4 May 2020

Incentivising staff when cash is constrained

For many companies, the various measures that the government has introduced to help mitigate the impact of Coronavirus (COVID-19) will not be enough. 

While furloughing staff may be a valid option for reducing payroll costs for those employees who simply have insufficient work, many businesses will still need to retain at least a skeleton staff and those key employees who really make a difference.  And even if furloughing employees is a possibility, the government grant of up to £2,500 per month (generous though it is) may not make a significant contribution to the total gross salary of higher paid employees - which could test their loyalty when the job market reverts to something resembling ‘normal’. 

So, is it possible to square the circle of reducing cash outflows, keeping your employees happy, and rewarding their contribution and loyalty at a difficult time?

A potential solution may be to replace some cash-based remuneration with share awards in the company.  

Our webinar on Supporting and retaining your key employees examines these issues in more detail.

The uncertainty and economic consequences of coronavirus will have a significant impact on asset values – as can be seen from the performance of all the major stock market indices in recent weeks – and there is little question that this flows through to privately owned companies too (in fact, the decline in value may be even more significant for these businesses due to a lack of liquidity in their shares).  However, when the current crisis clears and uncertainty ceases to have such an impact, it would be hoped that these values will bounce back.

If share-based remuneration is a viable option for your business, you will need to consider carefully how shares are awarded to staff.  Your shares will certainly still have some value, so free awards of shares will mean that the employee is taxed on that value in the current tax year - which is not ideal from an ‘incentive’ perspective, particularly if the individual is concerned that the value could fall further.  Issuing share options, by contrast, does not give an immediate tax charge, provides the employee with an effective interest that they can crystallise in the future and, if structured correctly, can be tax efficient for the employee on redemption. 

This is where the Enterprise Management Incentive scheme (EMI) comes in.  EMI is an option scheme, so tax liabilities are only crystallised when the share option is exercised.  However, the scheme is HMRC approved and, as such, the basis of charge is the value of the shares on the date the option was granted – locking in that potentially lower value today, and incentivising your employees to stick with the company through the hard times so that they can benefit from future growth when things return to normal.

It is worth noting that any share award structure will only generate cashflow benefits to the extent that it affects remuneration that is yet to be paid.  Past salary cannot be ‘reversed’ to generate a PAYE repayment.  And of course, if you are changing salaries or bonus entitlements for individuals, you will need to do so in a manner that is compliant with employment law, which is unchanged by the crisis.

Clearly, any share-based reward mechanism has wider consequences for the long-term future of your business, your shareholder base and your staff.  Such awards (particularly if they are significant) should not be made on a whim to resolve a short-term issue if you think your business will be successful in the longer term.  You also need to ensure the beneficiaries are the people you want to keep for the long term and consider all potential future outcomes (such as what happens if a recipient chooses to leave). These questions cannot be rushed, but for businesses in a period of stasis, the owners may have more time to consider them - with the lower current value of the business acting to in part de-risk the tax consequences.

PKF Littlejohn has significant experience in advising companies, from start-ups to mature established groups, in providing share incentives to their key staff.  For further information, please contact Chris Riley (criley@pkf-littlejohn.com; +44 (0)20 7516 2427) or Catherine Heyes (cheyes@pkf-littlejohn.com; +44 (0)20 7516 2237).