Our corporate solicitors advise many businesses on a range of employee share schemes, with the most common being EMI share option schemes. However, that’s not the only route for your company. Here we explain more about the variety of employee share schemes and how they work for both the employer and the employee.
- Brief overview: Tax advantaged schemes
- Why set up a scheme?
- Different types of employee share scheme
- Some statistics on schemes
- What are the consequences of setting up an ESOP for the company?
- What are the benefits for employees?
- Are there any disadvantages to an ESOP?
- Comparing the different schemes
- Non-tax-advantaged schemes
Brief overview: Tax advantaged schemes
Employee share ownership plans (ESOPs) are a great way for companies to reward and incentivise employees. One of the most popular (and well known) employee ownership schemes is that run by the John Lewis Partnership, where employees are known as ‘partners’ in reflection of their underlying ownership stake in the business.
Here are the most common forms of ESOP:
- Share option schemes – Employees are given the option to purchase shares in the business for which they work, at a price set at the time the option is granted. Even if the share price increases after that date, the employee has the right to buy at the price originally agreed.
- Share gifting schemes – Workers are gifted shares, that are normally held on trust for a period of time.
- Share purchase schemes – Shares are offered for sale to employees, usually at a favourable price.
Why set up a scheme?
There are a number of very good reasons why you might consider setting up an ESOP as part of your overall benefits package:
- Research has shown that ESOPs have a positive effect on company performance overall, as well as productivity per worker
- Employees who own shares feel more connected to the business, their job satisfaction improves, and a focus on the company’s success becomes a shared objective with management
- Employees feel more loyal, and this improves retention and morale
- ESOPs can help transform company culture, creating an atmosphere of shared enterprise and trust
- Workers develop a longer-term view on company performance, and shift their perspective to a holistic one involving the whole company team. Absenteeism can also decrease
- ESOPs are a popular and attractive addition to a benefits package when recruiting
- ESOPs are a tax efficient way to reward employees
Different types of employee share scheme
The main types of scheme are:
- Save as you earn (SAYE), where employees are invited to make monthly contributions to the scheme for three to five years. The pot is then used for share purchase.
- Company share option schemes, where either all or certain employees are invited to purchase share options.
- Share incentive plan (SIV), where all employees are given or invited to purchase shares. The employer may match contributions.
- Enterprise management incentives (EMI), where SME employees are invited to purchase share options.
- Employee ownership trusts (EOT), where employees are awarded bonuses in the form of share by a trust that controls the company.
Some statistics on schemes
Since their inception in the UK, ESOPs have proved so popular that around half a million employees have been granted share options in the UK, and in 2016/2017 companies made over 8 million awards, with an initial value of shares and options granted of £3.68 billion. 80% of FTSE100 companies have share option schemes in operation (credit: equiniti.com).
What are the consequences of setting up an ESOP for the company?
The consequences for your company of setting up an ESOP will largely depend on the nature of your business. If you are a not-for-profit, worker share ownership is likely to be more intangible than financial, making employees feel they have a valuable stake in the success of the organisation, and a say in the way it is run.
In SMEs, ESOPs can be a powerful way to ensure the success of the business, particularly in the case of start-ups; as well as a potentially life-changing financial reward, employees that own shares are highly motivated to work hard to ensure the company succeeds and grows, and this can be a valuable incentive in high-growth businesses where long hours are common.
For both SMEs and larger companies, the principal advantage of ESOPs are financial, both in terms of the potential for capital growth of the shares and dividends, but also the tax reliefs that accompany the schemes.
It’s important to note that employees who own shares will not be entitled to contribute to the management of the business, and as we have seen in our previous piece on share voting rights, shares in ESOPs often do not come with voting rights attached. However, it’s prudent, when considering an ESOP to develop ways in which share owning workers can communicate regularly with management on key issues.
What are the benefits for employees?
ESOPs are a tax effective way to reward employees, and form part of the remuneration package. As shares increase in value, workers benefit from that uplift. If you have given away shares, or offered shares at a discount, or even match-purchased shares bought by your employees, then those financial benefits can be considerable.
Are there any disadvantages to an ESOP?
As we all know, share prices can go up as well as down, and this unpredictability may cause difficulties when the economy takes a downturn. They are also slightly more complex to set up and administer than other incentive schemes so are more costly to provide. However, given that most ESOPs offer employees shares on very favourable financial terms (gifting, discounts, share-matching), the worst-case scenario for employees is likely to be that they don’t suffer any loss.
Comparing the different schemes
As well as the schemes discussed above, all of which provide some benefits in terms of tax treatment, it’s also possible to set up share ownership schemes for employees that, while they don’t offer tax incentives, can incentivise employees. These non-tax-advantaged schemes have the additional benefit of more flexibility in terms of limits on holdings, and types of company that can offer them. Here are some examples of the most common non-tax-advantaged schemes:
- Long term incentive plans/performance share plans
These plans are generally set up to award shares to senior executives at nil or nominal cost, and generally set up by listed companies. They can be tied to performance conditions, and be structured so that the director receives restricted or forfeitable shares. Restrictions apply on the types of shares issued, and the tax treatment depends on the nature of the award.
- Deferred bonus/share matching plans
These are normally operated by listed companies, and involve an executive deferring his or her bonus into shares held in a trust. Matching shares or free options may then be granted if performance conditions are met.