Is your family business growing? How to incentivise your non-family manager

As the family business grows, succession can be a challenge. In order to bring the relevant knowledge and expertise to continue to grow the business, it is usually necessary to move to a more “corporate” structure and recruit senior management out with the family.  However, to attract and retain the right talent finding a remuneration package that rewards and empowers management, without conflicting with the family’s objectives, can bring challenges. This is an area many of our clients ask for assistance with as they strive continue their business success by striking the right balance of being commercially minded whilst continuing to protect their legacy. 

Remuneration Packages and Long Term Incentive Plans

As well as the usual salary and benefits package, reward that includes a form of equity-based incentive can mean management share in the success of the business along with the family, bringing loyalty and motivation to deliver on the strategy.   

However, family business may be apprehensive in expanding share ownership outside the family and don’t want to dilute the control and ownership that has been passed down the generations. In these situations a form of Long Term Incentive Plan (“LTIP”) or a phantom share plan which doesn’t involve physical share ownership, but allows the management to receive a return based on the growth of the company value, can help bridge the gap. 

An LTIP can be very flexible and in a private company can be structured to provide a monetary / cash bonus based on performance instead of an of issue equity. If structured correctly a cash LTIP arrangement means that management feel and act more like a business owner.   

A cash LTIP reward can result in a high level of tax leakage with the value being subject to PAYE and NI.  For that reason, the family business should consider whether an equity award with future growth being subject to lower capital gains tax rates provides an enhanced incentive for management.

Enterprise Management Incentives

HMRC approved share scheme’s such as the Enterprise Management Incentive (“EMI”) provide a very tax efficient way of incentivising management. An EMI option can be structured very flexibly with performance conditions required to be met before the option can be exercised and the equity acquired. These conditions could be an exit event or based on a growth in value.  As management would only hold options, there are no minority shareholders which require to be party to shareholder agreements or be involved in the shareholder decisions.  Any options held by a leaving employee simply lapse and there is no requirement to buyback shares owned by management.  

Alternatively, if the business doesn’t qualify for EMI there are other protections for the family that can be factored into shareholder agreements and company Articles if equity is awarded to management.  There can be restrictions on transfers of shares, restricted voting rights and provisions on dealing with the equity in leaver situations which will give the family comfort that they can influence the future ownership of any equity.   

Having an aligned and incentivised management team allows the family to move away from the day to day operations of the business where required, and gives time to focus on the core values, vision and growth strategies keeping ahead of the competition. 

If you would like any assistance on analysing, implementing or reviewing any existing incentive schemes, please get in touch with Lynn Wilson or your usual AAB contact.  

Find out more about AAB’s Family Business Team here.