I have just set up an Enterprise Management Incentive (EMI) Option Scheme for a (very happy) client and I have a number of others to set up over the coming weeks.
At a time when cash is tight, EMI option schemes are a cost effective and tax efficient way of incentivising key employees.
Here are just 10 reasons why I believe EMI incentives are a great way of incentivising key management:
- Employees feel valued as they may one day be shareholders in the business
- Employees feel like they’ve received a potentially lucrative bonus (but there is no cash outflow for you)
- Employees will start to treat the business like its their own – suddenly downtime and frivolous paper-clip fetishes are a thing of the past as such issues are chipping away at “their” capital growth!
- Employees are less likely to leave (as you will no doubt have built in provisions such that the share options lapse if they leave)
- Employees can have performance milestones built into the EMI scheme such that they can receive further share options if they do the right things in the business
- There is no tax suffered by the employee or employer on the grant of a share option
- You can agree in advance the market value of the shares at the date of grant with HM Revenue & Customs so that the employees can have certainty about their personal tax position
- Growth in shares under EMI are subject to more favourable capital gains tax rates
- Your company should receive a tax deduction on the difference between the market value of the shares at the point of sale and the exercise price
- You can structure the EMI options as ‘Exit Only’ such that the employees can only ever get their hands on the shares in the fleeting seconds before a sale of the company – so they can share in the upside of a share sale without hanging around the boardroom seeking to exercise their shareholder rights (albeit that they might only hold a handful of shares!) in the meantime.
Remember, the earlier you set up an EMI scheme the better as you can then peg the HMRC agreed exercise price down as low as possible before the company builds up in value over time.