Family businesses – incentivising managers in the digital age

7 Sep, 2017

Nick Latimer, Tax Partner in our Cheltenham office, advises business owners, entrepreneurs and families on incentivising growth.

The pace of change in the workplace has never been greater. Disruptive technologies and flexible working practices have made uncertainty the new norm and are driving family business owners to think of new ways to attract and retain talent.

Keeping non-family managers focused and incentivised is one of the biggest challenges faced by the owners of family businesses.

As small to medium sized companies (SMEs) expand, it can become harder to find the necessary skill-sets available within existing staff structures to support that growth. It therefore becomes more important to look elsewhere.

Traditionally, the key element of attracting and retaining talent was in the remuneration package offered and how packages compared to those offered by other organisations in the industry. Flexible benefits, such as enhanced pension provision or the buying and selling of holiday for example, can be a tax efficient extra to complement bonus or share reward arrangements, although recent changes in salary sacrifice rules has restricted some opportunities here.

The offer of flexible working, making use of emerging technologies, an appealing office environment and genuine opportunities for training and career progression are now just as important. Successful local businesses are now offering fun workspaces, birthday holidays and all-expenses-paid mini breaks, as just a few examples.

The tax system supports capital investment, through schemes such as the Annual Investment Allowance. This offers full tax relief on up to £200,000 of capital expenditure each year on certain assets, which can include laptops and mobile phones (usually exempt from benefit in kind charges). Additional relief and reduced taxes are available for low emitting company cars and workplace nurseries.

That is not to say pay is not important of course, but cash can be provided in a way that incentivises ambitious members of staff. A carefully structured bonus system based on performance is a useful tool because it rewards success when the business is thriving but can be scaled back when the economy tightens and the ability to pay rewards is not immediately available.

Other avenues are also available. While family companies can have concerns about awarding shares to employees, if structured carefully, the existing shareholders’ interests can be protected. Employee shares can be created which do not allow the employee to vote; do not disturb the company’s dividend policy and allow the employee to share only in the growth in value of the business, to which they contribute. If a business has assets of £30 million or less, it may be possible to offer share options known as Enterprise Management Incentives (EMIs) for instance. This gives the employee an opportunity to buy shares at a set point in time in the future, potentially subject to performance conditions, with a current value of up to £250,000. The gains the employee enjoys can be free of income tax and National Insurance Contributions (NIC) and there is a special relief which can mean that the rate of tax on the proceeds from selling the shares is just 10%.

Alternatively, if the sale of the business is the ultimate goal, then share plans dependent upon the sale taking place are ideal for focusing the attention of key employees on achieving that goal.

Ultimately, if there is no natural family successor identified, then a trade sale or sale to the management team, could be considered. If a trade sale takes place, it is possible the acquiring company may not welcome family members staying on, on what is after all no longer a family business. It is possible the acquiring company will place the interests of the non-family management team first and foremost.

If a management buyout is a real option, then by building an involved and incentivised management team, the foundations for a successful exit and the continuation of the business have already been laid.

Whatever the ambition, obtaining specialist help from pro-active advisors who can help plan and make the most of reliefs that are available to the business will be crucial.

Building attractive and flexible working arrangements, accompanied by the right incentive structure for non-family managers in the business, can make all the difference to help deliver success.

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