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Practical Issues

How easy is it to set up a Share Plan?

It depends. Many companies find it straightforward, but it can occasionally be more complex.

If you want to grant options to just one or two executives, this can often be done simply, although you will have to consider some design questions, for example what should happen if they leave the company.

As far as you are able you should however take time to establish a share plan which is tailored to the needs of your company. For your share plan to be as well-designed as possible, you should naturally expect to apply the same quality of analysis and creativity as you would in developing any other aspect of your business. You should also consider taking professional advice from an experienced share plan specialist, who will steer you efficiently through the issues you need to think about, although if you do have the time to do this work yourself there is no reason why you shouldn't. Most companies do seek professional advice.

The all-employee SIP is potentially the most complex of the approved plans, because it offers so many choices. An experienced professional adviser may be able to add particular value here, but it may still be feasible for you to do the work yourself.

How long will it take?

If you want to establish an HMRC approved plan, you should (unless it is EMI) normally expect it to take a minimum of two months, mainly because the plan needs to be examined by HMRC before it can be launched. Where there are special reasons for a faster response, HMRC are usually willing to help.

EMI plans do not require prior HMRC approval, so can often be established more quickly, as can unapproved plans.

How much does it cost?

We would recommend that you take professional advice. If you do use an adviser, the cost will largely depend on the type of plan. The case study links above give some guide to costs, but the scale set out below indicates how, very broadly, cost may differ according to the type of plan, with SIP being the top end of the scale and EMI being the lower end of the scale:

  • SIP
  • Unapproved
  • EMI

There will be ongoing costs if you use a third party admiistrator.

How much time will it take to administer?

Again, this depends on the type of plan.

An option plan for a small number of employees is unlikely to demand much administration at all. A record needs to be kept of option grants, lapses and exercises, and for approved plans a return needs to be completed for HMRC each year.

Option plans for greater numbers of employees will create heavier administration requirements, although there are a variety of software packages which make record keeping as easy as possible.

Administration of SAYE options is normally handled by the savings provider. For SIP, most companies outsource administration duties to a third party administrator.

How should I communicate Information about the plan to employees?

Good communication is essential - share plan participants need to understand what the plan is for and how it works if it is to have the intended effect. It's rarely worth establishing a share plan if you don't bother to communicate it properly!

Where the plan involves only a few employees, we would recommend one-to-one personal briefings, explaining how the plan works, providing the chance to ask questions, backed up by a short and clear written guide.

Where the plan involves greater numbers, you should consider giving briefings in groups, also supported by a written guide. Some companies with very large numbers of employees produce promotional videos and use intranet and e-mail for communication.

Communication shouldn't end when the plan has been launched. Employees need to be kept informed about how their company is performing and how this affects the value of their shares.

My company is unlisted. how will employees be able to sell their shares?

You should think about this carefully. A key question is whether your strategy involves working towards a sale or flotation, or whether your company is likely to remain independent.

If sale or flotation is your goal, then your employees will be able to realise the value in their shares when your company is sold or floated. If you are granting options, you might make their exercise conditional on the company being sold or floated, so that you only create new employee shareholders (as opposed to option-holders) at the point of sale or flotation.

If continued independence is your goal, then you will have to think more carefully about who will buy shares from your employees. The most common approach would be for you to establish a trust, which the company would fund to acquire shares from employees who wished to sell. The shares in the trust could then be recycled to employees through further awards or option grants.

How do I decide how much equity to allocate to each employee?

Some companies set aside a fixed percentage of their issued shares within ABI guidelines for their employee share plan, then allocate smaller percentages of that to employees, without applying any particular science.

If you wished to ensure that you obtained the most efficient use of your company's equity, you could create a financial model showing the value - in say three years time - of a share under your target for growth in the Company's profits. Having decided how much reward you think would be reasonable for a given employee to receive if profits did grow according to target, you would then know the number of shares over which to make an award to him.

Will it have any effect on who manages the company?

No. Share ownership is completely different from management, although your share plan will work best if you keep your employees informed and are a good listener.

If you are concerned about preserving shareholding control, you should remember the following:

  • If you retain more than 90% of the ordinary shares, you can sell the company and require minority shareholders to sell at the same time
  • If you retain 75% of the voting shares, you retain the right to pass special resolutions (for example, to change the Articles of Association of the Company)
  • So long as you retain 50% of the voting shares, you retain control of the company because you can control who sits on the board
  • If your holding is more than 25%, you can block special resolutions of shareholders
How do I know what the shares in my company are worth?

Unless your company is listed, you will need to organise a valuation. Before any CSOP or SAYE options can be granted, or shares awarded under a SIP, you will need to agree a share valuation with HMRC. Your professional adviser should be able to organise this for you, and it can normally be done quickly. If you have time, you may wish to tackle this yourself.

It is advisable to agree a share valuation before granting EMI options, although not compulsory.

We have some overseas employees. How should we deal with them?

You can think about extending participation to them, too, but you would need to take local legal and tax advice.

Are there any accounting Implications for my company?

There may be, depending on what type of share plan you establish.

  • Free Shares or Matching Shares under a SIP - broadly, the costs incurred by your company in funding its SIP trust to acquire those shares for allocation to employees will result in a charge to profit and loss account
  • Options - option gains by employees do not currently result in a profit and loss account charge, unless the options are granted at a discount to market value - in which case a charge is made reflecting the discount. However, SAYE options are currently exempt from this provision

Proposals have been made by the Accounting Standards Board which would require companies granting options to expense in their profit and loss account the value of those options.

HBOS Employee Share Solutions