The impact of recent movements in the financial and credit markets mean that many employers are feeling a financial pinch and consequently pay rises this year may be less than many employers would want to provide or the cost of a new employee targeted to take the business forward may be more expensive than they can bear.
In that context, any way in which a company can incentivise its employees in a cost effective manner becomes very attractive. It is for that reason that employer companies may wish to consider giving shares in the company to some or all of its employees or granting them the option to buy shares at a fixed price in the future. Options granted by an employer can be made subject to the company or the relevant employee meeting specified performance targets.
If a share incentive arrangement is implemented when a company is doing well, it is a good way to reward the employees who have contributed to that success. If done when times are not so good, it provides a means to retain and recruit quality employees, to incentivise them and to encourage them to take a longer term view of the business which may give rise to greater gains for the employees in the future. The fact that employee share ownership arrangements can usually be structured in a tax efficient or tax advantaged manner and that they can be directed at all employees or at particular individual means is another added advantage.
While existing shareholders are often concerned about losing control of their company, by simply adopting a suitable structure, there is no reason for such a situation to arise.
The current financial crisis does not mean that share incentive arrangements should be discounted as they remain an effective way of rewarding employees.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.