Share options can be a tax-efficient way to retain and motivate key staff
The main reason for listing on a public market is to gain additional financial muscle, but exchanges such as AIM and PLUS can also help a company to keep and attract quality staff.
Before digital marketing business dotDigital Group joined PLUS via a reverse takeover in January this year, chief executive Peter Simmonds had already made up his mind about one thing.
‘We had decided to allocate share options to all staff,’ says Simmonds. ‘It was very important for us to do that at the point of admission. It was a way of saying, “You are all now sharing in the future of this company.”’
Predictably, the news went down well among the company’s 40 employees, but this is no one-off shot in the arm. ‘We are going to repeat the process annually so that people build up a larger interest in the company. Next year we’re going up to 66 staff, so they will all get options.’
Naturally, you don’t need to be publicly quoted to grant options. Richard Goodfellow, executive commercial director of biotech venture Scancell, says the company has had an option scheme since it was founded ten years ago. But he adds that a flotation on PLUS last year has encouraged option holders to view those bits of paper in a new light, especially as the company’s share price has increased from 30.5p to 52.5p over the past few months.
‘For our kind of company, you need a long-term commitment from your scientific staff,’ says Goodfellow. ‘Some companies take the view that share options are only for directors and senior management, but I’ve always believed that extending them to everyone is an important incentive. It means that everyone has an interest in seeing the share price go up.’
Jon Isaacs, a director at PLUS advisory firm Alfred Henry Corporate Finance, explains that share option schemes aren’t merely a generous giveaway. They’re also intended to lock in important staff for the longer term, with a ‘vesting period’, typically around three years, during which the options remain just that. When people leave the company, they generally lose the options.
Isaacs adds one crucial point. Most companies with gross assets of less than £30 million, subject to certain conditions, can have their share option scheme approved under the Enterprise Management Initiative (EMI), resulting in tax savings for both the option holder and the company.
‘For the option holder, any gains they make are taxed as capital gains rather than income, so at 18 per cent rather than potentially at 40 per cent,’ Isaacs elucidates. ‘As for the company, it won’t have to pay tax or national insurance on the options.’
There is clearly a lot to be said for company share option schemes as a tax-efficient employee motivation and retention tool, especially compared with simply giving away shares. They do, however, have their drawbacks. One obvious limitation is that options only work if a company’s shares keep rising. If the price drops after options are given out, they become virtually worthless. Another problem for smaller companies may be that there is a limited market in their shares. Scancell’s Goodfellow says, ‘We had our eyes open when we listed, so we were aware that this might be an issue, but it hasn’t prevented trading taking place.’
Simmonds of dotDigital has no regrets about introducing the scheme. ‘My big mantra in business is goal alignment,’ he remarks. ‘As a result of our option scheme, we have 40-odd people interested in seeing the company’s value grow.’