Share awards could be way for companies to reward employees in tough times - Lynette Jacobs

When something as huge as a global pandemic strikes, the challenge for businesses is to try to weather the storm and hopefully thrive at the end of it. In times of crisis it is even more essential for companies to retain and incentivise the best employees – after all, they are the key to ensuring the longevity and growth of a company.

Lynette Jacobs is a Partner, Pinsent Masons
Lynette Jacobs is a Partner, Pinsent Masons

When Pinsent Masons ran a webinar, Re-imagining your business post Covid-19, clients were saying that assuming they could survive, to come back even stronger they needed to re-imagine and restructure their business model. As part of that exercise, a key focus was employees, who would be the driving force of the business going forward.

Companies recognised that when times are tough financially, it can be difficult to make employees feel valued and motivated. The challenge is to find ways to do that and many companies have chosen to do this through the medium of shares.

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Whilst it might not be feasible to offer pay rises and bonuses, offering employees equity in the company can be a great alternative to show appreciation and reward ongoing loyalty. Having a share scheme can also be cost-effective.

Additionally, companies may want to thank employees for having worked with them through this difficult period. A good way to do this is to make a form of share award.

This can be done under an existing share plan or, alternatively, the company may establish a new share plan for this purpose. If a company's employees are all in the UK or it wants to award its UK employees, it can consider using the tax advantaged UK all-employee Share Incentive Plan (SIP).

Under a SIP, a company can make a free share award over shares with a value of up to £3,600 per employee. Employees must generally stay with the company for a minimum of three years to have some tax benefit from the award and for five years to have the full tax benefit, encouraging employee retention.

As a tax-advantaged plan, a SIP must comply with various HMRC requirements. Free share awards can also be made under other forms of share incentive arrangements which, whilst not offering a SIP's tax advantages, can be designed more flexibly to meet a company's commercial requirements.

Some businesses undoubtedly continue to feel the pandemic pinch and companies in that situation could consider making a form of share award instead of a salary rise that otherwise might have been due, or alternatively paying some or all of a bonus in the form of shares.

The source of the shares for any of these forms of award must be considered. They could be new issue or treasury shares. Alternatively, the company may have unallocated shares in an employee share trust which can be used to satisfy the awards.

In all these scenarios, there are legal points to think about, including employment, tax, company and securities law matters. None should prevent companies from making awards appropriate to their business goals.

If a company has an employee share trust and their share price is currently low, it could fund the trust to buy shares in the market now, so it has shares available to satisfy any new awards it is making and/or other existing share awards due to vest or mature in the future.

Any purchase will depend on how much cash the company has and there can be potential financial assistance areas to consider from a company law perspective. A company will also need to calculate how many shares will be needed, judging how likely it is that awards will vest, based on leaver predictions and the extent to which performance targets relating to share awards are likely to be met.

Good communication to manage employees' expectations is vital. Employees must perceive the potential benefits of share awards and the need for them to stay with a business to have the opportunity to receive the shares. But also very importantly, employees should understand the value of shares can go down as well as up, and the company cannot be seen to be advising them to make any investment decision, even if they are not required to pay anything to realise the potential benefit.

Lynette Jacobs is a Partner, Pinsent Masons

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