By Nicholas Mirarchi
In the dynamic world of manufacturing, where innovation, efficiency and collaboration are paramount, the significance of fostering a motivated and engaged workforce cannot be underestimated.
We find that corporates may not consider certain tools that exist to help align the interests of employees with the long-term success of a business. One of these tools is the employee share scheme (ESS), which can be relevant for start-ups and mature companies.
An effective and well-crafted employee share scheme is a powerful tool for recognising, retaining and rewarding talent, whilst engaging a culture of ownership and commitment. Having an advisor with a sound and commercial understanding of these tools, and the needs of your business, is crucial when embarking on a journey looking to implement an ESS.
An employee share scheme can come in a variety of forms, each with its own tax implications for the employee. The financial outcomes for the employee need to be modelled so that they understand the value proposition.
An option plan
One common type of ESS is the option plan, where employees are granted options to acquire shares at a predetermined price after a specified time, or once performance conditions are satisfied. Typically, the taxation of these plans occurs at the time the options are exercised, but depending on how the plan is drafted, this may also be deferred until an exit event such as a share buy-out.
Our experience is that option plans are particularly effective in closely held companies, as they help in retaining key staff over the long term and maintaining their commitment to the underlying business. An effective option plan is one that goes hand in hand with an overarching remuneration strategy.
For option plans, the employee is taxed on the difference between the market value of the shares at exercise and the exercise price. We find a key factor in obtaining employee buy-in is whether the option plan has been appropriately modelled and communicated. There are also tax concessions available in specific circumstances that further bolster the value of the plan and provide significant tax benefits to employees.
A share plan
Alternatively, the popularity of the share plan, where the employee is granted shares outright but with certain restrictions such as vesting periods or performance goals like an option plan, is on the rise. Share plans are generally taxable at the time they are granted but it is sometimes possible to defer this tax when the plan is offered to a broad number of employees and certain restrictions exist on vesting. These plans are most effective when coupled with a sound shareholder agreement.
Like option plans, the market value of the shares is treated as taxable to the employee, reduced by any amount that the employee paid to acquire the shares.
Only one tool in the remuneration strategy
An ESS is only one tool in demonstrating a company’s commitment to recognising and rewarding the contributions of its workforce. By providing employees with a stake in the company’s performance, businesses can foster a sense of ownership and accountability, driving productivity and innovation. The potential financial benefits of participating in these schemes can also enhance employee determination and satisfaction, leading to higher levels of loyalty.
Key management staff play a crucial role in shaping the strategic direction and success of manufacturing businesses. Along with a sound remuneration plan, an ESS can be particularly effective in attracting and retaining top talent for the long term. By offering non-cash incentives tied to performance goals and company objectives, businesses can incentivise management to drive growth and profitability, while simultaneously reinforcing a culture of collaboration and teamwork.
A well-designed ESS can represent a strategic tool for manufacturing businesses looking to thrive in today’s competitive landscape. It must always address the unique needs of the company. By tapping into the skill and knowledge of an experienced advisor to help model, implement and execute a tailored plan, companies can unlock the full potential of their workforce.
The takeaway for manufacturers
An ESS can be particularly beneficial to manufacturers in the following circumstances:
- Attracting board level expertise where there is a desire to grow the business over the long term into new markets or product offerings. We have found in these circumstances an ESS helps provide certainty to both parties of what success will look like and ensures a sense of continuity in key expertise around the board table.
- Attracting or retaining key technical expertise where there is a skill shortage for a particular technical skill. This has been common within the post-covid period and we have found an ESS to provide a point of difference in remuneration packages, with the potential for more upside for the individual over the long term as compared to a bonus-based structure.
- Achieving key business performance indicators where the success of the business, or a new product offering, is dependent on the collaboration of one or more technical staff members. Having an ESS in place can ensure a cohesive and collaborative environment and allow staff to participate in the upside of their success.
- Succession planning in family operated businesses is where an ESS can serve as another alternative within a manufacturing business. By enabling staff to gradually acquire ownership stakes in the company over time, businesses can cultivate a pipeline of future leaders. This helps strengthen the fabric of the company culture, a sense of camaraderie and a shared purpose at all levels.
If you are interested in understanding how an employee share scheme could apply to you or want to discuss the effectiveness of your overarching remuneration strategy, William Buck’s advisory team will be more than happy to discuss your needs and become part of your journey.
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