Equity-based incentives can be a real differentiator and are especially worth thinking about in times of economic challenge when asset values are low, cash flow is strained and the need to incentivise teams to work together is most acute.
Here are five ideas:
1. Deferring cash bonuses
Existing and new cash bonus schemes can be converted to share option schemes to deliver reward in shares.
Arrangements such as employee trusts can be a way to cash out shares in the future but there are alternatives to provide liquidity.
2. Rebasing "underwater" options
With share prices falling, the cost of existing share option awards may be higher than the value of the shares involved. Where options are underwater and have no value, there are different ways to rebase option exercise prices and restore the incentive effect.
3. Re-aligning profit-based performance conditions
Where existing awards are based on hitting sales or profit targets, these could be changed to conditions which are better aligned to successfully negotiating the crisis.
4. Extending the life of share options
Many options will have a 10-year term. If the end of the term coincides with a temporary downturn in trading conditions, options could be varied or replaced to extend their life.
5. Crystallising existing share options
Where share option awards have met their performance conditions so are already free to be exercised, staff could be encouraged to exercise, for example by way of a temporary employer loan.
This will allow the employer to claim a corporation tax deduction for the option gain which will reduce its cash outflow at nil cost.
Please note that the above options do not include the tax impact. if you need advice on the taxation side of share incentive transactions, please contact our tax team.
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These are just a few ideas on how to use share incentives in tough times. We would be happy to discuss how these, or other ideas might help in your business. Please do not hesitate to contact us using the form below today.