Share option to keep key 'wanderlust' staff

Staff who have endured pay cuts may decide to leave when the economy improves.

Nick Davies, a senior tax consultant at the Leeds office of independent accountants and business and advisers, Garbutt & Elliott, believes firms should try to find ways of keeping their best staff.

He said: "They need to tie in key people. How can this be achieved when cash is likely to remain tight for some time and research shows that simply increasing cash rewards is largely ineffective for staff retention?"

One solution could be to introduce tax-advantaged share options, which creates a chance for selected staff to benefit from a percentage of future growth in the value of the business.

One tax-efficient vehicle for qualifying companies is an Enterprise Management Incentive Scheme (EMI). To qualify, companies must be independent, have gross assets of not more than 30m and fewer than 250 staff. Even though certain trading activities are excluded, the vast majority of businesses can participate.

Mr Davies said: "In an EMI share option scheme, staff are granted options over shares at a predetermined price and can exercise them when decided by the company.

"The selected time might be on achieving certain performance targets or, very often, on the imminent sale of the business.

"There is no income tax or NIC on either the grant, or exercise, of the options.

"The staff member will be subject to capital gains tax on the

difference between the price they paid for the shares and proceeds when they sell them, but, with CGT currently at 18 per cent, this represents a huge tax advantage, particularly for higher rate taxpayers.

"The company may also be able to obtain a corporation tax deduction for the difference between exercise price and market value."

Mr Davies said that there was "significant flexibility" over the design of EMI schemes. Employers choose who will be involved and the number of options granted.

"Employers also decide on the trigger points and conditions for exercise" he said. "Options can be granted over a different class of share, perhaps with no dividend entitlement, or voting rights.

"Essentially, the existing shareholders can ring-fence the current value of the company, enabling selected employees to share only in the future growth in value which they help to deliver."