The Enterprise Management Incentive Scheme- can help your employees behave like owners

What difference will it make to your business if your employees thought and acted like owners or business partners?

If your employees thought and acted like owners, they would be loyal, incentivised and enthusiastic about the business, their business. They would care, or as one client told me-they would make sure the light is turned off behind them.

If this happened in your business, you would no doubt agree that the benefit would be tremendous with direct affect on your profit.

It is for this reason that so many employers are willing to spend time and money to figure out the best way to create such sense of ownership and partnership culture.

How can you expect an employee to think like an owner?

By permitting them to become one.

It has long been established that providing employees with a real sense of ownership of the business by providing them with share of the equity in the company, gives organisations a competitive edge and actually increases the bottom line of corporate performance. Yet it is a tough objective to meet. To do so requires vision and a holistic approach and a real understanding of the workforce. It also involves cultural issues such as the establishment of shared values and beliefs.

I regularly meet company directors who take steps to achieve just that. They put specific schemes in place to give all employees a real sense of ownership and it has been proven that such schemes increase overall motivation that leads to rise in corporate performance.

One such very popular scheme is the Enterprise Management Incentive Scheme (EMI).

What is the EMI?

The EMI is a tax efficient Inland Revenue scheme allowing companies to grant options over shares in accordance with their business needs. The EMI is a very business-like scheme and it allows great flexibility in the drafting of the scheme rules. The tax advantages are substantial, both to the company and the employees.

How does it work?

The option

Employees are granted options over shares in the company, so they become Option Holders. It is within the Company's discretion to decide when and on what conditions the EMI options may be exercised, as long as they are exercised within ten years of the date of grant. On cessation of employment the options simply lapsed.

Option Price

The company could grant options over shares at market value in which case there will be no charge for income tax and National Insurance Contributions. The Company may, however, grant options on a discount or at no cost, but this will give rise to an income tax charge on exercise.

The exercise

The exercise can be linked to time (e.g. 3 years) or can be linked to performance (e.g. personal targets, company's turnover, etc.) or can be conditional upon a Sale of the Company or to a number of elements put together (e.g. performance conditions and a sale).

The elegance of having company sale as the trigger for exercise is that employees do not actually become shareholders, but the motivation to grow the business still exists. This is because all participants realise that if everyone works hard, the growth of the business will be reflected in the value of their shares on sale.

Employee shareholders

If the right to exercise is not triggered by sale but by, for example, time and/or performance conditions, once the employees exercise their options they become Shareholders in the company and their rights and obligations are dealt with by the Company's Articles of Association.

It is within the company's discretion to determine in the articles the type or class of shares over which EMI options will be granted. For example, options can be granted over B Shares which have no voting rights but can enjoy dividends. The features of the relevant class can also determine when employees are permitted to sell the shares, the method of valuation, the payment structure, etc.

Employee Benefit Trust

The company can also set up an Employee Benefit Trust (EBT) to be used as a 'warehouse' for employees' shares pending making them available to employees. Once employees exercise their options, the EBT can also be used to create an internal market for the shares in which shares are subsequently bought back from employees upon leaving of employment or on other specified circumstances and allocated to new participants. An EBT with a trustee of which the Company has control, can provide an ideal vehicle to work in parallel to the EMI.

Does it suit your business?

To participate in an EMI Scheme your business must be a "qualifying company" and your people must be "qualifying employees".

To find out if your business can qualify and what difference it can make to your business, please contact Penina Shepherd, our Share Scheme specialist, for an initial consultation either by email or by telephone on 08458- 678 978.

At Acumen Business Law we do not charge for initial consultations.

This article is subject to our disclaimer