Need to know:
- Employers need to choose the employee share scheme that matches their business objectives and the interest and eligibility of those they hope will sign up to it.
- The number of new shares that can be issued under employee share plans will have a limit, so employers should ensure the capacity is there to be able to offer the options that they want.
- Internal departments must work collaboratively to get the best out of the scheme, which also needs to be well communicated to employees so that they understand the real value of membership.
Employee motivation is no longer linked solely to remuneration; employers are constantly looking for more effective and innovative ways to reward staff, boost motivation and engagement, and ultimately, productivity.
As many are discovering, an employee share ownership scheme can be an effective way of incentivising staff through a sense of ownership that increases their loyalty to the company.
The good news for employers planning to make such a move is that there are a number of schemes to choose from that offer a range of alternatives to traditional pay increases or bonuses, says Gabbi Stopp, head of employee share ownership at IFS Proshare. “There is more choice, but employers must also be sure that they choose the plan that best suits them as an organisation,” she says. “For example, with a share incentive plan (Sip) [employees] have real shares. With a sharesave scheme [they] have the option to buy, but not the obligation. There is also the issue of affordability, and certainly with the minimum monthly saving into a [sharesave] plan of just £5, there is no barrier to part-time or lower-paid employees.”
Benefits of different share schemes
Share schemes can be introduced to meet different business objectives. All-employee schemes, for example, can enhance employee engagement by fostering a sense of alignment with the organisation’s success among staff. Others are used to target selected individuals on the basis of seniority, potential or merit.
The four main types of HR Revenue and Customs (HMRC) tax-advantaged employee share schemes include Sips, sharesave (or SAYE), enterprise management incentive (EMI) schemes, and company share option plans (Csops). Which type of scheme employers choose will depend upon a number of factors, including size of the organisation, employee demographics and salary levels.
Sips, which can include free shares, partnership shares, matching shares, and dividend shares, can be offered to all employees. They have proved popular among smaller employers that may not otherwise have offered a staff share scheme. The shares must normally be held in a trust on the employee’s behalf for five years before removal, without incurring a tax or national insurance contribution (NIC) liability.
Sharesave schemes are also used by organisations looking to grant options to all members of staff, with the number granted linked to the amount that each employee agrees to save each month. At the end of a fixed term of three or five years, employees receive a tax-free bonus on their savings.
Enterprise management incentive (EMI) schemes are designed to help small, higher-risk organisations attract and retain key talent by offering tax-favourable share options. Simon Burton, tax director at Johnston Carmichael Chartered Accountants, says: “Commercially, there is no risk for the employee because there is no cash outlay until the options are exercised and this will often be at a time when the shares can immediately be sold at a profit.”
Company share option plans (Csops) are typically offered to selected, senior staff members. However, there is no reason why they cannot be operated on an ‘all-employee’ basis, says Sarah Nicholson, senior associate at Squire Patton Boggs (UK). “A Csop is less flexible, can take longer to put in place and the tax benefits are not as generous as for EMI options, but it can be useful if an organisation or the relevant employees do not qualify for EMI,” she explains.
Share scheme advantages
One of the most significant advantages of using shares to reward employees is they need not have a cash cost. The issue of new shares is paid for by diluting existing shareholders, rather than drawing on often-scarce cash reserves, explains Andrew Page, partner at Aon’s talent, rewards and performance practice. But it is not entirely a free ride. “Investors generally place a limit on the amount of new shares that can be issued under employee share schemes, so [employers need to] check whether [they] have ‘headroom’ to make the awards [they] want,” he says.
Another consideration is the administration of the scheme. Stopp says: “A share plan requires a great deal of cross-functional cooperation, from finance, HR, payroll [and so on], to make it run smoothly throughout its life.”
Therefore, an employer should carefully choose the type of share scheme that best matches its business objectives and the eligibility of its employees that it is hoping to engage with the scheme.
PCA Predict offers share scheme to motivate staff
PCA Predict provides address validation technology used on e-commerce sites, for customers that include Tesco, Dow Jones, and Disney. The organisation, which has offices in Worcester and New York, and employs over 55 members of staff, offers an enterprise management incentive (EMI) scheme.
The EMI scheme was chosen as a way of motivating staff through the generous tax incentives it provides to encourage wider share ownership. Guy Mucklow, co-founder of PCA Predict, says: “It has been proven that employee-owned businesses are consistently more productive, innovative and profitable than those that that are not. One of the main reasons for this is that employee shareholders treat the business like it’s their own.
“They care more about the [organisation’s] future and understand how their financial and career paths are inextricably linked to the success of the business. If we can get to that point, then we will create that virtuous circle where everyone will benefit.”
The organisation decided to kickstart the scheme by gifting up to 10% of equity to employees. Mucklow says: “It is a fairly unusual arrangement in that with most EMI schemes, employees are expected to pay something for the option. By gifting our equity, it means that there is immediate value in the share award and that, ultimately, unless the business is worthless when we sell, the share options will provide a good return for our employees.”
To illustrate, an employee who received 0.01% of the equity on the first round that was paid out last May, would have received approximately £6,000 of immediate value for their shares based on a valuation received in December 2015.
Mucklow says: “We are very keen to ensure that we have the best talent and that we do our utmost to share our success.”
Viewpoint: Share schemes offer significant tax incentives
Typically, an organisation’s choice of employee share scheme will depend on the degree of employee share ownership that it wishes to introduce. One employer might want only key people to own shares, whereas another might prefer all employees to become part-owners of the business by introducing an all-employee share scheme.
Various factors could be relevant: strategic reasons such as securing ownership succession; rewarding employees, and if there are financial reasons, whether this means employees share in any growth in the organisation’s value, annual profits, or both; a tax-efficient way to reward employees; business reasons such as enhancing the loyalty of employees or establishing a common interest among employee-owners.
An employer that wishes to extend ownership to individual employee shareholders should be able to take advantage of one or more of the significant tax incentives that are available. These include the following arrangements: the enterprise management incentive (EMI) under which smaller organisations that satisfy certain conditions can grant to employees options to acquire shares on a discretionary basis. Provided that the price payable under the option for the shares is not less than the market value of the shares when the option is granted, there will be no income tax or national insurance (NI) on any increase in value of the shares. Any gains realised will be subject to capital gains tax (CGT), which can be at a rate as low as 10%.
The company share option plan (Csop) permits grants of options over shares valued at up to £30,000, which, broadly, can be exercised without paying income tax or NI.
The all-employee share incentive plan (Sip) under which income tax relief is available when employees buy shares in their organisation and/or when they are given free shares. Any gains realised will be free of CGT.
Stephen Chater is share plans director at Postlethwaite