Incentivising employees while conserving cash

Out-Law Analysis | 30 Jun 2020 | 10:57 am | 2 min. read

Share plans can offer UK employers alternatives for incentivising the workforce at a time when many will be looking for ways to retain cash in the business.

The UK’s Coronavirus Job Retention Scheme (CJRS) has taken some of the short term pressure off businesses financially impacted by the Covid-19 pandemic. However, as the longer-term economic impact of the pandemic becomes clearer - and the CJRS scheme begins to wind down, with employment costs gradually transferred back to the employer - companies will need to become even more creative in the way in which they manage cash.

Paying some of the employees’ salaries in shares is one way of reducing cash costs on the business. In most cases, this will be put in place by the employees agreeing to reduce their salaries and receiving an award of shares to ‘compensate’ for the reduction. Legal issues will need to be addressed including employment, tax, corporate and, in some cases, securities laws - but these can be successfully navigated with an integrated approach both within the company and with the assistance of external advisers.

Paying some of the employees’ salaries in shares is one way of reducing cash costs on the business.

Good corporate governance provides that non-executive directors should not be awarded share options or performance-related remuneration. However, it is possible to pay non-executive directors’ fees wither wholly or partly in shares. Again, legal issues will need to be addressed, but it is not uncommon for non-executive directors in listed companies to be paid at least partly in shares.

Companies will also need to consider ways in which they can continue to incentivise their workforce as working patterns return to normal. Annual cash bonuses, even where employee performance has been outstanding, will be a cash drain on the business. Paying annual bonuses in shares, in full or in part  - often with payout deferred for a number of years - reduces cash costs for the company while continuing to provide an incentive for employees, with the added potential for employees to benefit from share price recovery as the markets re-adjust.

Perhaps counterintuitively, the economic impact of Covid-19 offers some opportunities for employers. Employers which had fallen outside of the qualification requirements to put in place highly tax-advantaged Enterprise Management Incentives (EMI) may now qualify again. Companies with fewer than 250 full-time equivalent employees and less than £30 million gross assets may be able to offer EMI options to their employees, with a potential tax rate of 10% on gains realised when shares are sold following the exercise of EMI options.

An audit of existing variable pay plans may also highlight ways in which they could be operated more cash efficiently for the company.

Employer liability for National Insurance contributions (NICs) which usually arises on the exercise of an option or vesting of a contingent share award can be transferred to the employee. The ability to do this is often drafted into plan rules, although many companies have not historically transferred this liability to the employee in practice. This cash cost to the company can be avoided by making future awards subject to this requirement.

Using shares purchased in the market via an employee benefit trust (EBT) to satisfy share awards will not immediately allow the company to conserve cash. However, funding an EBT to enable it to buy shares whilst the share price is depressed may result in significant cash savings for the company in the future, when share prices recover.

Companies may also be able to make cash savings around pensions. While the CJRS continues to operate, measures to reduce pension contributions down to, or even below, statutory minimum levels have become relatively commonplace. However, as the CJRS winds down, employers will need to consider whether such reductions should become more permanent. Less drastically, employers who do not currently provide pension contributions through salary sacrifice arrangements could consider implementing this type of scheme to save employer NICs.

Finally, and moving away from employee benefits, companies may consider paying consultants, and potentially even suppliers, in shares or share options. There are additional legal issues to consider here, as the usual employee share scheme exemptions for various company and financial services law requirements will not be available. However, this can offer a way for viable companies to continue to operate while conserving valuable cash.