The great reset – an opportunity to incentivise key people

If one thing is clear, it is this: the Covid-19 pandemic has not affected all businesses alike.

For some businesses, the objective has been merely to survive.  For others, due to the nature of their business, or perhaps due to an inspired new business idea, trading during the pandemic has been a roaring success.  For others, the effects of the pandemic were strangely inconsequential.

In general, however, the pandemic has caused many businesses to take stock of where they are, and to rethink what the future may hold.  Perhaps the business needs to go in a different direction or perhaps there is now a realistic prospect of a sale in the medium to long-term.  Many business plans prepared in a pre-Covid world have simply become obsolete.

Any businesses resetting their strategies and revising their business plans, need to think carefully about their people.  Crucial to this is how a business can ensure, in such uncertain times, that it is able to retain its key employees, and continue to attract the right calibre of talent.

A key tool in addressing attraction and retention is a well-designed long-term incentive plan (LTIP).  An LTIP allows your key employees to share in the long-term value growth of the business.  In most cases an LTIP would be forfeited if an employee chooses to leave before it crystallises, ensuring retention.  Many businesses that have never had an LTIP may now need to consider implementing one, and many businesses who already have one may need to revisit theirs to make sure it remains fit for purpose.

HMRC also recognise the need for companies to have a high-calibre, well-incentivised management team, and this opens the door for certain LTIP structures to be afforded highly favoured tax treatment.

Take for example, ‘Enterprise Management Incentives’ (EMI).  This is a share option scheme aimed at companies with less than 250 employees, whereby employees can be granted options to acquire shares in the company.  When they eventually exercise their EMI option and sell their shares, their tax rate on the gain can be as little as 10%.  In the meantime, the existing shareholders retain full control.

EMI is only one of many ideas that could be explored.  The reality is that, no matter what size a company is, or the nature of the business, an LTIP can be designed that is both commercially effective, and tax efficient – the perfect combination!

As we come out of the worst of the lockdown restrictions, and we look ahead with renewed optimism, now is the perfect time to speak to your tax advisers about getting an LTIP in place.