As a whole, the technology sector has fared well during the pandemic. Fundraising activity is strong, and increased demand for digital products and services has seen many tech businesses thrive.
However, for many tech companies, growth is on hold until the rest of the economy recovers, particularly where revenues are reliant on the success of other sectors. These businesses need to preserve cash flows, adapt where possible, and maintain a stable and motivated workforce.
But the pandemic has taken its toll: many employees are fatigued and eager for change, and those previously reluctant to move roles might now be more easily persuaded.
Even companies that have flourished should be alert to this. In many cases, success has brought additional pressures and employees have worked long hours to satisfy demand. Staff that don’t have a stake in the company itself, and whose remuneration has not kept pace with their workload, may be considering whether they could be compensated better elsewhere.
The competition to attract and retain talent in the tech sector is therefore likely to be particularly pronounced as restrictions lift and life moves on. All tech companies, regardless of how they have fared during the pandemic, now need to look critically at the way they incentivise and reward their employees.
In this article, we consider various ways in which businesses can incentivise employees without a significant upfront cash burden.
Flexible working arrangements
Tech businesses have been ahead of the curve when it comes to flexible and remote working arrangements. However, it is clear that employees will view such arrangements as a ‘given’, rather than a perk, post-COVID.
Ensuring your flexible working arrangements are competitive is therefore essential. As well as flexible hours and remote working arrangements, consider flexible remuneration options such as allowing employees to buy or sell an amount of holiday each year.
Where fully flexible arrangements cannot be accommodated, the reasons should be communicated to staff, and businesses should consider what alternative benefits could be offered in compensation.
A share option is a right to buy shares in a company at a fixed price at some point in the future, usually after a specific period of time has passed or when the company is sold. The opportunity to become a shareholder in the company can have a powerful effect on employee motivation and retention.
UK tax legislation provides for a number of tax-efficient option plans. The most well-known of these is the Enterprise Management Incentive (EMI) scheme.
No tax charges should arise when EMI options are granted to employees or when the options are exercised and the employee receives their shares. When the employee sells their shares, any gain is subject to Capital Gains Tax rather than Income Tax, yielding a much lower overall tax rate. Further details about EMI options can be found in our recent ‘Spotlight On…’ article here.
EMI arrangements are becoming increasingly commonplace, particularly amongst start-ups. It is now unusual for senior hires not to have some kind of equity-based compensation (whether shares or options).
Growth shares allow holders to participate in the total value of the company above a particular threshold, which is usually set at or slightly higher than the current market value of the company. This means the shares can be issued at a very low value, limiting the upfront cost to the employee.
Employees who hold growth shares are then incentivised to grow the value of the business, so that value accrues to their shares. Growth shares are often useful where the EMI conditions cannot be met (e.g. if the business is already too large to qualify).
Deferred bonus arrangements involve committing to pay cash bonuses at some point in the future. The timing and amount of the payments can be either fixed or dependent upon the company (and/or the employee) achieving certain performance criteria.
Flexing the performance targets in this way can help ensure the company will have sufficient cash to make the payment. However, these targets should be realistic and within the employees’ control; otherwise, it will limit the incentive effect.
Certain benefits provided to staff are non-taxable and therefore yield National Insurance savings for the employer company. Pension contributions, employee suggestion awards, Cycle to Work schemes, and free meals provided on business premises could all be considered as part of an overall benefits package.
How we can help
We have a great deal of experience of working with clients to implement tax-efficient remuneration plans, with particular expertise in relation to EMI option plans, growth share arrangements and other equity-based incentives.
Please contact a member of our technology team, your usual Blick Rothenberg contact, or Robert, using the details on this page, if you would like to discuss this further.