Small and Medium Enterprises (SMEs) are crucial to the Irish economy, contributing significantly to job creation and economic growth. However, in the current competitive labor market, many SMEs are finding it challenging to attract and retain top talent, especially when competing with multinational companies that have deep pockets. To address this issue and foster innovation, SMEs are increasingly implementing share schemes. These schemes allow employees to own a stake in the company, aligning their interests with the success of the business.
Implementing share schemes in SMEs can yield numerous benefits for both the company and its employees. The most common reason for creating a share scheme is to attract and retain talent. Offering employees a stake in the company, especially during a period of strong growth, can provide a real competitive advantage in the labor market. It incentivizes employees, making them feel more connected to the company’s success and fostering a stronger sense of ownership, motivation, and loyalty.
Share schemes also facilitate long-term planning and continuity by incentivizing employees to contribute to the company’s growth over the long run. They can also reduce employee turnover, allowing companies to benefit from the time and money they have invested in developing their employees. Additionally, share schemes can avail of favorable tax treatment for both the employee and employer, further enhancing their attractiveness.
For instance, a restricted share scheme, commonly known as a CLOG, allows SMEs to give shares to new or existing employees with tax relief amounting to up to a 60% reduction on the value of the share allocation. To illustrate, if an employee were entitled to a cash bonus of €100,000, they may be liable to PAYE of 40%, PRSI of 4%, and USC at 8%, resulting in a tax payment of €52,000. However, if a CLOG scheme is made available, and the bonus is paid through an allocation of shares, the tax relief of 60% would reduce the tax bill to €20,800. Moreover, the employer can also benefit from an exemption to the employer’s PRSI, resulting in a saving of 11.5%.
To avail of the tax reliefs in a restricted share scheme, the shares must be retained for a minimum period of 5 years and 1 day. During this period, the shares are held by a share scheme trustee, and they are vested at the end of the 5-year period. However, the five-year term may be reduced in the case of death, sale of the company, and some corporate actions.
While the theory of a restricted share scheme is relatively straightforward, there are complexities that SMEs should be aware of. It is crucial to choose the most suitable scheme and ensure ongoing governance, trusteeship, and administration are done correctly. To reduce costs, SMEs often opt for pre-packaged solutions for these aspects.
In summary, SME share schemes provide a valuable tool for empowering growth, increasing employee engagement, and fostering a sense of ownership within small and medium-sized enterprises. These schemes offer numerous benefits for businesses and their employees, including enhanced loyalty, attraction and retention of talent, long-term stability, and, perhaps most importantly, tax savings. It is crucial for SMEs to adhere to applicable regulations and seek professional advice to ensure compliance and maximize the potential advantages offered by share schemes. By embracing employee ownership, SMEs can thrive and create a win-win situation for both the company and its workforce.
Eoin Hassett is the Trustee Services Director of the ITC Group.