The market downturn only increases the need for directors to find ways to reduce costs but keep employees incentivised. Granting an option while share values are low has obvious advantages - there is no significant cost to the company in making the grant, lower share values translate into greater potential gains and there are increased tax savings for the individuals concerned. A share option is effectively a right to purchase shares in the future (normally at a predetermined price). The right to exercise the option can be subject to the satisfaction of performance conditions, for example, staying with the company for a number of years. Exercise of an option is often conditional on achieving an exit. What are the main advantages of share options in the current financial climate?
- They can be considered as an alternative to a cash bonus.
- They reward loyalty and therefore help you to retain valued staff.
- Having a stake in the future of the business aligns the interests of employees with those of shareholders.
- Employees will share in any increases in the value of the business.
- Share options can be very tax efficient. There is no tax or national insurance to pay on grant and, if certain conditions can be met, exercise of the options can also be tax free, leaving only capital gains tax to be paid on the sale of the shares.