Enterprise Management Incentive share option schemes (or ‘EMI’ for short) have long been a useful tool for entrepreneurial fast growing companies that wish to both tie-in key employees and incentivise them tax efficiently with the promise of jam tomorrow in the form of a slice of the share equity.
The peculiar thing as evidenced from the chart above is the apparent lack of take-up by start-ups and SMEs – even ignoring the flat-lining in recent years which could be attributed to the general market malay – in that only approx 7,500 companies have an EMI scheme across the entire UK…! Which begs the question:
Before going any further, its worth having a brief recap on the key tax benefits of an EMI share option scheme for qualifying companies:
Admittedly the entrepreneur’s relief relaxations (which I have long banged on about!) are fairly recent changes; but still, the benefits are plain to see, compared to say unapproved share options which normally have income tax and NIC written all over them…!!!
Let’s not forget that for cash-strapped start-ups and early stage companies, the ability to give highly valued employees a stake in the company with no cost outlay is a huge deal especially in the current economic climate – also, note how the company can get a tax deduction (on the increase in value between the exercise price and market value) even though the company has not incurred an expense as such!
There is also flexibility as to how and when employees can exercise the EMI share options e.g. with some being structured as ‘exit only’ options (ie the EMI options vest only minutes before a sale of the company) and /or performance criteria can be included to keep the relevant employees on their toes!
Here’s my take from experience of talking to entrepreneurs about structuring tax efficient employee remuneration planning and EMI’s in particular:
What’s your experience of EMI option schemes (good and bad)?
Enterprise Management Incentive Schemes (EMI) are a great way of tax efficiently tying in and incentivising key employees within a fast growth SME company.
One of the limitations on EMI schemes has been that each employee could only receive entitlement to shares worth up to £120,000. This is all set to change with effect from 16 June 2012 when this limit goes up to £250,000.
It is good to see the Government supporting schemes like EMI that allow employees to share in the potentially significant equity growth of their employer company.
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:
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.
Whilst Stephen Hester, chief exec of RBS, did the right thing and waived his entitlement to his £1m bonus, how would you like the opportunity to reward your key employees with the potential for significant future windfalls without any flack (in fact, more likely with a whole heap of praise from your happy employees!)?
Mr Hester’s ‘bonus’ was actually in the form of a share option rather than cash. So he was entitled to acquire shares in RBS at a fixed price in the future – at which time the expectation (hope!) was that the shares would be worth a whole lot more – giving him a potentially significant cash windfall when he sold the shares at their then market price.
Share options aren’t limited to listed companies. They can also be used for private limited companies. Like yours.
The key advantages of share option schemes are: