EMPLOYEE BENEFITS AND INCENTIVES 14 th May 2015 KSW1 RESEARCH - - PowerPoint PPT Presentation

EMPLOYEE BENEFITS AND INCENTIVES 14th May 2015

KSW1 RESEARCH

• Research into 20 of the most profitable agencies
• Seven key trends and behaviours common across them were:
• Culture of the agency and senior team
• People: recruitment and retention
• Agency positioning
• The client-agency relationship with existing clients
• Approach to new business
• Commerciality
• Financial tracking and measurement - processes and systems
• Many are about your people!
• The right behaviour leads to success.

EMPLOYEE INCENTIVES

Zoe Wilson

• Retention and Reward

Ian Graham

• Segmentation by employee
• Bonus schemes & equity incentives

Mike Hayes

• Tax aspects

Retention & Reward

Zoe Wilson – Director, HR Insight

How Far Would You Go?

“Boss treats 6,400 employees to French holiday,

personally costing him £24Million”

“Williams F1 staff receive £2Million bonus despite

£42.5Million company loss”

“American Airlines Chief gives up salary for stock

(following the likes of Mark Zuckerberg of Face Book. 54% is now tied into a performance target”

“Morrisons to introduce new bonus scheme based on

customer satisfaction levels”

(HR Grapevine Articles April-May 2015)

Reward Overview

Aim to Attract, retain and motivate staff Traditionally: Salaries

attract

Benefits

retain

Bonus & incentive schemes

motivate

It’s Not ALL About The Money!

Company Branding Ethics, Values & Social Responsibility Non Financial Reward Access to Training and Development Perception of Job Security

Pay Facts – CIPD Survey 2014

• Just over half employees got a salary increase last year
• Average was 2%
• 34% have seen their salary grow at the same or higher rate than the

increase in cost of living

• 38% of those who didn’t get a rise, said they hadn’t since 2012
• Of those surveyed 28% have access to a cash bonus scheme – 75%
• f those eligible did receive a bonus
• Main drivers for satisfaction on pay rise decisions were down to the

explanation given by the company for its decision and how satisfied the person was with that (source: CIPD

Employee Outlook Survey 2015)

How Do you Attract & Motivate Top Talent?

Think about the whole package and what

that will cost the Company

Do you know what your competitors are

doing?

The impact on current employees Regular reviews Communication

Terms & Conditions

• Salary, Allowances, PMI, Life Assurance, PHI
• Enhanced Annual Leave or Sick Pay
• Christmas Closure periods
• Enhanced Maternity, Paternity and Shared Parental

Leave

• Core Hours
• Discretionary or Non-Discretionary Bonus Scheme
• Commission and Overtime
• Flexible Working
• Company Car

Incentives, Recognition & Non-Financial Reward

Prizes & Gifts – merchandise, travel or retail

vouchers

Bonus payments – Individual, Team, Ad Hoc or

Business

Certificates and Presentations A simple thank you Tackling poor performance & rewarding good

behaviour

Creating A Strategy

• Ask employees what they value, there is no point introducing

initiatives that aren’t valued by employees or candidates

• Benchmark your ideas against competitors – do you want to keep up
• r exceed what they have to offer?
• Keep costs under consideration – explore tax and salary sacrifice
• ptions
• Don’t forget auto-enrolment!
• Consult on changes to increase awareness, credibility and remain

legally compliant

• Make communication a big part of your strategy and
• Review regularly

Creating A Strategy

• Review current rewards offered and consider if relevant in

supporting business objectives

• Link reward strategy to the business and HR strategy
• Understand how business objectives can be achieved

through a new reward strategy

• Review and recommend new reward strategy
• Involve all stakeholders to ensure buy-in across the

business

• Plan, communicate, implement and review new strategy

Other Factors to Consider

• Reward can be a very individual thing and can vary based
• n:

