Share and share alike?

Times are hard. But they seem to be getting better (and certainly can’t stay this bad indefinitely).

 

As a result of the downturn, many SMEs have seen profitability slump and this is reflected in their accounts. Far from being all doom and gloom, this actually presents an important opportunity for businesses looking to the medium-long term and planning to position themselves strongly as things do improve.

 

The reason is this. As the economy recovers, talented individuals will be in high demand. Many of those who sat tight during the recession, perhaps having accepted a pay freeze or even cut, may begin to develop wanderlust once opportunities begin to open up to them. Those good, entrepreneurial staff need to be tied in now.

 

So how best to do that? How do we reward those people who have managed to steer the company through the recession, having in many cases suffered a pay cut, and incentivise them to take the business forward?

 

Cash is tight at present and will probably remain so for a while. Substantial salary increases are therefore unlikely to be an option – and query whether they have the desired effect in helping to retain employees anyway.

 

If you can’t “show them the money” what can you do?

 

Awarding shares (or granting share options) in the business might be the solution. This gives staff a sense of ownership and control over their own destiny – there is a real “feel-good factor” associated with becoming a shareholder. More tangibly, this is a mechanism that enables staff to participate in future growth (and incentivise them to “go the extra mile”).

So SME owners would do well to have a think about this.

 

Employee share ownership may help a business to hang on to the people it needs to ensure future success. Shareholders’ agreements and articles of association can be drafted so as to protect the position of existing founder shareholders. And because times have been hard and profits have been hit, it should be possible to agree a lower share valuation with HMRC than would otherwise be possible, simply because businesses are worth rather less now than historically.

 

So the recession actually represents a real opportunity – share ownership and options are at their most attractive just now because employees can acquire a bit of the business they work for – without an upfront cost in the case of options, at a reduced price (and potentially tax efficiently). And everybody loves a bargain…

 

By

 

Nick Davies, Director of Reward & Employment Tax Consulting at Armstrong Watson

 

And

 

Natalie Saunders, employment law and share options specialist and Director of Berwins Solicitors Limited