Is a Growth Share Scheme right for your business and employees?

Growth share schemes have become an increasingly popular tool for companies seeking to incentivise key employees and align their interests with the long-term success of the business, providing a framework that rewards performance and commitment. These schemes offer a unique approach to employee equity participation, focusing on the growth in value of a company rather than its current value.

Overview

The primary purpose of growth share schemes is to motivate and retain key employees by offering them a stake in the future growth of the company. Unlike traditional share options, growth shares are typically issued at a nominal value and are designed to reward employees only if the company achieves a growth in value and is sold above an agreed ‘hurdle’ value. This aligns the interests of employees with those of shareholders, as both parties benefit from the company’s success.

In a simplified example, say a company is valued at £100 (the ‘Hurdle’ value) at the date on which the growth shares are issued, and a 10% growth share is issued. If the company was then sold for £250 at a later date, the first £100 (being the Hurdle) would be split between the shareholders according to their holding; the second £150 (the amount above the Hurdle) would allow the growth shareholder to receive 10%, (£15) with the remaining value (£135) split between the shareholders according to their holding.

Benefits for Employers and Employees

Employers:

1. Alignment of Interests: By tying employee rewards to the company’s performance, growth share schemes ensure that employees are motivated to contribute to the company’s success.
2. Retention of Key Talent: Offering growth shares can be an effective way to retain key employees, as they are incentivised to remain with the company to realise the potential value of their shares. The scheme can also allow businesses to compete with larger firms that may offer higher salaries.
3. Cost-Effective: Growth shares are often issued at a nominal value, making them a cost-effective way for companies to offer a shareholding participation without the immediate financial outlay associated with traditional share options.
4. Flexibility: Companies can tailor growth share schemes to meet their specific needs.

Employees:

1. Potential Financial Gains: Employees participating in growth share schemes have the opportunity to benefit financially from the company’s success. As the value of the company increases above the ‘hurdle’, so does the potential value of their shares in the event that the company is sold, potentially leading to significant financial rewards.
2. Ownership Stakes: Growth share schemes provide employees with a sense of ownership in the company. This sense of ownership can enhance job satisfaction and loyalty, as employees feel more connected to the company’s achievements and future prospects.

2. Tax Advantages: Growth shares are typically subject to Capital Gains Tax rather than Income Tax, provided certain conditions are met. This can result in a lower tax liability for employees when they realise the value of their shares.

Eligibility Criteria

For Companies:

• To implement a growth share scheme, a company must be structured in a way that allows for the issuance of shares. This typically involves being a limited company with the ability to create and allocate shares to employees.

For Employees:

• Eligibility for participation is usually determined by the company. Factors such as job role, performance, and tenure may influence an employee’s eligibility. Companies should establish clear criteria to ensure fairness and transparency in the allocation of growth shares.

Potential Drawbacks and Considerations

While growth share schemes offer numerous benefits, there are potential drawbacks and considerations:

1. Valuation: A valuation of the company’s shares is required to establish the baseline value from which growth will be measured (the ‘hurdle’).
2. Tax Implications: Schemes must be carefully structured to ensure compliance with HM Revenue & Customs requirements and to maximise the tax efficiency of the scheme. Professional advice from an Accountant should always be sought before the scheme is implemented.
3. Management of Expectations: Whilst the scheme can offer the opportunity for an employee to benefit financially from the company’s success, employees should also be made aware that there is no guarantee of financial gain and should consider their personal financial situation before participating.

In conclusion growth share schemes offer a compelling way for companies to incentivise and retain key employees by aligning their interests with the company’s long-term success. With careful planning and expert legal and tax advice, these schemes can be a powerful tool for driving business growth and achieving strategic objectives.