"The qualifying criteria specified under KEEP has made the scheme unsuitable for the very SMEs it was first intended for."
Following Ocorian's attendance at the Irish ProShare Association's (IPSA) Employee Share Ownership Day (ESOD) and Awards evening at the Google Ireland headquarters, Conor Blake stresses the importance of share ownership plans within small and medium sized enterprises (SMEs) and how they can be vital in attracting and retaining key talent.
ESOD doubles up as a celebration of employees having a stake in the success, sustainability and creativity of the organisations they work for, but also as an excellent platform to showcase employee financial participation in Ireland using the various structures allowed under Irish law.
There were several speakers and panel discussions across the day, including a speech from former UK Trade Minister, Lord Mark Price, who underlined how the secret to share ownership is that if employees own something, they will care more about it.
It was share ownership's future in Ireland that dominated discussion. SMEs comprise 99.8% of the Irish economy and employ 69.1% of the working population. The significance of these facts was supported by IPSA CEO Gill Brennan, who reiterated that those companies who are part or fully owned by their employees are demonstrably more productive, profitable and overall, more valuable in terms of earnings per share and contribution to the national economy. It was very much a case of 'the proof is in the pudding,' with Dalata Group's Sean McKeon providing an interesting talk evidencing their recent and successful introduction of a share ownership plan in Ireland's largest hotel operator.
However, if the number of private and public companies facilitating share ownership schemes is to continue to increase and stabilise the ever competitive market for employee movement, a more pronounced commitment from businesses is needed to encourage employee participation. An uptake in share ownership will largely depend on the re-drafting of the restrictive criteria for the Irish government's recently introduced KEEP scheme.
The KEEP scheme
Introduced in 2017 as a potentially tax advantageous share option incentive for private SMEs, the Key Employees Engagement Programme is a non-approved share scheme appropriate to Ireland. It provides a more relevant alternative option to drive employee participation in SME share schemes.
Impetus for the new scheme came from the UK Enterprise Management Incentive Scheme. Its intention was to attract and retain key talent in the face of increasing loyalty issues among employees, rewarding workers' efforts and loyalty through employee share ownership. Loyalty issues stem from - as research suggests - millennials tending not to stay in a company for longer than three years, a topic that received significant traction over the course of the day.
The introduction of KEEP was also designed as an attractive alternative to existing Irish non-approved share schemes, which have tax and non-equity limitations. These include;
- Unapproved Share Plans
- Restricted (Clogged) Share Schemes
- Phantom Share
Under the KEEP scheme, qualifying private companies may grant KEEP share options to key employees. Employees enrolled on the scheme are incentivised by not having to pay income tax on the exercise of an option - only capital gains tax will be charged upon the disposal of shares.
However, the drafting of the KEEP legislation was unexpectedly restrictive. The qualifying criteria specified under KEEP has made the scheme unsuitable for the very SMEs it was first intended for.
The issues with KEEP
- The valuation of shares - Under the KEEP criteria, companies engaging with the scheme are required to give an independent valuation. This is challenging for a start-up as they are often unsure of their future value.
- Excluded industries - KEEP excludes the professional and financial services industries. This means that the many Fintech start-ups across Ireland who would naturally favour KEEP, are excluded.
- Full-time employee exclusivity - For employees to qualify for KEEP they would have to be registered as full-time and work over 30 hours a week - many start-up employees are part-time or because of the nature of Fintech start-ups, work on a consulting basis.
- Restrictive capping - The total value of unexercised qualifying share options that can exist per SME is capped at EUR3m.
- Buy/back and redemption - For the buy/back and redemption of shares there has to be a market for their disposal. SME's would need to either redeem or buy back the shares.
The general consensus of the day was that the key driver behind KEEP ironing out these issues is the Budget 2019. Revised legislation is needed from the next Finance Bill in order to encourage the adoption of the schemes from virtually zero. This is being prompted by various parties such as IPSA, who all seek amendments to the legislation.
The meet offered invaluable insight into the existing share ownership climate in Ireland and how the schemes are a crucial factor in attracting and retaining key talent within Irish companies. It is now up to the government to recognise the true importance of share ownership and relax the stringent and counterproductive KEEP legislation.
How Ocorian can help
Ocorian is a trusted provider of bespoke Corporate Services to both private and public companies. We can support your business by providing advisory and trustee services to a broad portfolio of clients. Ranging from small yet dynamic private businesses - to which KEEP and non-KEEP schemes are relevant - to listed companies who may be considering share ownership schemes, we personalise our approach to suit our clients' every need.