Article

The UK skills shortage: how employee incentive schemes can attract and retain staff

14th July 2023

As a result of the UK skills shortage, businesses are having to do more to retain and attract staff. Effective employee incentive schemes have been shown to increase productivity and improve employee mental wellbeing. These schemes include:

Growth share schemes

Growth shares are a special class of shares issued to employees which allow them to share in the growth in value of the company above a valuation hurdle – the minimum rate of return needed for the growth shares to receive any proceeds – usually on an exit event, such as a share sale, asset sale or a listing.

Enterprise management incentives (EMI)

The EMI scheme is a share option scheme designed specifically for small or medium-sized businesses, which have assets comprising £30m or less. A company can grant EMI share options up to the value of £250,000 in a three year period. Employees do not have to pay income tax or national insurance contributions if the shares are bought at their market value or higher at the time the option is granted. If employees are given a discount on the market value, then income tax or national insurance contributions will have to be paid on the difference.

Company share option plan (CSOP)

A CSOP is a tax-advantaged share plan that enables a company to grant market value share options to selected executive directors and employees. This gives employees the option to buy up to £60,000 worth of non-redeemable shares in the future at a fixed price. Employees do not have to pay income tax or national insurance contributions on the difference between what they pay for the shares and what the shares are worth.

Granting options to employees also provide employees with an effective incentivisation to perform well and does not have to end upon an exit.

How exiting can benefit your employees

Employee ownership trusts (EOT)

EOTs are a government initiative aimed to promote employee ownership by giving business owners the opportunity to sell their shares to an employee-owned trust free from capital gains tax. EOTs do not involve direct share ownership by employees, rather a controlling interest in company is transferred to an all-employee trust which is then held for the benefit of employees. Examples of these include the John Lewis Partnership, Richer Sounds and Aardman Animations. The benefits are numerous.

In the short term:

  • They allow for exits where there is no obvious third party
  • They provide quick exit routes for shareholders
  • Owners can keep some involvement in the company (up to 49%).

In the long term:

  • Stakeholder and employee goals are aligned
  • Innovation is encouraged at all levels
  • Improved employee retention and morale
  • Improved engagement.

Management buy-out (MBO)

An MBO is a form of buyout in which some or all of a company’s existing management team purchase the company, or part of it, supported by institutional investors through private equity or venture capital investment or third-party debt.