October 30th, 2012 / Insight posted in

Use share options as an incentive

MW writes: I am giving my employees share options, which will be under the Enterprise Management Incentive (EMI) scheme. I have read that many options are linked to profits, but do we need such criteria or could I use my discretion?

Share options are a great way of retaining and motivating staff, thus improving productivity and performance, and the EMI scheme’s tax advantages make it a common choice, writes Jon Sutcliffe, partner at Kingston Smith LLP.

When you issue share options, you define the criteria for the options to “vest” so employees can get their hands on the shares. The options can vest immediately without conditions if you wish, but to incentivise your staff consider including criteria such as: three years’ employment; meeting sales targets; or achieving development milestones.

The EMI rules say the criteria must be ascertainable when the option is granted and must be capable of being achieved within 10 years. The most common vesting criterion is the company being sold or floated, as this is when the employees will be able to get cash for their shares.

When setting vesting criteria, think about what you are trying to achieve. Also consider whether employees should be allowed to keep their options if they leave the company. If they do leave, they will lose the EMI tax advantages.

If done at the outset, you can include management discretion into the option agreement to relax performance criteria later, but absolute discretion without any other vesting criteria is not allowed.