Last month, we were delighted to welcome rugby league and Leeds Rhinos legend Kevin Sinfield to speak at our annual conference. He gave a captivating speech about the ingredients for sporting success and how to motivate teams to perform at their peak. Inspiring teams in sport and business has many similarities, and it got me thinking about the times when companies need to incentivise their key performers.
We work with a wide range of business owner-managers as they are leading up to the sale of their business to help them make sure they’re fully prepared for the event and to maximise value. There are a number of key areas in which they often need guidance. One of the most common is how to align their management team with the performance of the business ahead of the sale and to allow the team to also benefit from the transaction. The most effective way to do this is through a management incentive scheme.
These schemes allow business owners to motivate their managers to grow the company and to hit targets that will increase its value ahead of a forthcoming sale. By receiving shares in the business, the employees will benefit from the sale as a reward for their efforts. It’s a win-win. So, using a sporting theme and taking inspiration from Kevin Sinfield’s wise words, here’s my suggested game plan for introducing a management incentive scheme to your business.
Choosing the right tactical approach is vital. There are a couple of options on the table for business owners in this situation, including the award of Growth Shares, which allow employees to benefit from the growth in value of the company beyond an agreed hurdle from the point that they receive the shares. However, recent changes announced in the Budget mean that growth shares are unlikely to be eligible for Entrepreneurs Relief, so they have lost much of their once-attractive cashflow and tax-efficient appeal.
While Growth Shares are an option that might have been relegated to the bench, Enterprise Management Incentive (EMI) Schemes have not been similarly afflicted by the Budget. They allow companies to grant share options as a way of rewarding, retaining and incentivising staff but they will remain eligible for Entrepreneurs Relief and are very tax-efficient. Post-Budget, most businesses considering a management incentive scheme would, in sporting terms, give EMI schemes the call-up. They more than earn their selection. They have a number of strengths and bring clear benefits to the team – both the business and the employees…
Bringing the Best Out of the Team and Retaining your Best Players
EMI schemes help drive team performance and retain key staff. A business owner can make the award of the share options dependent on the employee reaching certain targets and staying with the business until an eventual sale event. The targets can be personal targets for the individual or, depending on the nature of their role, team or corporate targets for the team or business to hit. It’s an effective way to enhance the performance of the individual and the company and keep key performers.
It’s important to think carefully before setting the KPIs and targets you want the management team to meet. It goes without saying that they need to fit with the company’s culture and aims and the goals of the relevant employees. They shouldn’t contradict each other or encourage blindly hitting an individual target at all costs, which might end up being detrimental to other parts of the business.
Working Within the Budget
Truly skilful sporting managers can deliver success while sticking to the budget and keeping the financial considerations foremost in their minds. EMI schemes deliver in this department too. For the employee, they are tax-efficient. No Income Tax or National Insurance is payable when EMI share options are granted, and when they eventually exercise their options and sell their shares they are eligible for Entrepreneurs Relief, making the gain taxable at a rate of 10%, rather than the standard Capital Gains Tax rate of 20%.
It’s also a cash-flow friendly option for the employees, who don’t need to pay anything on the award of the options. It is a paper transaction at the outset and the exercise price only becomes payable when the employees exercise the option, usually prior to a sale. If the business is to be sold, the exercise price can be settled from the proceeds of the sale. This is not to say that there aren’t some upfront costs. A business will need the services of an accountant or tax adviser to establish a valuation of the business at the outset and agree this with HMRC. They will also need legal advice and assistance with drafting the share option terms and the Articles of Association so these will need to be factored in.
So, whether you’re a rugby league legend or a business owner looking to drive performance in your own team, incentivising your key performers is vital. If you would like some help in setting up an Enterprise Management Incentive scheme for your business, please get in touch.