Share schemes in the UK

A great way to incentivise staff, or just too difficult?

Share schemes started in the US half a century ago. They’re now widely offered both in the UK and on a global basis – particularly helped in the UK (and several other countries) by frequently favourable tax treatment.

So, what are share schemes all about?

They’re a means of sharing equity with employees, giving them a real incentive to support the business by awarding shares free or on favourable terms. Share schemes are offered by almost every listed company; larger companies will often have different tiered schemes aimed at different levels, from the shop floor to top executives.

Why have one – what are the advantages?

They can incentivise at all levels and across all geographies in an organisation – from directors, who can actively work to increase the share price, to staff generally who become more engaged by having an element of their reward linked directly to the performance of the business. Research carried out by Capital Strategies has also found that an index of companies with a ‘significant degree of employee ownership’ outperformed the FTSE All-Share index by 173% between 1992 and 2000.

In some cases, the rewards can quite legitimately be taxed only at 10% or even free of tax, if particular exemptions apply. In a market that’s increasingly competitive for talent, they’re a

key part of any recruitment package. Schemes can also provide ‘corporate glue’ for the organisation. For instance, we advise on the UK legal and taxation aspects of share schemes for a major international bank. The share scheme in the bank unites staff from offices all over the world who are all interested in the parent bank’s share price and fortunes.

And we’re not just looking at large corporates. For smaller companies and start-ups, the real advantage can be in saving cash and focusing on an ultimate sale or float. Biotech companies are particularly strong users of share schemes; we do a lot of work in the life sciences area.

For every advantage there’s bound To be a disadvantage – so what’s the Story here?

When a scheme is set up well and the company performs to expectations, there are no disadvantages. The downside comes from poor schemes where you can create a monster that’s poorly understood by employees, expensive to operate and a massive consumer of management time. Worse still, if you set an option price too high, the whole scheme can go ‘underwater’. Essentially that’s when the option price exceeds the share price. Not surprisingly that can be a real demotivator.

Share schemes have equally got a bad name from excessive generosity, meaning that companies need to think carefully about the size of awards and targets set. One of our team is also on a working group trying to make it easier for smaller companies to operate share schemes: I am speaking at an IoD conference on this in the autumn.

Why do I need professional advice?

For corporates, there’s no great drama or magic, but we can bring our experience to bear to help get the tax situation right, dealing with the corporate and employment law issues as well as accommodating employee and shareholder sensitivities and aspirations. Certainly ‘all employee’ schemes have more Revenue involvement, so can be very procedural – and we become project managers there.

The Revenue have a number of approved schemes, and we work closely with them – but we can also advise on bespoke schemes, which often are very complicated, and not necessarily ones which the Revenue like!

What are the ‘hot topics’ at the moment?

Age discrimination is one – can shares be received early when people retire but not in other cases? On the tax front, the Revenue is consulting on changes to the tax treatment of gains made on many start-ups with private equity involvement and this could produce some dramatic changes.

Should every company have a share scheme?

Share schemes are not the only option and it’s best to give honest advice to companies. In some cases, for instance, a good bonus scheme may be just as effective and could be cheaper to implement.

So how can I find out more?

Talk to us – we thrive on optimism – share prices will go up, and benefits should be shared with the wealth creators!