EMI schemes – how to incentivise staff via share options

Enterprise Management Incentive (EMI) schemes may be an attractive way to remunerate and incentivise key staff – especially when the economic downturn may restrict other options.

Benefits of EMI schemes

Ian Hodgkinson, corporate partner at law firm Mace & Jones, says he is advising an increasing number of firms to use Enterprise Management Incentive (EMI) schemes. The EMI is a share scheme that helps firms to recruit and incentivise key staff by giving them shares in the company.

“The EMI scheme is ideal for firms tight on cash who want to keep or attract experienced and able staff,” he said.

“Making pay rises in the current climate is not an option for many firms which leaves them vulnerable to losing key staff. But through an EMI scheme bosses can really incentivise staff without paying out precious cash or giving up control of their businesses. Bosses can structure EMI options so that they are only exercised on trigger “exit” events when the business is sold. That way bosses retain sole rights, in the meantime, to dividend payments and voting . However, from a staff viewpoint they have been incentivised with a financially rewarding share of the business which shows them how valuable they are to the firm.”

EMI schemes and tax

Mr Hodgkinson said EMIs are also attractive from a tax perspective.

“EMIs are tax efficient,” he said. “Unlike salary or cash bonus payments in most cases there are no National Insurance Contributions (NICs) liability for the company when either an option is granted or the staff member exercises an option and acquires the underlying shares. This provides a potential saving to the company of 12.8% of the value of any financial gain made by a staff member which would otherwise be subject to employer’s NICs as employment related income. Moreover the costs of providing the shares on exercise of the option are deductible trading expenses for corporation tax purposes.”

He also suggested that firms whose options are “underwater” should consider amending their schemes so that their incentive value is not lost. “Underwater” means that the value of the shares is below the exercise price of options previously granted as result of the impact of the recession.

The law firm points out that companies must meet a number of criteria to qualify to use EMIs:

Which firms are eligible?

Firms must have no more than £30 million of total assets of, not be controlled by another company and have a maximum of 250 employees.

Firms in some sectors are prohibited form taking part in EMI Schemes, these include; financial services, agriculture and property development.

Who is an eligible employee?

A company can enter any employee into the scheme, provided:

  • the individual is an employee of the company, working at least 25
    hours a week or, if less, 75% of their working time
  • they do not own more than 29% of the business
  • the reason they are being given share options is to ‘retain’ or ‘recruit’ them

How many people can join an EMI scheme?

There is now no limit on the number of employees who can be awarded share options under an EMI scheme – as long as the total value of the share options is no more than £3 million.

An individual employee can receive share options to the value of £120,000 and they must be exercisable within 10 years.

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