only be realised if the benefits of the scheme are well-communicated within an organisation. To maximise the benefits already mentioned, employers need to ensure that their employees (both current and prospective) are aware of what EMI could really mean for them.
2. The outsourcing dilemma
Another area for improvement is the cost of outsourcing EMI schemes - especially to accountants and lawyers. While many respondents acknowledged the relative cost-efficiency of setting up an EMI scheme, one intermediary interviewed quoted an eye-watering £20,000 - £30,000 for an EMI scheme set up. This is madness, given that it costs as little as £150 per month to set up and manage a scheme on Vestd.
3. The knowledge gap
Perhaps one of the biggest challenges for employers and employees interviewed is understanding EMI and its benefits. Part of this problem is created by poor communication internally, but the remainder is a result of the tax laws and processes surrounding equity being complex.
Helping employers and employees to better understand equity in general is one of the reasons why we built our platform, and so we fully acknowledge that this is a bigger issue.
A key objective of HMRC’s research was to understand how the process of administering EMI schemes might be eased. From their findings it is clear that employers believe relaxing the EMI eligibility requirements and restrictions would support growth in uptake.
For example, increasing the threshold beyond 250 full time employees, or raising the gross assets ceiling to above £30m. In addition to this, allowing certain industries, who are currently ineligible, to participate would definitely open a lot of doors.
There are considerable positives to celebrate in this research. The fact that both organisations and their teams are experiencing success with EMI is encouraging, and the advantages highlighted in this research show the power of EMI, when it is done right.
It also demonstrates that there is still some way to go in really nailing EMI down. Schemes need to be communicated more effectively, and understanding needs to be improved among employers and employees alike.
Finally, organisations need to stop paying ludicrous sums to accountants and lawyers for the management of schemes, when it can be done far more effectively by a specialist provider. If you would like to learn more about doing EMI right, then do holler and we’ll get to work.
You can read the full report on the HMRC website.
Last updated: 17 April 2024
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