Employee Share Plans

Employee share plans

In recent years, the use of Employee Share Plans (also known as “Schemes”) that enable employees to acquire shares in their employing company as part of the company’s benefits package has become common place.

There are many types of Share Plans. Our Jersey team is fully conversant with the management and administration of the following Plans for both quoted and privately owned client companies:-

Share Option Plans

•  Employees are given the right to buy shares in the future at a price calculated at the time the rights are granted. This right is called an “option”.
• The Plans may be limited to executives in which case options are usually only exercisable if performance conditions are met.
• The Plans may also be extended to the whole workforce, most commonly as a savings-related Share Option (SAYE) Scheme. Some executive and most SAYE Plans carry tax benefits.

Profit Sharing Share Plans

• Employees receive shares in their employing company or its parent free of charge. It is like a bonus arrangement, but instead of cash, they receive shares.
• The shares are held by a Plan trustee before release to employees at a later date. In the UK, and in a few other countries, this may carry tax benefits.

Share Incentive Plans

• These are special to the UK, and are an approved type of Plan which can receive very favourable tax breaks.
• Share Incentive Plans (“SIPs”) can have any one or more of the elements listed below:
• One of the elements is similar to Profit Sharing Plans above. Employees receive shares in the employing company or its parent (or, more unusually, another group company), free of charge. It may be necessary to satisfy certain performance conditions to receive all or part of those free shares.
• Employees may acquire shares in the employing, parent or other group company as above out of monthly contributions, generally paying current market value.
• Employees may receive free matching shares for every one or more shares which they acquire using their own funds.
• The shares are held by the Plan trustee before release to employees at a later date. They usually carry tax and national insurance benefits.
• Employees may acquire additional shares with the dividend payments they receive on the shares held by the Plan trustee. These may also carry tax benefits.

LTIPs

• LTIP stands for Long-Term Incentive Plan. Sometimes also called Restricted Share Plans.
• They are usually restricted to senior executives who receive free shares in their employer or its parent company free of charge at the end of a definite period if performance conditions have been met.
• There can be many types of LTIPs.
• They do not carry any special tax benefits, but following changes in legislation introduced by the Finance Act 2003, it may be possible to elect to pay tax upfront. This may mean a tax saving in the long run, but inevitably will involve something of a gamble.

Phantom Share Option Plans

• These are often known as Share Appreciation Option (Rights) Plans, or SARs.
• Instead of a right to acquire shares, employees are granted a right to receive a cash amount when they exercise the phantom option. This cash amount is equal to the difference between the market value of the shares under option, calculated at the time of exercise, and the market value of the shares at the time the phantom option is granted.
• Shares may or may not be used to provide this cash amount. Strictly this is not a Share Plan because employees are not usually entitled to receive shares. However, the benefit which the employees receive is directly related to the performance of the shares, so this is a Share-Based Incentive Plan.
• There are no special tax benefits.

ESOPs

• ESOP stands for Employee Share Ownership Plan, sometimes called ESOT for Employee Share Ownership Trust.
• An ESOP is a Trust which holds shares for distribution to employees of the relevant company or its subsidiaries.
• ESOPs are often used to deliver shares under the Employee Share Plans referred to above.

Employee Share Plans do not exist as separate legal entities. They are described as “arrangements” because they set out a set of rules which determine when and how employees may receive shares. The ESOPs or any other plan which operates as a Trust, are also not legal entities, but Trusts do have specific tax treatment and legal provisions which apply to them.

WHAT THEY ARE USED FOR?

Our client companies use Share Plans for many reasons, however, the following are often the drivers for establishing such arrangements:-

Incentives

• Share Plans enable employees to feel they can make a real contribution towards the success of the business in which they work.
• They provide a link between better performance and reward. The OECD (the Organisation for Economic Co-operation and Development) has carried out studies into the effects of profit sharing on productivity of companies in OECD countries. A study carried out in the 1990s of ninety-three UK firms indicated that firms which have Profit Sharing Plans are more efficient and have on average higher levels of productivity.
• Plans are particularly relevant in people skills industries (for example, computer software financial services, or banking) where individual performance can have more direct impact on company performance.

Encourage employee participation

• By giving employees an equity stake in the company they will identify more closely with its successes and failures.
• Share Plans help break down any “them - us” divide between owners, management and workforce, and can improve industrial relations.
• Share Plans give employees a long-term interest in the company’s performance, not just a short-term interest in the next pay-rise; this may particularly be the case with all-employee Plans which extend to the whole workforce.

Reward

• Share Plans can provide employees with substantial additional remuneration especially in the medium to long term.
• Option grants can be cheaper for companies to provide than increased salaries or cash bonuses.
• Start-up companies may have no cash to pay employees so they use share incentives instead.
• Share Plans can allow employees to take advantage of favourable tax treatment.

