The Value of Hurdle Shares: A Strategic Option for Incentivising Growth

Are you looking for innovative ways to incentivise your valuable team and unlock business growth? Hurdle shares, also known as growth shares, could be the game-changer you need. With the right strategy in place, hurdle shares can provide a tax-efficient mechanism to reward your employees and drive your company's growth.

Hurdle shares are a type of share-based incentive arrangement used by companies to motivate and reward their employees. Hurdle shares are typically granted to senior executives and require the recipient to meet certain performance targets before the shares are awarded. These performance targets are known as "hurdles." Hurdle shares are designed to align the interests of the employee with those of the company by incentivising the employee to increase the company's value.

1. When designing a hurdle share scheme, it's important to set clear performance targets that are relevant to the employee's role and responsibilities.
2. The scheme should also include a mechanism for determining whether the performance targets have been met and how the shares will be awarded.
3. The share scheme must comply with all applicable laws and regulations, including tax and securities laws.
4. Hurdle shares are often subject to vesting periods and restrictions on transfer, so it's important to carefully consider the terms of the share scheme and ensure that they are clearly communicated to the employee.
5. Companies must also consider the potential impact on existing shareholders and any potential dilution of their shares.

Common mistakes people make when implementing hurdle share schemes include:

1. Failing to set clear and relevant performance targets, which can lead to confusion and disputes over whether the targets have been met.
2. Failing to comply with applicable laws and regulations, which can result in legal and financial penalties.
3. Failing to communicate the terms of the share scheme clearly to employees, which can lead to misunderstandings and dissatisfaction.
4. Failing to consider the impact on existing shareholders, which can result in dilution of their shares and a decline in share value.

How Hurdle Shares Work

Hurdle shares are a separate class of shares only sharing in the increase in a company's value beyond a predetermined threshold. This ensures that your employees remain motivated to help you achieve your ambitious growth targets. Moreover, this innovative financial instrument can be beneficial to both the company and employees from a tax perspective.

Let's break it down: a company with a current value of £5 million issues hurdle shares that only participate in proceeds over a £6 million value. Fast forward five years, the company is sold for £10 million. The first £6 million goes to ordinary shareholders, with the remaining £4 million split between the ordinary and hurdle shares. This structure creates a win-win situation, incentivising employees to drive the company's growth.

To successfully implement a hurdle share scheme, your company should consider several factors. Setting the hurdle at an optimal rate ensures the hurdle shares have minimal initial value, thus reducing the cost for employees. This can also lead to tax efficiency, as employees would pay Capital Gains Tax (CGT) on the sale profit, which typically stands at 20% or can be reduced to 10% with Entrepreneurs' relief.

While hurdle shares can provide significant advantages, they also pose potential challenges. The implementation process can be intricate, involving the creation of a new class of shares, amendments to Articles of Association, and requiring shareholder approval. Furthermore, it is usually not possible to agree on a value for the shares in advance with HMRC.

Despite these complexities, the benefits of hurdle shares are manifold. For fast-growing companies, they serve as an effective tool to incentivise key employees without a cash cost, encouraging them to contribute towards the company's growth. Furthermore, these shares can be non-voting, ensuring employees do not interfere with the board's decision-making process.

The suitability of hurdle shares does, however, depend on the company's structure and growth potential. Due to the requirement of creating a new class of shares, hurdle shares are not typically ideal for UK listed companies.

To sum up, hurdle shares can be a transformative tool for businesses looking to reward and motivate their employees. By strategically implementing a hurdle share scheme, you can leverage this unique financial instrument to drive growth, enhance employee satisfaction, and deliver value to all stakeholders.

Similar incentive arrangements you might want to to consider

• Enterprise Management Incentives (EMI): This is a highly tax-efficient share option scheme designed for smaller companies to incentivize key employees. It's an excellent method for high-growth companies to attract and retain talent, as employees can benefit from the business's success without a hefty tax bill.
• Employee Ownership Trusts (EOTs): This is a model where a majority stake in the business is held on behalf of all employees. It fosters a culture of shared responsibility and can be a tax-efficient way of transferring ownership.
• Flowering Shares: These are an equity incentive tool where employees benefit only when the company’s value blossoms beyond a certain level. They can be an attractive option for high-growth businesses, as they align employee incentives with business performance.
• Growth Shares (another name for Flowering orHurdle Shares): These allow employees to benefit only from the future growth in the company's value above a specified threshold. Ideal for high-growth companies, they provide a cost-effective way of incentivizing employees.
• Non-Tax-Advantaged Share Plans: These are flexible share schemes that allow companies to reward employees in a way that isn't governed by statutory tax advantages. This flexibility can be beneficial for companies with unique circumstances or high growth rates.
• Phantom Share Schemes: These are incentive plans that grant the value of a company's shares, without actually issuing shares. They can offer a simpler way for high-growth businesses to incentivize employees without diluting share ownership.

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