"Share options", "employee share ownership plans", "share incentive plans" - just some of the expressions you may have heard in recent years, and perhaps wondered whether they have a role to play in your own business.
They are all different ways of describing arrangements to reward employees through the ownership of shares in their company. Participation can be selective - sometimes limited to one or two key people - or extended to all a company's employees.
Whether your approach has been sceptical, enthusiastic, or anywhere on the scale between, you may not have had enough information to consider these kinds of arrangement as thoroughly as you'd like to.
This feature aims to demystify share-based incentives, and enable you to make an informed decision about their relevance to your own business.
Approximately 3.5 million UK employees either own shares in their company or participate in a share-based incentive plan - about 13% of the country's working population. Share plans that are approved by HMRC operate in about 5,000 UK companies.
These figures suggest that whilst it is by no means a majority of employees who participate, nor are they a luxury available only to the FTSE 100. There are more private than listed companies operating a share plan, and the number has grown considerably in recent years.
Much of this growth has occurred in the last ten years, although legislation to encourage all-employee share ownership in the UK was first introduced in 1978. However, some companies have been practising it successfully for far longer.
In 1897 an obscure parliamentary candidate named Winston Churchill argued that if employees held shares in their employer they would be less vulnerable to lay-offs in bad times and would share in the benefits of good times - an idea that has been given practical application in these more modern times.
Companies that have created a share plan will normally say they did so for the following reasons:
Additionally, an employee share plan sometimes enables the present owners of a company to sell up and transfer ownership to those working in the business. Legislation which came into force in April 2003 provides a new tax incentive designed to encourage more private company owners to realise value built up in their company by selling some or all of the shares to its employees (see next page for more about this).
There is plenty of research evidence on this key question, most of which focuses on companies in the UK and the USA, where employee share plans are most common. The clear conclusion is that share plans tend to improve company performance, where the management culture is participative. However, employee share plans are less likely to be compatible with a command and control management style.
Yes. There are now four different kinds of schemes benefiting from tax breaks in the UK, two of which were introduced in the Finance Act 2000. The philosophy behind this relatively recent legislation was that:
However, you don't need a tax break to set up an employee share plan, and plenty of companies manage without one, either because they don't meet the statutory conditions, or they occasionally find them too restrictive. Some tax breaks (notably EMI) are less widely available than others, but the vast majority of companies will qualify for a tax-approved plan.
If you are able to use an HMRC approved plan, it will enable you to deliver more value into the pockets of your employees for a given cost to your company. An approved plan should always be given careful consideration, although sometimes commercial considerations might make an approved plan unsuitable. Tax considerations shouldn't overrule what you need to do commercially.
The most common type of unapproved share plan is an unapproved share option. This means that any gains made by the employee on option exercise will be subject to income tax (even where these are not yet cash gains because the shares acquired on exercise have not yet been sold), and may also be subject to employer and employee National Insurance. For listed companies, it will often be possible to sell the option shares - or some of them - following exercise, bringing in enough cash for the employee to pay their tax bill. This may also be true where options have been granted over shares in a private company, where exercise coincides with a sale of the Company or its flotation. However, for companies which remain private, you will need to think carefully about how employees who exercise unapproved options and incur a tax bill at that point can raise sufficient cash to pay it.
From 6 April 2003 employer National Insurance is 12.8%. In respect of option gains, it is now possible to transfer responsibility for this to the employee, with his agreement.
The most common ways to release the value you have built up in your business are trade sale, payment of dividends and, in some businesses, flotation. An employee share plan can however be a fourth.
Using an employee share plan for succession may be part of a management buyout, or it may be different animal altogether.
A management buyout normally involves the management team investing in and arranging finance for their own new company (Newco), which then acquires 100% of the shares in the trading company. Frequently, the new owners will then introduce an employee share plan to create an equity incentive for some of the other employees who did not invest in Newco.
Alternatively, an employee share plan can enable you to sell your company gradually, and at a pace you feel comfortable with. You may be able to enjoy special tax reliefs which are only available to shareholders selling their shares through an employee share plan.
There are many different ways of doing this, but the most common involves establishing an employees' trust, which is then funded by the company or its bank to acquire some or all of your shares. Those shares may then be transferred over time to selected, or all employees, using any of the approved or unapproved plans described above.
The most powerful tax relief comes through selling your shares to a Share Incentive Plan (SIP):
If the SIP acquires at least 10% of the ordinary shares in your company, you can defer paying CGT on any gains arising from the sale of your shares so long as you reinvest your sale proceeds in other investments.
