Tag Archives: Bonus

Accountancy & Accounts, News, Tax

How to Give Your Staff a Tax-Free Christmas Bonus

December is often a time when businesses look to give back to their employees and celebrate the company’s success over the last year. The most common way to do so is through a Christmas bonus, usually in the form of some extra cash, but this is not always the best way to get the most from your money.

Cash bonuses paid by businesses are subject to Income Tax, which means that anyone who receives a bonus will not benefit from the full value of your Christmas gift. If you give goods with a cash value, these will also be subject to a tax liability that will reduce their value in most cases. These factors can make it difficult to decide how much to offer as a bonus, and may lead you to ask whether you can give a Christmas bonus without incurring this tax liability.

Thankfully, there is a way. By using the trivial benefits exemption to offer staff (including company directors) bonuses in the form of gift vouchers, you can avoid any tax liability for the business and for the recipient and let your staff enjoy the full value of a well-earned Christmas bonus.

Here, the expert chartered accountants at Sherlock & Co will explain how the trivial benefits exemption works, the restrictions that apply, and what businesses need to do in order to take advantage of this exemption in time for Christmas.

How can I make sure gift vouchers qualify as tax-free bonuses?

Gift vouchers are among a number of possible items that may be considered “trivial benefits” under tax law. Unlike cash bonuses or goods, trivial benefits are not subject to Income Tax, although there are some conditions that you must meet when giving vouchers to ensure that they qualify as trivial benefits.

If the gift vouchers meet all of the following restrictions, it will be considered a trivial benefit:

– Each voucher must cost a maximum of £50
– The voucher must not be a cash voucher or be exchangeable for cash
– The recipient must not be entitled to the voucher through the terms of their contract
– The voucher cannot be given as a reward or performance incentive
– The voucher cannot be provided as part of a salary sacrifice arrangement

Not only are vouchers that meet these conditions free from any Income Tax liability, but their cost is a tax-deductible expense for the business. It does not matter where you buy the voucher from, so you are free to pick something your staff will like. You might choose a popular high-street shop, an online outlet, or a voucher that they can spend in multiple places to allow them to choose for themselves.

Are there limits to how many vouchers I can give?

There are no limits on how many vouchers you can give, but there are some limitations on how many staff members and directors can receive. For employees, there are very few restrictions and they can enjoy essentially unlimited trivial benefits each year (that meet the above conditions), but they cannot receive more than one per day.

For directors of companies with five or fewer shareholders, there is an annual limit of £300 per tax year on the trivial benefits they can receive. These businesses are referred to as “close” companies and this £300 limit extends to anyone who lives in the same household. Nevertheless, this means that directors can enjoy up to six £50 gift vouchers each year without incurring any additional tax liability.

For these reasons, vouchers that qualify for the trivial benefits exemption can be a good way to offer bonuses throughout the year. What is more, trivial benefits are discretionary, which means that you do not have to give them to every employee. You can give to one employee, a group, or your entire staff – just remember, you cannot give them in recognition of hard work without incurring a tax liability and this may be more difficult to prove if you give them to only a few select recipients.

With all of this in mind, we hope that you take advantage of the trivial benefits exemption and give a generous, tax-free Christmas bonus to your staff this year.

Business Research, News

Giving CEOs financial-based incentives actually damages long-term firm profits

The greater stress companies put on financial incentives and financial performance in bonus systems for CEOs, the more negative the impact is on the firm’s financial performance, according to new research from Vlerick Business School. These findings come from a research study into the top 600 European firms and their CEOs remuneration.

The study was conducted by Xavier Baeten, a Professor in Reward and Sustainability at Vlerick Business School and director of the school’s Executive Remuneration Research Centre, alongside Vlerick researcher, Marthe Van Hove. The study examined the pay levels, habits and incentives of CEOs and CFOs of the STOXX 600 – a stock index of the 600 largest firms across European countries, including 155 UK firms.

The researchers did find however, that these financial performance incentives had a positive impact on the firm’s financial performance in the short-term. Therefore, granting high-level remuneration and committing strongly to incentives such as bonuses and share-related reward schemes, is an effective way to boost firm’s profitability, but only in the short-term.

Professor Xavier Baeten says,

“These financial incentives have a positive impact on firms profitability in the first year – the short-term, however, as we look into the long term, the impact over a two-year period is very surprising. All the positive effects disappear, and the incentives even end up having the opposite effect. Loading CEOs with as many financial incentives as possible is not an effective way to boost financial performance, as it treats CEOs like machines having an exact input and an exact output, reminding us of the saying “the grass won’t grow by pulling it”. CEOs need a variety of motivations and purposes to be incentivised by – not just money.”

