I am thinking of giving some of our employees shares in our business. Should I?

I am thinking of giving some of our employees shares in our business, would this be a wise thing to do?

Last year, because of the proposed changes to the way that ’employee share schemes’ (and I use that phrase in the broadest possible sense to include not only formal schemes but also the adhoc arrangements commonly in place in small businesses) are taxed, many employers started to have second thoughts about giving shares to employees. But interestingly for most small- and medium-sized businesses employees share schemes were never, actually, that attractive to employees.

Under employee share schemes, businesses pay some of the remuneration of their employees in the form of shares in the business. Cash strapped businesses a decade ago used this to the max (and you probably remember the employees that became ‘overnight’ millionaires when Amazon, Google, etc went public). So many SMEs started offering ‘shares in the business’ to employees as a way of attracting and retaining staff.

Initially employees tend to find the prospect of ownership very exciting. It’s a little like owning your own heavily mortgaged home, you are on lowest rung of a very long aspirational ladder, but at least you are on it. Sooner or later however employees realise that they are only going to make money from their shares if they can actually sell them, and that’s the rub. If you are an employee of a private business there is no market for the shares, and if there is no plan for the owners to do a trade sale or IPO of the business in the next five to 10 years time there is no market on the horizon either. You would be astonished at the number of people I know who still own a small interest in businesses that they left years ago, and who harbour a small hope that one day they may recoup a dollar or two when they finally get a chance to sell their shares.

The changes to the tax legislation last year really just made employee share schemes even less attractive for many people. The guts of the change is that all employees will be taxed on the value of the shares they are given, in the year they are given them (prior to the change in legislation employees covered by ‘special’ schemes could defer the tax and pay it when the sold the shares).

Like all legislation there are still some exemptions, but you get the idea: essentially if an employee is given shares worth $10,000 they will need to pay tax on that amount in the year that they are given the shares, even though they probably won’t be able to actually sell them, and release the cash, for many years to come.

So you can see that giving employees shares in your business may not actually be in their best interest, but there is a good alternative. If you can wait until next week, I will share it with you then.

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Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses: Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business” and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).