For many companies operating in competitive markets in the current economic circumstances, a key aim is to preserve cashflow and maintain profits. These companies will likely also be wanting to retain key employees who will be essential to keeping the business running during the downturn and coming out of it with a competitive advantage. These two aims compete with one other, as one way of preserving cashflow is to decrease employees’ salaries or take advantage of the Government’s Furlough scheme.
One way in which companies can seek to achieve both the preservation of cashflow and the retention and motivation of employees is through a salary sacrifice arrangement. These are contractual arrangements between an employer and an employee where the employee agrees to give up some of their salary in return for a benefit. For most companies, particularly start-ups, equity in the company is a powerful recruitment and retention tool and can be offered to employees as the benefit in exchange for a salary sacrifice.
Sharing equity with employees in this way is often called “sweat equity” as the employee’s investment of skill and effort into the company is rewarded with equity. The award of equity can be structured in a number of different ways. The structure best suited to a company will depend on its circumstances and long-term plans, however broadly speaking, equity can be awarded in two different ways:-
1. Award of shares – shares are allotted or transferred to the employee immediately on the agreement to the salary sacrifice. The employee will then have all of the rights that are attached to the shares.
2. Grant of a share option – the employee is given the right to acquire shares at an agreed price at a date in the future subject to the terms of a share option scheme. These terms could be based on the employee’s or the company’s performance so that they can only exercise the option once the performance hurdle has been passed. The employee will not actually own the shares at the time of the agreement to the salary sacrifice.In addition to the preservation of cashflow and motivation of employees, employee share schemes can offer additional benefits to the company, such as tax benefits if an approved scheme is implemented.
How can we help?
For more information about how salary sacrifice arrangements may work for your company, please contact our Corporate team who have experience in providing businesses with tailored advice on the options available.
If you want to implement a scheme, our Corporate and Employment team work together to prepare the necessary documentation, which can include:-
- Shareholders’ Agreement
- Articles of Association
- Employment Contracts
- Share scheme documents
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