The researchers, who have reached their 10th consecutive year of this study, also reviewed the time period from 2014-2019, to see how CEOs remuneration and incentives has changed over these 5-years. The researchers found that over the 5-year period, overall CEO remuneration in Stoxx Europe 600 firms peaked in 2015 at €3.5M, and has decreased since then to €3.3M in 2019.

The researchers also found that over this time period, obliging CEOs to keep shares once vested has grown by 14%. Also, a number of interesting evolutions have taken place related to key performance indicators used in incentive systems.

Professor Xavier Baeten said,

“Between 2014 and 2019, we have seen an increase in the use of non-financial KPIs (such as employee-related measures, sustainability-related measures etc.) in short-term incentive schemes from 71% of the firms in 2014 using non-financial KPIs, this has increased to 83% in 2019. A remarkable finding is that in 2019, no more than 30% of the firms used non-financial indicators in their long-term incentive schemes. We see that employee-related measures, such as employee engagement, are quite popular (used by 44%) in non-financial KPIs, and there has been an important increase in the use of CSR measures, now being used by 30% of the firms, up from 12% in 2014.”

The researchers also found other interesting results about UK CEOs in comparison to their European colleagues, including UK CEOs earning significantly more than their colleagues in Belgium, Netherlands, Scandinavia and Germany. Only French CEOs earned more on average per year – which the researchers suggest could be due to the fact French companies in the index were generally larger firms.

The research also shows the average UK CEO remuneration was €3.3M per year in 2019, which was composed in three different ways on average; base pay (26%), short-term incentives (27%) and long-term incentives (47%).

The Executive Remuneration Study by Professor Baeten from Vlerick Business School, has been carried out now for ten consecutive years.

Environment

Less than 10% of UK CEOs have a financial incentive to tackle climate crisis

Less than 10% of UK CEOs have financial incentives in place to be environmentally friendly in their business practices and thus tackle the climate crisis, according to new research from Vlerick Business School. In fact, the researchers found that only 6 per cent of UK CEOs have in their bonus a KPI focusing on the environment, and less than one per cent have long-term incentives focused on this area.

This research comes from Xavier Baeten, a professor in reward and sustainability at Vlerick Business School and director of the school’s Executive Remuneration Research Centre, alongside Vlerick researcher, Bettina De Ruyck. The study examined the pay levels, habits and incentives of CEOs and CFOs in 899 major European companies. The main focus of this was on the STOXX 600 – a stock index of the 600 largest firms across European countries, including 159 UK firms.

Analysis of data on the 159 UK companies by the researchers revealed that over 90 per cent of CEOs were given no financial incentive to focus on sustainability or environmental initiatives. UK CEOs had more incentives – both short-term and long-term – focused around income, revenue and profit, employees, customers, safety, innovation and shareholder return.

Professor Xavier Baeten said,

“There is a general consensus in business, certainly among larger firms, that there is a climate crisis and that different stakeholders have to play a role in becoming part of the solution. They now understand how their practices are impacting the environment, and are actively looking to implement initiatives that focus on being more environmentally friendly.

However, our research shows that for the overwhelming majority of UK firms, there is no incentive for the top CEOs to enact these environment focused initiatives and policies”.

The collated data also shows that though the majority of UK firms have included a least one non-financial KPI into their bonus plan, only 21 per cent of UK CEOs had a long-term incentive that was not related to the profit of the company or returns for shareholders.

Long-term incentives are a much more significant part of the remuneration package in the UK compared with other countries meaning that, according to the researchers, UK CEOs are much more strongly steered towards uplifting the share price compared with other countries. Even though this is the ultimate measure of firm value in the long term, performance shares, a popular part of UK CEOs remuneration package, could very easily lead to sub-optimal behaviour.

Professor Xavier Baeten also said;

“Though there is a clear lack of these environmental KPIs, it would not be effective for governments to look to impose these KPIs to firms. It would be much more effective and beneficial if firms think about exactly how the climate crisis will affect them and then look to first develop a sustainability strategy focusing on what are for them the most important topic of this, taking into account their business. Then, after identifying these, firms can select the relevant KPIs to include in CEOs remuneration”.

The researchers also found other results about UK CEOs in comparison to their European colleagues, including UK CEOs earning significantly more than their colleagues in Belgium, Netherlands, Scandinavia and South Europe and long-term incentive grants being much bigger in the UK compared with rest of Europe. Despite this, 42% of UK CEOs have actually had a decrease in their packages over the last three years – with FTSE 100 firm CEOs’ median remuneration dropping to €3.9m from €4.3m in 2016.

The Executive Remuneration Study by Professor Baeten from Vlerick Business School, has been carried out for nine consecutive years.