SME share schemes: Empowering growth and employee ownership
SME share schemes can help engage employees in the company's success, fostering a stronger sense of ownership, motivation and loyalty.
Small and Medium Enterprises (SMEs) play a vital role in the Irish economy, contributing significantly to job creation and economic growth.Â
With the current buoyant labour market many SMEs are struggling to attract and retain top talent in particular when competing with multinationals with deep pockets. In order to foster innovation, incentivise employees and attract and retain skilled talent many SMEs are implementing share schemes.Â
These schemes offer an opportunity for 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 we see for the creation of a share scheme is the attraction and retention of talent. Offering a stake in the company, especially during a period of strong growth can provide a real competitive advantage in the labour market.
For SMEs who are having issues retaining or motivating staff, linking an employee’s long-term wealth with that of the company can incentivise employees and make them feel part of the company's success, fostering a stronger sense of ownership, motivation and loyalty.Â
Share schemes facilitate long-term planning and continuity by incentivising employees to contribute to the company's growth over the long run. They can also reduce employee turnover allowing companies benefit from the time and money they have invested in developing their employees.
Share schemes can avail of very favourable tax treatment for both the employee and employer. For instance, a restricted share scheme (commonly known as a CLOG) will allow the SME 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.
This is possibly best explained through an example. If an employee was entitled to a cash bonus of €100,000, they may be liable to PAYE of 40%, PRSI of 4% and USC at 8% meaning they will pay a whopping €52,000 in tax.
 If instead a CLOG scheme is made available, and the bonus paid by way of an allocation of shares the tax relief of 60% will reduce the tax bill to €20,800. In addition to this generous reduction in tax for the employee, the employer can also avail of an exemption to the employer’s PRSI, a saving of 11.5%.
To avail of the tax reliefs in a restricted share scheme, the shares must be retained for a period of minimum of 5 years and 1 day. During this period the shares are retained by a share scheme trustee and the shares are vested at the end of the 5-year period. The five-year term is 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 forward there are of course complexities.Â
Firstly, making sure you choose the most suitable scheme is crucial. It is necessary to ensure the ongoing governance, trusteeship and administration is done correctly. In order to reduce costs, SMEs will typically use a pre-packaged solution for this.
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, and long-term stability and perhaps most importantly tax savings.Â
It is crucial for SMEs to adhere to the applicable regulations and seek professional advice to ensure compliance and maximise 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.Â
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