Employee Incentives – What are the ‘Options’?

8th June 2017 by Robert Leggett

“Treat them mean, keep them keen” is perhaps an interesting philosophy when it comes securing long-term commitment from a romantic relationship, but I don’t think the same can necessarily be said when it comes to guaranteeing the enduring loyalty of your employees. Research shows that in order to get the best out of your staff, they need to feel motivated and valued, not downtrodden and demoralised.

Often, companies see a real link between employee share ownership and increased productivity, and with this in mind, the UK Government has introduced a number of tax efficient ways in which employees can obtain a real stake in their employer.

The most recent of these employee share schemes was the Employee Shareholder Status.

However, from 1 December 2016, any tax benefits associated with this scheme were withdrawn to new entrants and the Government is now legislating to close the scheme to new entrants altogether.

So, what does this leave us with?

Enterprise Management Incentives (EMI)

EMI allows selected employees to acquire a significant number of shares through the issue of options, with no immediate cost to the employer and potentially no tax arising on the employees until the shares are eventually sold.

However, in order to qualify for the scheme, there are stringent conditions that must be met by the employer company and there are then further conditions to be met with regard to the employees and the shares over which options are to be issued. 

Providing these are all satisfied, EMI allows considerable flexibility as to when the rights to exercise options will arise, and can, in certain circumstances, provide the employer with significant Corporation Tax relief.

Company Share Option Plan (CSOP)

 This scheme operates in a very similar way to EMI, but is less flexible and less generous, both in terms of the value of options that can be granted and their exercise price.

Share Incentive Plan (SIP)

Rather than employees being granted options that are exercisable at a set price in the future, SIPs involve a trust being set up and funded by the company, to hold shares on behalf of employees. The plan must be available to all employees and directors on the same terms, although entitlement may vary based on hours worked, length of service etc. The shares must be held in trust for a specified period before they can be sold, but there will be no liability to tax when the shares are awarded, nor on the increase in their value whilst in the SIP.

Save As You Earn Option Scheme (SAYE)

This is a scheme that involves employees being granted options and entering into a savings contract to buy the shares at the end of a fixed term. As with SIPs, the plan must be available to all employees and directors, and as an alternative to exercising the options at the end of the term, employees may withdraw their savings including any tax free interest element.

With all of these schemes, there are complexities and certain conditions that will need to be met in order to qualify, and you should seek professional advice as to which scheme is right for your company and employees. 


Author

Robert Leggett

Robert Leggett

Partner
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