We have seen a greater take up in employee share option schemes having seen successions of governments and think tanks promoting their virtues. The main reasons that such share schemes are used is to:
- Attract individuals to a senior role or to retain them over a long period of time
- Motivate senior employees to increase performance and achieve greater targets and/or
- Get more “buy in” from employees as it allows them to share in the success of the company
Share schemes can be either approved by HMRC or not. If they are approved the person receiving the option shares and/or the company issuing them will benefit from certain tax reliefs which further enhances their value as compared to non-approved schemes or cash bonuses.
In order to be an approved scheme, the scheme, the company and the employees must qualify under the relevant legislation.
Types of Share Schemes
There are a number of types of share scheme that are commonly used, including the following:
Enterprise Management Schemes (EMI)
EMI options are by far the most popular as they can be drafted for all employees (subject to satisfaction of working time and other criteria) as part of a scheme or tailored to the requirements of each individual.
Being an approved scheme, the employee will, subject to satisfaction of certain conditions, benefit from relief from income tax and national insurance contributions (NICs) on the receipt of the shares as well as entrepreneurs relief on capital gain tax on a subsequent sale of the shares.
The conditions to exercise the options may be flexible and can be subject to specific performance targets or alternatively simply by a minimum time requirement.
Company Share Option Plan (CSOP)
CSOP’s are approved schemes giving the employee income tax and NICs relief on the receipt of the shares. They do not need to apply to all employees and can be subject to performance criteria.
However they can only be exercised at least 3 years after their grant in order to receive the tax benefits.
Save As You Earn Schemes (SAYE)
These are both a share option scheme as well as a savings scheme and are more popular in companies with large numbers of employees. They apply to nearly all employees making it more complex to administer.
As an approved scheme, the employee receives income tax and NICs relief.
Share Incentive Plans (SIP)
These allow employees to acquire shares as opposed to share options. There are 4 types of share available under a SIP: free shares, partnership shares, matching shares and dividend shares.
These schemes are very flexible as the company can decide the elements it wishes to implement and the level of award.
Unapproved Schemes
These are very flexible and are beneficial where the shares under option do not qualify under any approved schemes. These are usually a lot cheaper to set up and maintain, but do not have any of the tax benefits of the approved schemes.
Employee Benefit Trusts (EBT’s)
EBT’s are commonly used in larger employee share schemes such as CSOP’s, SAYE schemes and SIP’s where the EBT is required to acquire and hold shares in the company to provide benefits to both employees and former employees.
They can also be used to simply “warehouse” shares on behalf of the company.
Conditions to Exercising Options
Share options can include a number of different types of conditions which need to be achieved before the option can be exercised. These can be performance or event related, for example:
- Performance conditions – these can be based on financial performance of the company overall such as sales or profit or on an individual or team basis or
- Event conditions – the most common event is a sale of the company (known as an “Exit Only Option”), but other events could be a minimum length of service
The conditions could also be a mixture of both, for example a sale of the company provided that the sale value is of a minimum amount.