Do you attract and motivate employees?
Share plans are increasingly popular due to their ability to attract and motivate key employees, provide flexibility and promote more sustainable decision making for the benefit of shareholders over the long-term.
What is the most suitable share plan for your company and employees?
There are many different ways of structuring employee share plans. When choosing the most suitable arrangement for your company, or reviewing an existing share plan, it is important to understand the company’s objectives and in turn determine what the key motives are for an employee share plan, such as:
- Employee recruitment and retention;
- Tax and NICs efficiencies;
- Motivating and incentivising employees;
- Alignment of employees’ interests with that of shareholders;
- Providing employees future value; or
- Succession planning towards an exit.
Do you have a good retention rate?
Share plans provide an important element of the remuneration package for employees, rewarding them for the contribution they have made to the success of the company and incentivising them to maintain and improve the company’s performance for the medium to long-term.
Share Plan Partners can help you to establish a share plan arrangement or carry out a review of existing share plans to ensure they still meet your company objectives. For further information please contact us.
In summary
An SAYE plan, otherwise known as a Sharesave or a savings-related share option plan is an HMRC approved all-employee plan that links a grant of share options to a three or five year savings contract under which employees can save up to £600 of post-tax earnings each month with an approved savings carrier. When the savings contract comes to an end, the employee can use the funds to acquire shares in their company at a pre-determined price, set at the beginning of the savings contract and at a discount of up to 20% of the share price at the date of option grant. Any gains are free of income tax and national insurance contributions and the employer company is entitled to corporation tax relief on the gains which would otherwise be subject to tax.
Popularity
SAYE plans are very common in listed companies as well as more established private companies. They are often operated in conjunction with an employee benefit trust (EBT) and are popular with employees as savings can be returned to them at the end of the savings period should they not want to exercise their options. The costs of administration can, however, be high depending on the sharesave carrier.
Factsheet
In summary
Under a SIP an employer can award shares to its employees for free, or employees can purchase shares from pre-tax salary on a tax-favoured basis. The shares are held in a UK resident trust, and a minimum period of three years is imposed before the employee can withdraw any free shares. A company can choose whether to offer:
- Partnership shares — the employees pay for these out of pre-tax salary up to a maximum of £1,800 each tax year
- Matching shares — the employer awards these free of charge at a maximum ratio of two matching shares for each partnership share acquired.
- Free shares — these are awarded for free by the employer up to a maximum value of £3,600 each tax year.
- Dividend shares — these are dividends paid on any of the above shares which are reinvested in additional shares. There is no cap on the amount of dividend shares which can be purchased.
Popularity
SIPs are increasingly popular due to the potential for all gains to be realised completely free of any tax. Trustee services are typically provided through administrators although it is increasingly common for companies to administer smaller SIPs in-house with directors of the company acting as trustees through the creation of a dormant subsidiary company. The costs of outsourced trustee and administration services are often more than covered by the associated employer national insurance savings associated with the use of partnership shares. SIPs are equally relevant for listed and private companies although private companies typically require a greater degree of support in their operation.
Factsheet
In summary
An LTIP is a discretionary plan that is usually used to attract, motivate and retain key senior executives and the board, and generally are awarded based on a percentage of salary. An LTIP usually involves an award of nil cost share awards or options and is a conditional award based on the satisfaction of set performance conditions, typically measured over a period of three or four years.
Popularity
Proven longevity with listed companies with the main benefit of the executive receiving the full value of the shares (thereby avoiding any difficulties with underwater options) albeit subject to income tax and national insurance contributions. Quite common in private companies where tax-advantaged plans are unavailable or the limits are exceeded.
Factsheet
In summary
Deferred share bonus plans come in various guises, but often involve an award of nil cost shares as part of an employee’s annual bonus, with a deferred/holding period (often one or two years), followed by a vesting/release of these shares at the end. The plan typically also defers a further percentage of the bonus, which can be accompanied with an award of matching shares, given free by the company, which are conditional upon specific performance targets, with a deferral period of typically three years. Performance conditions are usually specific to the company, but popular measures used are total shareholder return (TSR) and earnings per share (EPS).
Popularity
Remain popular amongst listed companies despite attempts to introduce a number of other structures for achieving greater tax efficiency.
Factsheet
In summary
Under a Company Share Option Plan (also commonly known as executive share option plans – ESOP), the employer can grant tax-advantaged share options on a discretionary basis to employees up to a value of £30,000, which they may exercise between three and ten years following the date of grant. Any gains are free of income tax and national insurance contributions. CSOPs can be used for all employees but are most often used for the benefit of managers and other senior employees on a discretionary basis.
