Employee incentives schemes

There is a growing trend towards employers using share-based incentives to encourage performance and help with staff retention.

There are a variety of different share based incentive schemes, many of which carry tax advantages.

Common share/share option schemes

  • Enterprise Management Incentives (EMIs)

EMIs are very popular amongst employers and employees because of their tax advantages and flexibility. Under an EMI, a qualifying employer can grant employees share options up to the value of £250,000 in a 3-year period. EMI options are usually exercisable on a triggering event e.g. a sale of the business.

  • Share Incentive Plans (SIPs)

Employers have several options for granting shares under a SIP, including giving up to £3,600 worth of free shares to employees in any tax year.

Employees who are given shares through a SIP and retain them in the plan for 5 years will not pay income tax or national insurance on their value. Employees will also avoid paying Capital Gains Tax on the shares provided they are kept in the plan until sale.

  • Save As You Earn (SAYE)

SAYE is a savings-related share scheme where an employee can buy shares for a fixed price. The employee can save up to £500 a month under the scheme, for a set period of either 3 or 5 years, after which those savings (built up over time taken from salary monthly) can be used to buy shares.

  • Company Share Option Plans (CSOPs)

Under a CSOP, employees have the option to buy up to £30,000 worth of shares at a fixed price. No income tax or national insurance contributions will be payable on the difference between what the employee pays for the shares and what they are actually worth, although capital gains tax may be payable if the shares are later sold.

Long Term Incentive Plans

These are the most popular form of long term awards for senior executives, often with free shares given to the employee provided certain service and performance conditions are met.

Options are usually granted annually by letter and will vest over a stated period of years.

These options are often the highest value element on a senior executive negotiated exit, together with any deferred bonus elements.

What happens when employment ends?

The key question for employers and employees is what happens to those shares or share options when the employee leaves the business. The answer to that question depends on several factors, including the type of shares/options held, how long they have been held, and the circumstances surrounding the exit.

In most cases shares/options will not be immediately valuable to an employee. Having first been granted, they must then vest and finally, in the case of options, become exercisable. The terms of most schemes will include ‘good leaver’ and ‘bad leaver’ provisions. An employee might be a good leaver if they retire, or are made redundant, for example. Conversely, the employee might be considered a bad leaver if they are dismissed for misconduct or poor performance. There is usually some form of general overriding discretion reserved to the remuneration committee.

The rights afforded to good leavers and bad leavers vary too. In relation to shares, a good leaver might be able to sell any vested shares at whatever price they choose whilst a bad leaver may have to sell them back to the company for a fixed price, or possibly forfeit them altogether.

In relation to options, which normally lapse on termination of employment, there may be provision that certain leavers are able to keep or exercise their options (although in the case of tax-advantaged schemes, preferential tax treatment may be curtailed or lost). Alternatively, such an agreement might be reached as part of a negotiated exit, so that the departing employees get more than they would be contractually entitled to. Similarly, in the case of shares, a good leaver may be able to negotiate a better outcome than the governing rules indicate.

Ultimately, each scheme is different and employers or senior executives needing advice on the negotiation of the above elements in the context of an exit under a settlement agreement should seek specialist advice.

If you require assistance with any of the above matters, please contact David Greenhalgh of the Joelson employment team on +44 (0)20 7580 5721.

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.