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Mistakes with employee share schemes – and how to avoid them

Employee share planning can save huge amounts of tax as well as having all the well documented positive effects of a more motivated, engaged team – the ‘John Lewis effect’, as it is now known.

But a recent article I read in Real Business gave a timely reminder of the mistakes that are sometimes made with employee share schemes. Here are the top five:

  1. Having no exit strategy so that the shares/options have no perceived value. Of course, if dividends are paid on shares this can counteract any such concerns – especially if they save tax too.
  2. Offering shares or options at an unrealistically high price.
  3. Giving too many shares/options to new, unproven employees and not being able to withdraw them later, and therefore…
  4. … upsetting existing team members with whom you have been less generous.
  5. Promising shares when values are low but deferring the formalities until the value rises, so creating unnecessary tax bills.

Following from point 5, in my experience, the number one problem is procrastination on the part of business owners. They know that making employees shareholders is the right thing to do (for the company, the employees AND for their own succession planning) but ‘seller’s remorse’ and fear of change stops them from seeing through their promises, especially to key team member. Over time those key people become increasingly disenchanted with promises not fulfilled and leave with ill feelings. Often they take with them valuable knowledge, contacts and experience that enable them to set up in competition with their old employer – the very worst scenario!

I think that ‘growth shares’ can provide an answer to the business owner’s concerns, and they may also bring an immediate tax benefit (for employer and employee). Growth shares only give the employee a percentage of the increase in value of the company from the point at which they are issued. That way the business owner is locking in the wealth they have created to date and needn’t fear giving away everything they have sweated to create over the life of the business. The fact that the shares will have little or no value at the outset also means that there should be no tax on giving the shares.

Let me know if you’d like to learn more about growth shares or other ways of tax-efficiently getting employees on to the first rung of the share ownership ladder.

One Response to “Mistakes with employee share schemes – and how to avoid them”

  1. Bob Harper says:

    It would be great to attend a one day workshop on this.

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