At Brodies we have a specialist legal team called Corporate Tax & Incentives
Most people have an intuitive grasp of what corporate tax is. It involves advising companies, organisations, shareholders and individuals, on how to structure their business deals, assets or day-to-day operations in such a way that complies with, or mitigates, a particular tax regime.
But incentives? This is when people start guessing.
“Something to do with incentivising performance?” is a common response. “It’s all about bonuses and share options?” would be another. “Paying people tax efficiently?” is a third.
And all would be correct, sort of.
At its core, the practice of incentives is about helping executives, employees and investors measure and deliver something that is important to the organisation that they are involved in. Put another way, incentives involves identifying what is operationally or strategically important to a company and then devising something – a reward structure? a methodology? – to help that company achieve its aims and objectives.
Sounds simple doesn’t it? Well it is if you know what you first want to achieve.
“If you don’t know where you’re going, you might not get there.” Yogi Berra
Designing a roadmap
Let me give you some instances of how we help companies work out what they want to achieve from an HR and reward perspective.
At some point all companies have to actively plan for and manage staff recruitment, retention and motivation.
If it is the recruitment of a senior executive, how should the reward package be documented? Senior executives are recruited to help a company achieve its strategic aims and objectives and so when a company decides to recruit one executive over another, the company is taking a view as to which executive will better deliver on its strategic aims and objectives, i.e. which executive will create greater value for the organisation.
And once that decision has been made, the recruitment package must be struck and documented, after which the package continues to evolve. From term sheet to execution and beyond we help companies to formulate, strike and document the recruitment package.
But because business life never stands still, appropriate elasticity in reward policies and incentive structures is vital given the number of remuneration elements in the package and their potential value.
For example, in private companies it is common for management to hold equity in the form of growth shares (being a favourite alternative to granting something called EMI options which are not always available). These growth shares are normally designed to motivate management to drive the business forward with equity vesting levels linked to the satisfaction of certain predetermined performance targets such as EBITDA or Enterprise Value.
But what happens if the business plan has to change rendering the performance targets unrealistic? Is it possible to re-set the terms of the equity without disturbing the tax efficiency of the shares? Yes it is possible, but each situation turns on its own facts because each company has its own capital structure and legal constitution.
Often in preparation of an exit, businesses like to reorganise themselves, streamlining their operations and creating new group structures. If a company restructures itself what does this mean for incentives? What are the tax implications of management rolling over their equity onto a new holding company? Can entrepreneurs’ relief still be obtained? Is the original incentive still fit for purpose?
It should be apparent by now that a large part of the incentives work that we do at Brodies is responding to changing client need. A well designed incentive structure that was implemented last year may not be fit for purpose this year, for no other reason than “events, dear boy, events” intervening. Companies do not move in a straight line, they are constantly adapting.
Your incentives policy needs to be capable of adapting too.
Nigel Watson is a partner in the Brodies Corporate Tax & Incentives team at Brodies LLP.
On August 20, 2019