Employee Share Schemes and Incentives

The introduction of share incentive or share option arrangements for employees will require full consideration of all the commercial, financial and other implications. In particular, the company should consider why it wishes to introduce such an arrangement, what it hopes to achieve from doing so, and seriously consider whether a share scheme really provides what the company wants.

It is possible that the advantages arising from a share-based arrangement may not justify the drawbacks and complexities of introducing it and some form of cash-based incentive may be more appropriate.

Advantages of share schemes include:

• Incentivising participants in the scheme
• Increased productivity
• Enhanced entrepreneurial culture throughout the business
• Lock-in of key employees
• Creating a market for shares – in schemes such as SIPs that require shareholder trusts to be established.

The types of scheme available are:

Share Incentive Plans [SIP]

A tax and NIC advantaged plan for all employees. Companies can give up to £3,000 worth of shares a year to each employee. Employees can buy up to £1,500 worth of shares a year. Companies can reward this commitment by giving up to 2 matching shares for each share an employee buys. (Also known as All Employee Share Ownership Plan or Employee Share Plan).

Savings Related Share Option Schemes [SAYE]

Tax advantaged scheme for all employees and directors. Participants save up to £250 per month to acquire shares at the end of a 3, 5 or 7 year period.

Enterprise Management Incentives [EMI]

This is usually the most interesting scheme for companies with gross assets not exceeding £30 million. They can grant tax and NIC advantaged share options worth up to £100,000 each to any number of employees, subject to total share value of £3 million under EMI.

Company Share Option Plans [CSOP]

Up to £30,000 worth of options each can be granted to any number of employees with tax and NIC advantages.

Shares and share options without tax and NIC advantages

These are awards of shares and share options granted by an employer outside the scope of an Inland Revenue approved employee share scheme. Although they do not have the tax-efficiency of approved schemes, they are useful to accurately target awards to employees. Outright awards of shares to employees at below market value would fall into this category.

Phantom share schemes

No shares or options are issued, but instead employees receive cash bonuses linked to movements in the company’s share price. There is no tax efficiency to such a scheme, but it has the merit of simplicity and may be attractive where the existing members of the company do not wish to dilute their shareholdings.At TWP we have experience in the creation and implementation of each of the above types of scheme, and can advise on the most suitable method of meeting your objectives.