There are many reasons for private businesses to implement a MIP. The benefits for both the company and the individual include:
- The ability to retain key talent in the business.
- The ability to recruit key people (i.e. to help compete with larger organisations).
- To provide real ownership to employees in the form of equity.
- They are tax efficient. Capital gains tax (CGT) of 33% applies to the sale of equity, whereas income tax of 52% applies to a cash bonus, along with employer PRSI of 11.05% (which does not apply to options or free equity).
- Rewards can be linked to the growth of the business.
Types of incentive plan
Employers can choose from many types of incentive plan. A MIP can be either an equity incentive plan or a cash incentive plan. It doesn't always have to result in a company giving away equity, as certain factors may preclude them from doing so.
Cash-based plans usually involve either a cash bonus, pension contribution or shadow equity. While pension contributions may be eligible for relief, cash bonuses and shadow equity are typically subject to tax rates of up to 52%.
In contrast, private businesses can choose from a variety of equity schemes when implementing an incentivisation plan. Typically, private businesses shy away from Revenue-approved schemes as they can be onerous to implement. They also provide less flexibility to the private business, as there may be a need for liquidity within a defined time frame. Common plans include:
1. Restricted or clog shares:
- Shares with specific transfer restrictions.
- The upfront tax charge can be reduced by up to 60%.
2. Sweet equity:
- Part of a deal (merger, acquisition or sale) that reserves some ordinary equity for management.
- Upfront tax costs are often low due to high levels of debt within the business.
3. Growth or hurdle shares:
- Employee shares in the future, provided certain targets are met.
- Upfront tax costs are often low or minimal due to challenging growth targets.
4. Forfeitable shares:
- Shares that are subject to forfeiture provisions.
- The shares can be clawed back if certain targets are not met.
5. Unapproved share options:
- An option to acquire shares at a later date by the employee.
- Any tax liability on exercise rests with the employee.
6. Key Employee Engagement Programme (KEEP):
- An option to acquire shares by an employee at a later date for a set price.
- CGT is payable on the sale of the shares instead of income tax on exercise, subject to certain conditions being met.
Ultimately, the scheme chosen will depend on the stage of the business (established business or scale-up), the type of employees to be rewarded (top executives, key management, wider employees etc.) and the objectives for the business (high growth or an established business with bolt-on acquisitions).
Plan design
The design of the plan will be dependent on the type of plan chosen. Nevertheless, common points for consideration are as follows:
- Targets or hurdles should be challenging, but achievable.
- The scheme should be simple to understand.
- The scheme should be designed so that it has a life of, say, three to five years.
- Typically, there will be milestones within that time frame.
- Consider whether the scheme will be open to current employees only, or whether future employees may be included.
- How will leavers be dealt with? There is the potential to treat good and bad leavers differently.
Three key actions businesses can take now
When deciding on whether to implement a MIP, private businesses must consider the following:
Do other companies in your industry offer a MIP? Do your compensation packages adequately attract the right person for the job? It is important to ensure that the package is suited to the position of the job (whether managerial or technical), so that it's in line with other similar roles.
What's the right MIP for my business? Each company is different and every MIP can be designed to suit the needs of the particular company. Private businesses often have more flexibility in terms of the types of plans available, as Revenue-approved schemes are typically not suitable.
What's the right MIP design for your company? Any MIP must be properly designed and implemented, and the tax implications for both employees and the employer considered and managed. Designing the MIP is only the first step in the process. The MIP is then implemented and the employer must also consider other aspects such as the initial valuation of the shares, share reporting obligations and payroll obligations.
We are here to help you
The job market can be challenging in terms of recruiting a good quality workforce with the required skills. With significant cash constraints many employers are looking for cost effective and creative solutions to remunerate these new hires in a way which will give a competitive edge but also serve to recruit and retain those hires.
Your company should therefore offer competitive remuneration packages to employees, which may include a MIP, so that new talent can be recruited and key talent can be retained for the medium to long-term.
We are ready to help you as you face the future. Contact us today.