Personal circumstances Career – promotions, development & succession

planning

The ethos and values of the Company

• Induction and probation
• You can fix benefits or have options for employees to

choose from

• Monitor take up, hold exit interviews and monitor

absence and turnover

Thank You

Zoe Wilson – Director HR Insight 01708 758958 ZWilson@hrinsight.co.uk

SEGMENTATION OF EMPLOYEES BY BROAD CATEGORY

Talent Time

Top talent but more committed to working with exciting clients and projects than to the company (“nomads”) Top talent but more committed to working with exciting clients and projects than to the company (“nomads”) Key players vital to the future, who would want to contribute long-term as

• wners and managers

(“super stars”) Key players vital to the future, who would want to contribute long-term as

• wners and managers

(“super stars”) Variable talent of no particular value to the company (“transfer list”) Variable talent of no particular value to the company (“transfer list”) Hardworking and loyal, forming the backbone of the

• company. (“core team”)

Hardworking and loyal, forming the backbone of the

• company. (“core team”)

POTENTIAL STRATEGIES - ONE FRAMEWORK FOR EVERYONE

Nomads Nomads Transfer list Transfer list Super stars Super stars Core Team Core Team Profit- sharing with share purchase for some Simple discretionary bonus where appropriate

SIMPLE BONUSES

• Simple is best
• Retain some flexibility
• Bonus Pool linked to company performance
• They can be linked to individual and/or team performance
• Benefits in kind instead of cash can be offered

INCENTIVES FOR “NOMADS”

Top talent but more committed to working with exciting clients and projects than to the company (“nomads”) Weaknesses Opportunities PROFIT-SHARING SCHEME (with handcuffs)

Talent Time

PERFORMANCE RELATED BONUS PLAN

• Individuals participate in an annual profit-sharing pool
• Individuals are allocated points according to various performance criteria
• Performance criteria will be assessed as part of the annual review process
• Individuals get bonus based on their proportion of overall points scored

Name Individual profit Contribution New Business Client satisfaction Contribution to Company management TOTAL POINTS (Max=40) Ed 6 3 3 10 22 Nigel 1 8 8 22 24 Dave 9 4 6 8 27 Nick 3 1 8 3 15 19 16 25 28 88

INCENTIVES FOR “SUPER STARS”

POTENTIAL SHAREHOLDERS Key players vital to future and who would want to contribute long term as

• wners and managers

(“superstars”) Opportunities

Talent Time

EQUITY INCENTIVES

• Key individuals who:
• make a top class contribution today
• vital to long term development
• are seriously interested in making a long-term commitment
• Continuing contribution adds value to the existing shareholders
• Restrict to a few individuals
• Value more if have to pay for it
• Mistake is often to include “Nomads”

SHARE INCENTIVES

• Phantom share schemes
• Employee offered the chance to buy shares
• Unapproved Share Options
• Enterprise Management Incentive (EMI)
• Nil / part paid shares
• Executive Share Options
• Employee Share Ownership Plan (ESOPS)
• Share Incentive Plan (SIP) (formerly known as All Employee Share Scheme)
• Founder shares / growth shares
• Deferred or capital shares
• Limited Liability Partnership
• Employee benefit trusts

SHARES OR OPTIONS ?

Advantages of share options

• No immediate cash outlay for option

holder

• Can attach conditions to options
• No dividend entitlement
• No need to involve option holder in

shareholder decisions

• Options lapse if employment ends

(simplicity)

• No commitment from employee if

share price falls

• No amendments to shareholders

agreement

Advantages of share ownership

• Individual has usually made a financial

commitment to company

• Likely to be valued more than options

by individual

• Feeling of “involvement” / status in the

company

• If dividend bearing then shares have an

immediate tangible value

EMPLOYEE BUYS SHARES

• Immediate equity participation
• Different class of shares provides flexibility
• Quicker and cheaper than options
• Test of commitment
• What price? Uncertain tax treatment
• Tax implications for recipient if buy at undervalue
• Consider how to be funded
• Reduced / no dilution of existing shareholder value

