Julia runs a boutique hotel in Brighton and wants to set up a benefits system for her staff. She has heard about tax-efficient employee incentives and would like to set up an incentive scheme along these lines for her employees. How should she set up such a scheme, and are there any pitfalls she should be aware of?
As a business owner, it makes sense for Julia to want to motivate and reward her employees, but it is important for her to understand what her reasons for doing this are. For example, she might be trying to encourage her staff to work towards a common corporate goal or she could be trying to hold on to some key members of the team.
She also needs to understand her employees so that she can use the most effective incentive to meet their needs. Employees can normally be segmented by their loyalty and motivation into four distinct groups. These are: Nomads - top talent but not committed to the company Superstars - talented key individuals who can contribute to the business in the long term Transfer List - less-talented and not valued members of the team and Core Team - hard-working, loyal members of the team.
For employees who fall into the category Core Team and Transfer List, the best form of incentive is a simple discretionary bonus. For Nomads, they will be motivated by some form of profit-sharing scheme whereas Superstars are future potential partners and shareholders.
Simple bonuses can be linked to an individual's performance or a team performance. Normally, bonuses depend on the performance of the business as a whole and apply to the whole workforce. But you can offer different bonus levels depending on status, length of service or sickness history, for example. Any bonus paid will be taxed as normal wages. Some businesses offer other non-cash incentives instead of a monetary bonus, such as gym membership. Julia should ask her employees what they would value most.
A profit-sharing scheme can be structured to serve as an incentive to staying with the business by paying any bonus in instalments and making it dependent on staff remaining with the business.
For Superstars, a type of share option incentive scheme will be most appropriate. There are a wide variety of share option schemes available and they fall into two groups, those that are approved by HM Revenue & Customs (HMRC) and those that are not. The ones that are not approved are still legal "unapproved" in this case just means that there are no special tax breaks.
From a tax perspective, an enterprise management incentive (EMI) share option scheme is one of the best available because they are fully approved by HMRC and they do not attract an income tax charge on the employee. This type of scheme was introduced by the Government to help smaller businesses attract top employees by allowing them to offer some shares in the business as compensation for them not being able, perhaps, to pay the kind of salaries that larger businesses would be able to pay.
Decide on what you want to achieve with your incentive.
Try to categorise your employees.
Consult with your employees to find out what they would value best: cash or other incentives.
Work out an incentive scheme that the business can afford.
Discuss your plans with your professional adviser to understand the tax implications.
Communicate the new scheme to your employees.
Make sure that the scheme that you eventually implement is one that is going to achieve your business objectives.
Chris Lane is a partner who specialises in the hospitality sector at chartered accountants Kingston Smith
020 7566 4000