Incentive planning to support your business goals

 

 

 

 

By Chris Booker, an equity and incentives director, and Kevin Chau, a tax consultant at Deloitte Private in the South West 

Effective incentive strategies can be a crucial tool to support the achievement of long-term business goals. By aligning the interests of key employees with those of the company and its stakeholders, competitive and well-targeted incentive arrangements can be a powerful tool in recruiting and retaining the calibre of staff needed to drive a business forward.

Setting targets

The first step is to set clear goals for your business and identify your timelines for achieving them, along with any key milestones or targets that will help on the way. 

An effective incentive plan will align the interests of employees with the business by rewarding behaviours which support the achievement of those goals and linking employee reward to the milestones or targets identified. 

For a business which is aiming towards some form of transaction, such as a sale, an incentive arrangement which provides employees with an opportunity to share directly in the proceeds of a transaction can encourage behaviours which drive the delivery of the transaction and maximise value for shareholders. 

For businesses not aiming for a transaction, incentives which reward based on the achievement of ongoing targets may be more appropriate. 

Design and structure

Share-based incentive arrangements have been shown to be particularly effective in aligning employees’ focus with that of the broader stakeholders, by creating engagement though a sense of shared business ownership. 

The use of shares can also bring opportunities for tax advantages, which can increase the motivational effect of any arrangement whilst decreasing the cost to the business and its shareholders. 

A share option scheme provides employees with an opportunity to acquire shares only at a specific point, for example on a transaction, and to participate together with the shareholders in the business in the realisation of value. Where available, an Enterprise Management Incentive (EMI) or Company Share Option Plan (CSOP) can offer potential tax advantages for both the employer and employee.

Alternatively, a share purchase plan can enable employees to benefit from real share ownership from the date of award, and to share in the capital growth of the business alongside other shareholders. Such plans often make use of ‘growth shares’ that provide an opportunity to participate in the future growth in value only, whilst reducing the acquisition cost of the shares.

Where no transaction is expected, arrangements can still be put into place to provide a way for employees to sell shares at the end of a performance period, or at key milestone event.

In cases where equity is not available or desirable, a well-designed cash plan can similarly create alignment with business objectives and shareholder value, albeit without the potential tax advantages of share plans.

Implementation

Whatever form of incentive arrangement is implemented it is important to consider all aspects of the implementation including the tax, legal and accounting.

However, one aspect which is often overlooked, and can be key to an effective incentive plan, is ensuring that your employees and management team understand and engage with the plan, as well as the behaviours which are expected of them. 

A well targeted communication strategy, along with ongoing monitoring and feedback on success, can help ensure the incentive arrangements deliver the desired actions by employees.

How we can help

Chris Booker is an equity and incentives director and works alongside Kevin Chau, a tax consultant. Both work within the Deloitte Private team based in the South West. The team focus on the design, implementation and operation of employee incentive arrangements to fit with business strategy and culture to help businesses meet their goals.

To find out more about how the team can support your business, email cbooker@deloitte.co.uk. 

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