Small firms

Flowering shares: new ways to attract the next generation

As summer blooms, the idea of ‘flowering shares’ is worth discussing, suggests Nick Mayhew, Price Bailey partner, strategic planning and development.

Wider equity participation is an interesting opportunity for legal firms in the new ‘company’ world. Clients trading through companies are using it to incentivise their teams. As summer blooms, the idea of ‘flowering shares’ is worth discussing.

With employee shares there are two things on the managing director’s mind:

  • Can we use shares to cement loyalty and attract talent, and
  • Can we start our rising stars off on gaining a larger stake in the firm?

These thoughts are a long way from the traditional ‘lock-step’ approach. They represent a contemporary look and feel that many will struggle to emulate. Could it also be a competitive advantage in a market where the loyalty of good people is crucial to success?

From a tax point of view, employee shares are more challenging than partnership equity. HMRC is alert to hidden pay in share values; so valuation requires expert help.

However, there are very popular, simple, approved schemes, like Enterprise Management Incentive (EMI). A main use of EMI schemes is to get ‘non-equity’ partners started with a right to buy shares at a fixed purchase price, which is often exercised when a pre-set target is achieved in the future.

These schemes are flexible, tax advantaged and attractive. There are a range of employee share option schemes to suit different employee groups. However, studies show that conditional rights are less of an incentive than owning shares outright. ‘Flowering’ shares are a way to do this. How do they work?:

  • Typically they are a separate class of share, with rules that make them worth little now (meaning little or no tax pressure), and
  • Value is not restricted as the firm’s results improve.

Past value is reserved for the existing shareholders, and future value grows equally in the hands old and new.

At many firms, the difference between a shareholder (investing) and an employee (working), and the rewards for each, are confused. The roles are unhelpfully mixed up in partnership. Gaining this understanding is very helpful to discussions about partner performance and firm’s results. For many firms, the partner culture cannot cope with such discussions.

For those that can cope, blossoming shares and similar ideas can help them offer an attractive long and short-term package mix to the younger generation. Outside of the law this is old hat, of course, and there is much more competition for talent than just fellow law firms.

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