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Incentivising Key Employees – The Structures for SMEs

Welcome to Query Of The Week

You are very welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.

In this week’s Query Of The Week, John Murphy explored the answer to “How do I retain key employees by allowing them to benefit in any future uplift in the value of the company?”.


Incentivising Key Employees – The Structures for SMEs

If this Query Of The Week was of interest to you, you will also be interested in our Incentivising Key Employees – The Structures for SMEs online course.

Full details for this online course can be found here.

CPD Allocation 1 Hour
Fee €25 (or 1 CPD Club point)
Presenter John Murphy – OmniPro
Category Taxation

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Hello and welcome to this week’s query of the week.

This week we were approached by a client who in turn had a client who wanted to incentivise an employee in some way.   The shareholders were afraid that this key employee would leave the company so they were suggesting there might be a way that they could introduce him into the company but not necessarily give him any value that had occurred before this date.   We recommended that they introduce a gross scheme effect whereby the key employee is bought into the company and will share in the growth of the company from that date effectively.

For example: –

A company is worth a million euro to the existing shareholders, and their share is called A shares, and if the company were to be wound up, their shares would be equal to at least €1 million. Then you will issue a new B share to the Employee shareholder, and that B share will effectively give them rights at whatever percentage that the company wants to give to that employee. However, they will only get value above the €1 million already allocated to the A share. In our particular case, the way it worked out and incentivised the employee was that this company was growing, with good prospects that this company will be worth €2 million in three to four years.

In this particular case, the company gave the employee 7% of the company, and he is in line to gain from the uplift to €2 million, so it was an excellent incentivisation for that employee.

Protecting against tax issues

I suppose the argument against any tax issues here was that they had done a very stringent valuation about that million so effectively when the employee introduced shares, he didn’t get anything of value.

He got shares in a company which he wasn’t going to get any value out of until it

went above one million and that was the reason why it wouldn’t have any stamp duty during any CGT value lifting or any potential PAYE/PRSI issues about the payment or the issue of shares to the employee because of the fact there was no value there.

There are other types of schemes that might work better, depending on the company. If it wasn’t growing, he could have a keep scheme, where they put in what’s called phantom shares which are shares that effectively are notional shares and that’s a bit like how your bonus is calculated, based on performance as opposed to being issue shares.

These will all be discussed in our Incentivising Key Employees webinar that we’re presenting on the 3rd of April, so if you’re interested in this area, please log in.

Thanks very much