SHARE OPTIONS

• Shares in the future at today’s value
• No funds required on grant of the option
• Usually have a “waiting period”
• Number exercisable and/or timing of exercise can depend on performance
• Options usually lapse if employment ends
• Provides an incentive to stay until an event
• Often exercisable on sale only
• Earn-out participation on same basis as founders
• If unapproved then usually income tax or PAYE/NIC payable on some or all of the gain
• Enterprise Management Incentive (EMI) – an approved scheme is by far most popular

ENTERPRISE MANAGEMENT INCENTIVE (EMI)

• Very tax efficient
• Entrepreneurs relief ( ER ) should be available on gain made on sale
• No 5% holding requirement for ER
• Option period counts towards the 1 year holding requirement for ER
• Get it right first time as very limited flexibility to vary after grant
• Many deals being done on a phased basis – so ensure exercisable in that scenario
• Directors discretion

NIL/PART PAID SHARES

• Popular where EMI not available
• Useful when employees lack available cash
• Provides immediate equity participation
• Fix the price at today’s value
• Defer some or all of the payment
• Can reduce rights until fully paid
• Real liability for employees on the unpaid element

FOUNDER SHARE SCHEMES

• Freeze current company value for existing shareholders in “Founder” shares
• New shareholders only benefit from future growth
• Reduced capital rights depresses the value
• Possibly as low as par value
• Makes purchase of shares for cash a more realistic prospect
• Can be layered with EMI

EXAMPLE OF FOUNDER SHARE RESERVING THE RIGHT TO FIRST £2M OF PROCEEDS ON SALE

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 2015 2016 2017 2018 2019 2020

Founder value Successor value Company Value £

LIMITED LIABILITY PARTNERSHIPS

• Extremely flexible
• Can change individual equity interests
• Can vary profit sharing entitlement
• Can have different “levels” of partner
• “Partner” is a desirable title
• Can set partnership rules to suit individual circumstances
• LLP structure does not prohibit a sale
• Tax planning opportunities are now limited since last Finance Act
• HOWEVER many LLP’s are now converting back to Ltd status
• Conversion might not be appropriate if an exit event is expected in less than 1 year

Employee share schemes Tax issues

Mike Hayes

14 May 2015

Key tax issues

• Corporation tax deduction for company
• Avoiding income tax / NIC
• Capital gains tax (28%) v income

tax/NIC

• Getting within Entrepreneurs’ Relief

(10%)

Cash based incentives

Sometimes referred to as ‘phantom share schemes’ Effectively a cash bonus Will be liable to income tax/NIC under PAYE Normally - corporation tax deduction for company for gross amount plus employer’s NIC Key issue is when tax is due

When is remuneration paid?

For non-directors:

• when a payment of earnings is made or

when a payment on account of earnings is made

• when a person becomes entitled to payment
• f earnings

When is remuneration paid?

In addition for directors:

• when earnings are credited in the company's

accounts or records

• where the amount of the earnings is

determined before the end of the period to which they relate, the date that period ends

• where the amount of the earnings is

determined after the end of the period to which they relate, the date the amount is determined

Corporation tax deduction?

If an accrual is made in accounts Must be paid within 9 months of year end

Unapproved share scheme

Date Event Shares Price/ value 2015 Grant of option 1,000 Price £1 MV £10 2018 Option exercised 1,000 MV £20 Income gain £19,000 2020 Shares sold Price £30 Capital gain £10,000

£19,000 liable to income tax & NIC PAYE? Company has a corporation tax deduction for £19,000

Readily convertible asset

Are the shares marketable? Are there trading arrangements in existence?

• Can the employee require the company to buy back

the shares?

