There are many ways you can incentivise employees, ranging from informal gifts and events, to formal arrangements for bonuses and even giving employees shares in your company. Today we’re covering both some ideas for bonuses and share incentives.
Standard Bonus Scheme
You can operate a bonus scheme on a discretionary basis, i.e. give an informal bonus at the end of the year with the amount being decided by you. Alternatively, you may like it to be more of a structured bonus scheme so that the employee is aware of their ability to earn a bonus at the end of the year. This will help incentivise them and motivate them. Implementing a bonus scheme is fairly easy and flexible and could be based on set objectives for the employee. These objectives should be agreed by yourself and the employee and then the progress of these can be monitored and finally a bonus can be paid depending on how the objectives have been achieved (either fully, partially, or not at all).
Alternatively, you could base the employee’s bonus on company objectives, such as a revenue, profit, KPI targets or a mixture of these and a bonus can then be calculated depending on how well the company does. For example, the bonus may be based on a percentage of salary (let’s assume 30% of salary). If the company hits a profit of £X, the employee will receive 100% of the 30% salary, if the company only achieves 90% of the profit target of £X, the employee will receive 90% of the bonus (i.e. 90% of 30% of their salary). Structuring a bonus in this way is excellent for aligning your employee’s incentives with those of the company.
You could also use a mixture of personal and company goals.
So 50% of the employee’s bonus could be based on them achieving their personal objectives (set with your help and agreement – these could be to win so many new clients, perform so many bits of chargeable work, continue with their own development, help the development of others in the company).
It is important for the above that any objectives set follow the “SMART” structure, that is they should be Specific, Measureable, Achievable, Realistic and Timely (i.e. set a date for achievement).
Any bonus in this respect would be taxed under PAYE in the same way as salary and would be deductible for corporation tax purposes within the company.
Issuing Shares
Instead you may wish to issue shares in your company to your employee. Allowing employees to participate in the equity of the company can be a tax efficient way to align the interest of the employee with the business owner, in addition to retaining talented employees and keeping them both motivated and incentivised.
The shares can be issued to an employee as a “bonus”. This will be taxable on the employee at market value, triggering income tax (if your shares are not publicly quoted, it would be necessary to prepare a business valuation). Where there is a market for onward sale of the shares, it could also trigger NICs. Therefore, we would need to check whether this may give rise to an NIC liability for the employee.
These shares would allow the employee to benefit from receiving a distribution of the profits of the company in the form of dividends, allowing them to benefit from a lower tax rate than that of a salary. However, please note that any dividends distributed would not be allowable for a corporate tax deduction. In other words, if a dividend of £5k is distributed to the employees holding the shares, corporation tax of 19% would still be payable on this £5k (it is not treated as an expense in your accounts).
A separate class of shares could be set up in order to allow restrictions to be put into place, and also allow different dividends to be voted for yourself and any employees that are given shares, either now or in the future. You may decide that the shares issued to employees should not entitle the shareholders to voting rights, distribution of assets on a winding up and so forth.
It is also worth considering that your shareholding would then be diluted – you would no longer own 100% of your company if you were to give some shares to your employee.
There are also different types of shares that can be given – for example “nil paid” shares. This is where the shares are treated as purchased at market value, which is owed to the company as a loan. Where the value of the shares is below the £10,000 benefit in kind limit, and the employee has no other loans to the employer company, the shares can essentially be granted free from tax implications.
Growth shares may be another option – these involve the creation of a new class of shares that allow employees to benefit only in the increased value of the company after the date of grant. The value of these new shares will typically be very low and so there are normally very few tax implications. In addition, growth shares directly link the value that they will receive to the growth of the company.
There are costs involved in issuing shares to employees and certain legal work required.
As ever – the advice given here is general in nature, and may not be relevant to your specific situation, so probably worth having a chat with us, or your accountant, to see which would be more suited to you, and any costs/tax/paperwork implications!
If you’d like to have a chat about bonus schemes or share incentives please drop us an email on hello@pinkpigfinancials.co.uk and we’ll set up a call.
