Companies implement share schemes for a number of different reasons and the motivations behind each arrangement will vary depending upon the nature of the business, shareholder goals and the employees in question.
Over the years our team of employee incentive specialists have advised hundreds of companies and key employees on the structuring and implementation of their employee share incentive plans.
A number of key recurring questions and issues arise, some of which are summarised below.
|Response||Most likely share plan types|
|We need to lock-in/ motivate selected employees rather than all employees.||
There are a number of “discretionary” share plan types that allow shareholders/the company’s Board of Directors to determine who participates, when they should benefit and how much should be awarded.
These plans types do not have to be operated on an all-employee basis and can therefore be tailored to suit the company’s needs.
|Enterprise Management Incentive (EMI), Company Share Option Plans (CSOPs), Growth Shares, Partly Paid Share Plans (PPSPs), Share Acquisition Plans, Joint Share Ownership Plans (JSOPs), Unapproved Options and Phantom Plans.|
|We are interested in tax efficient rewards for our employees.||
While other areas of remuneration planning have been targeted by recent legislation, Government initiatives have enhanced tax breaks on employee share incentives with the tax cost on share incentives commonly between 0%-20%.
With careful design, the company can often secure the benefit of corporation tax relief on the gain employees make on their shares.
The combined result of this can be 19% tax relief to the company and often between 0%-10% tax for the employees.
This compares very favourably with cash bonuses/non-tax favoured incentives which can give rise to 47% tax and NIC for employees and 13.8% employer’s NIC.
EMI, Growth Shares, PPSPs, Share Acquisition Plans and JSOPs can all offer significant tax efficiencies for selected employees and their employing companies.
Share Incentive Plans (SIPs) and Save As You Earn (SAYE) Plans offer tax efficiencies on an all-employee basis.
|We want to offer all of our employees a stake in the company.||
Direct all-employee ownership can be delivered in a number of ways and through tax efficient share plans.Indirect ownership offers a different model – allowing employees a say in the running of the business and an opportunity to share in the profits of the business, but no long term direct capital stake.
|Share Incentive or SAYE Plans are HMRC backed all-employee share plans.
It is also possible to operate discretionary plans (i.e. EMI or Growth Shares) on an all-employee basis.
Indirect involvement can be created via an Employee Benefit Trust (EBT) or the Government backed Employee Ownership Trust (EOT) structure. EOTs allow CGT free disposals by shareholders into the EOT and income tax free profit extraction of up to £3.6k per employee per annum.
|We are unlikely to exit so employees won’t be able realise value from shares.||
We have advised a number of family owned or “lifestyle” businesses where an exit is not likely.
In such circumstances internal markets can be created to give a genuine prospect of employees realising value from their shares. Recent company law changes also mean much greater flexibility in a company buying back employee shares.
Dividend returns to employees can also help to make the value of employees’ share interests more tangible and with some tax efficiencies still on offer.
|Depends upon the business drivers and aims for the incentives but likely plan types include EMI, CSOPs, Growth Shares, PPSPs and/or Share Acquisition Plans.|
|We want to offer employees a stake in the company but don’t want to dilute our existing shareholder value.||Share incentives can be structured to avoid any unwanted dilution to shareholders through a number of mechanisms.||
Growth Shares or Hurdle Shares (either on their own or in conjunction with EMI) or JSOPs can act as effective anti-dilution mechanisms.
Under these arrangements, existing value can be ring-fenced for existing shareholders with employees sharing in future value only. This also assists in making the incentives more cost and tax efficient.
|We want to incentivise key people to work towards an exit at a target value.||Exit driven share plans can be designed to link reward levels to exit values, whilst also aligning shareholder and employee interests in terms of the timing of the returns.||EMI, Growth Shares, PPSPs, JSOPs or CSOPs can all work very effectively on an exit driven basis.|
|We are concerned about having minority shareholders in the company with unwanted rights.||
Having minority shareholders does not have to result in a loss of control for existing shareholders.
Proper design of option and share rights can ensure that there is no unwanted impact on voting power, existing dividend streams and capital rights.
Importantly, any employee shares should be subject to specific transfer provisions – such that they cannot be sold outside the existing shareholder group (unless shareholders approve this).
Carefully designed leaver provisions also act to ensure that leavers have no continued stake in the business.
Option based schemes (i.e. EMI, CSOPs or Unapproved Options) and also direct share acquisition plans (i.e. Growth Shares) can all be structured to avoid any such complications through proper design and implementation.
If using options or actual shares is not acceptable, Phantom Share Plans can be used to provide share value tracked returns to employees without involving any issue/transfer of actual shares to employees.