• EBT to create a market?
• Could be in the articles, shareholders’ agreement or

just an ‘understanding’

• Or just that a ‘deal’ that is about to be signed

PAYE

Readily convertible asset? Income tax & NIC through PAYE Corporation tax deduction? No Income tax No NIC Paid through self assessment No Yes Yes

Beware s.222 charge

Employee has obligation to refund the PAYE to the employer within 90 days of end of tax year in which shares acquired If tax/employee’s NI is not refunded to employer within this period, the tax/NI is entered on form P11D as a benefit in kind

EMI

Date Event Shares Price/ value 2012 Grant of option 1,000 Price £1 MV £10 2015 Option exercised 1,000 MV £20 Income gain £9,000 2018 Shares sold Price £30 Capital gain £20,000

£9,000 liable to income tax & NIC PAYE? Company has a corporation tax deduction for £19,000

EMI – with different price

Date Event Shares Price/ value 2012 Grant of option 1,000 Price £10 MV £10 2015 Option exercised 1,000 MV £20 Income gain £Nil 2018 Shares sold Price £30 Capital gain £20,000

No income tax & NIC No PAYE Company has a corporation tax deduction for £10,000

EMI

Can’t be over shares with a MV of £250k per employee at date of grant Company cannot have more than £3m

• f shares under EMI option

The shares subject to the options must be Ordinary Shares The Option must be capable of exercise within 10 years of the date of grant

EMI

Company/group must be wholly trading Non qualifying trades:

• Financial/legal/farming/property

development/royalties & licence fees

The company granting the options must be the parent company if it’s a group Gross assets ≤ £30m at date of grant Must have < 250 employees

EMI

Employee must be required to work

• > 25 hrs. a week; or
• ≥ 75% of working time if less

Employees cannot be granted EMI

• ptions if they already own > 30% of the

company

EMI

Entrepreneurs’ relief available for

• ptions if:
• Less than 5% acquired; &
• Exercised after 5 April 2013

Option period counts towards 12 months Must still satisfy other conditions EMI now more attractive Preferable to grant an EMI option than have a straight issue of < 5%

What if EMI unavailable?

Trade does not qualify Options to be over shares in a subsidiary company Gross asset or employee limits exceeded Employee not full time etc. Etc.

The solutions

Nil paid shares Growth shares Employee shareholder status

Nil paid shares

Date Event Shares Price/ value 2012 Issue of shares 1,000 Price £10 Amount paid £Nil MV £10 Income gain £Nil 2018 Shares sold Price £30 Capital gain £20,000

Benefit on kind on unpaid calls at 4% Otherwise, no liability to income tax & NIC No PAYE No corporation tax deduction

Growth shares

1p shares Value Total shares 100,000 £2M Convert existing shares into shares entitled to first £2.2M on a sale 100,000 A shares £2M Create B shares entitled to share in proceeds > £2.2M Issue B shares to employees at say par 20,000 £200

What’s the market value of the B shares? No undervalue? Entrepreneurs’ relief? Can have EMI options over B shares

Employee shareholder status

• Free shares issued in return for giving up specified employment rights
• Shares must have a value of at least £2,000
• For shares issued under ESS no CGT on sale (£50,000 cap on value as at date of issue)

Employee shareholder status

• Income tax payable if shares issued worth more than £2,000 on date of issue
• Employees - independent legal advice before giving up employment rights (paid by employer)

Other issues

Selling shares at more than MV Enhancing share rights or otherwise making them more valuable artificially Restricted securities elections (s431)

• Must be considered in all cases

Corporation tax deduction:

• Doesn't matter where shares come from

Thank you

Ian Graham Kingston Smith W1 igraham@kingstonsmithw1.co.uk Zoe Wilson HRInsight zwilson@hrinsight.co.uk Mike Hayes Kingston Smith W1 mhayes@kingstonsmithw1.co.uk

DISCLAIMER

This presentation covers topics only in general terms and is intended to give a wide audience, an

• utline understanding of issues in tax, and therefore cannot be relied on to cover specific situations;

applications of the principles set out will depend on the particular circumstances involved. Furthermore, responses given in the seminar to questions are based on only an outline understanding of the facts and circumstances of the cases and therefore do not form an appropriate substitute for considered specific advice tailored to your circumstances. We recommend that you

• btain professional advice before acting or refraining from acting based on any of its contents. We

would be pleased to advise you on the application of the principles outlined in this presentation to your specific circumstances, but in the absence of such specific advice cannot be responsible or liable.