Popularity
CSOPs should be more popular with listed companies due to their tax efficiency. They are typically used together with a non-tax favoured share option plans if the company grants options in excess of the individual CSOP limit. CSOPs are also fairly common in private companies where EMI is unavailable.
Factsheet
In summary
A JSOP involves an employee acquiring shares jointly with a third party, which is typically an employee benefit trust (‘EBT’). This arrangement is governed by terms set out in a joint share ownership agreement under which the legal and beneficial ownership of the shares is split between the trustee and the employee, with the employee having a fractional interest in the net present value of a share but for all expects and purposes the entirety of any share price increase. Any gain is then subject to capital gains tax (CGT) rather than income tax and NICs. Their commercial effect is to give an employee the upside in share value equivalent to a full cost option, but without the income tax treatment.
Popularity
Allows for a flexible structure beyond the usual share plan structures although the associated costs are usually quite high. Valuation can also be complicated and informed advice is required before implementing a JSOP as the cost to benefit implications need to be modelled and understood.
Factsheet
In summary
EMI was introduced in 2000 to assist qualifying independent companies with gross assets of less than £30m and fewer than 250 full-time employees in attracting and retaining key employees. The EMI allows a qualifying company to grant options over shares with a value of up to £250,000 per employee (up to a maximum of £3 million per company) on very flexible terms but at the same time allows the employee an exemption from income tax and NICs on any gain provided the exercise price is not set at a discount to the market value as it was at the date of grant of the option. In addition, the company is exempted from employer NICs on such gains. On disposal, an employee automatically qualifies for capital gains tax at the preferential Entrepreneurs’ Rate of 10% provided at least 12 months has passed between the date of option grant and the date of disposal of the shares acquired through exercise of the option.
Popularity
EMI plans are extremely popular due to their flexibility and significant tax advantages. They are therefore often the only share plan worth considering for qualifying companies.
Factsheet
Download Enterprise Management Incentive (EMI) Factsheet (PDF)
In summary
Growth shares allow employees to share in the future growth of a company and involve the creation of a new class of share which participates in future income and capital rights in the company above those which exist at the date the growth shares are created. Economically, they are similar to full cost share options although the legal structure and tax implications are very different. Unlike share options, any gains realised on a sale would be subject to CGT, not income tax and NICs.
Popularity
Where approved tax-advantaged plans cannot be used, growth shares prove popular. Unlike unapproved share options, any gains realised on a sale would be subject to CGT, not income tax and NICs.
Factsheet
In summary
Known as nil-paid or partly-paid shares depending on the amount of initial payment made, this plan allows employees to buy shares at market value but defer some or all of the cost of this purchase until a later time, typically when the shares are sold. Any gains should be subject to capital gains tax although there might be a small amount of income tax payable over the period during which a notional loan is deemed outstanding not when the shares are actually allotted.
Popularity
Nil paid shares are popular where the facts suit such a situation. Unlike growth shares and JSOPs however, these nil paid plans do carry a risk to the employee as the debt outstanding remains to be called in, even if the share price falls or the company fails. They therefore very much suit a situation where the employee is expected to have skin in the game but at the same time the advantage of deferring any subscription amount.
Factsheet
In summary
A phantom share plan provides employees with a notional award that is subject to all the same rules of the share plan to ensure all participants are treated equally, but instead of receiving shares, they receive a cash amount equivalent to the gain they would have received if they had been in a share plan. The cash payment is based on the gain on vesting and no shares are actually involved. The cash payout is treated the same way as earnings for tax purposes.
Popularity
Phantom share plans are not particularly common in the UK (largely due to the cash exposure that they create for the company), although some companies use them to replicate the economic benefits of employee share option plans when shares are unavailable or where it is uneconomic to implement a share plan, for example when looking to introduce share plans into overseas territories where the costs of doing so far outweigh the number of employees who stand to benefit.
Factsheet
In summary
Many listed and private companies operate share plans internationally. Cost synergies often dictate the structure of the plan, with attention paid to structuring tax-advantaged plans in those countries where the footprint warrants the expense. Whatever the result, international share plans require careful due diligence enquiries to be carried out in order that all local compliance and tax considerations are understood, as are the tax withholdings responsibilities in each jurisdiction. Each country will present its own challenges, reporting and filing requirements, as well as cost implications that all need to be evaluated prior to implementing a share plan internationally.