Incentivising key employees with an EMI Scheme

Businesses often look to secure the retention of key individuals by incentivising through the use of an EMI Share option scheme.

Companies can often easily identify an individual, or individuals, who are key to the overall success of the business. This can be the owner manager but can also be a senior member of staff employed by the company.  Appropriately incentivising these key employees can generate growth and protect value.  

Although there are many methods of rewarding key staff, one of the most common ones that we see is in practice is an Employee Management Incentive (EMI) share option scheme.   Under the scheme, which is HMRC approved, individuals are granted options to acquire shares in the future based on criteria set at the time the share options are granted. Once the performance conditions are met, the options are exercised, and the shares are acquired. 

One of the most common ways to use this is on an “exit based” EMI scheme, which allows employees to participate in a sale of the company (and only a sale of the company). 

Key Features of an EMI Scheme

The key features are as follows:

• An EMI is an approved (by HMRC) share option scheme.
• It can be targeted at a small number of key employees.
• It is not immediate share ownership.
• It protects the existing shareholders as there is no immediate dilution of share ownership.
• It is low risk for the participants as they only pay for the shares if the options are exercised.
• The price paid for the shares is set at the outset by the company and the value is agreed with HMRC.
• On exercising the options, provided the participants pay at least the market value of shares at date of grant, then there should be no PAYE/NI implications.
• The profit from the sale of the shares may qualify for Business Asset Disposal Relief - formerly Entrepreneurs’ Relief (Capital Gains Tax at 10%).
• The company may receive corporation tax relief on the profit the participant makes in exercising the option.
• The options lapse if an option holder leaves employment

When to consider an EMI Scheme

We have seen many businesses review the ways they retain and incentivise these key staff, particularly in the run up to a sale of the business. Primarily, this is to protect against a number of things including:

• Taking knowledge / know-how to competitors;
• Depending on their position, it may be difficult, time consuming and expensive to replace them;
• Ensuring a consistent level of turnover and / or profits to maximise proceeds on a sale; and
• It can create uncertainty for other staff if other more senior members leave.

EMIs are an approved way of rewarding key employees with share ownership and can therefore be an extremely useful tool for business owners.

Our dedicated tax planning team are here to help.  If you would like to talk about how an EMI scheme could help you incentivise and reward your key employees, then begin your journey with us today; drop us a line and let's start talking.

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