Retention (or “Golden Handcuffs”)

• Potential share benefits may be lost if an employee leaves the company. The Plan only pays out if the employee remains in employment.
• Share Plans usually include a required vesting period or holding period before an employee can benefit from the Share Plan.

Recruitment/Prevention of Poaching

• Plans can be an alternative/additional form of remuneration to add to those on offer by competitor companies.
• Plans may be necessary in order to attract overseas employees (particularly from the US), due to market conditions and expectations.

Gain Sharing/Wealth Sharing

• Enables employees to have greater wealth than might otherwise happen if they only received income from their employment. This is not usually a primary objective for a company but was certainly an objective for the Conservative Government in promoting wider employee share ownership through the 1980s as a way of helping people plan for their retirement and be self sufficient and self reliant.

Other reasons

• Using an employee trust can help private companies create a controlled market for shares.
• Offering shares to employees on favourable terms on initial public offer in order to reward loyalty or allay employee concerns.
• Can be a tax efficient way of delivering value and benefits to employees.

THE ADMINISTRATION OF SHARE PLANS

Outsourcing the administration of Employee Share Plans to a third party administrator such as IFG is becoming common practice, mainly due to:-

• an increase in the complexity of Plans and the need for expert staff to handle processes and deal with queries;
• the comparative cost to a company compared with another organisation which could leverage the cost against the service that the infrastructure provides for other Plans;
• size of Plans, some operate for many thousands of employees, and overseas, these usually require significant peaks of activity to launch and then deal with the maturity, again usually a peak of activity. Some companies do not have the resources of trained staff to handle the peaks, and, therefore, need to outsource all or some of the process.

IFG takes on the role of agent of the company, it is doing the jobs that would otherwise be done by the company. As a result, IFG becomes the company’s agent and has certain legal responsibilities when it does that.

Therefore, when it undertakes activities like:-

• inviting participants to apply for participation in the Plan;
• processing the applications;
• issuing award or option certificates;
• dealing with option exercises, etc;

it is doing so on behalf of the company, not in its own name. So when IFG issues an invitation it is processing the invitation but the name of the company will appear on all the documents. The response may go back to the administrator to process it on the company’s behalf, as agent.

As an agent, IFG has obligations to its principal to:-

• obey the principal’s lawful instructions;
• act within the limits of the authority given to it;
• use its reasonable diligence and care in executing its duties;
• avoid conflicts between the agent’s and those of its principal;
• disclosing all material facts to the principal;
• not revealing confidential information;
• accounting to the principal for any property or moey belonging to the principal under the agent’s control.

It is important to clearly define and agree from the outset appropriate service levels and obligations. The contractual relationship between the employing company and IFG is governed by an administration agreement.

The administration agreement covers:-

• The services to be provided and for which plans;
• Confidentiality (and a data protection obligations);
• Assignment;
• Frustrating actions (sometimes known as force majeure);
• Terminating the agreement;
• Disputes and enforcing the contract (governing law and which court will hear it);
• Insurance;
• Ability to change fees;
• Administrators’ and employer’s liability.

HOW IFG CAN HELP?

IFG works together with professional advisers to help devise the most appropriate type of Share Plan arrangement for each client’s particular needs.

Typically, services on offer by IFG to companies are categorised as follows:-

• Administration Services
• Exercise and Trade Settlement
• Internet Services
• Plan Reporting
• Communication Services
• Specialist Services

Breaking down the common components of these categories, companies could consider the following:-

• Partial Administration available for companies choosing to retain their record keeping in-house, or with another provider, but wishing to outsource trade and settlement executions;
• Total Administration available for companies choosing to outsource all record keeping, trade and settlement executions, and, perhaps, employee support services. Services here may include:-
• calculation and processing of grants;
• grant acceptance processing (on-line or manual);
• monitoring plan and vesting rules and appropriate tax withholding;
• validation and processing of exercises;
• monitoring and maintaining blackout periods and insider dealing restrictions;
• retaining full historical and transactional information (where available).

Exercise and Trade Settlement services may include:

• Validation, recording and execution of exercise requests, supporting different methods of exercises (sell-to cover, etc.);
• Conversion of shares (e.g. Ordinaries to ADRs);
• Currency conversions – employees who exercise options for cash typically wish to receive the proceeds in local currency;
• Ability to facilitate trading on multiple stock exchanges;
• Tax withholding and remits of option costs, taxes and net proceeds to the designated parties, in the required currencies.

Internet Services:

• For the employee. These may include the ability to trade online, provide modelling, forecasting, currency conversions and reporting;
• For the company. This may be on a ‘shared administration arrangement’ whereby the company has access online to update specific sets of information (e.g. personnel changes) whilst the external administrator retains full control of the plan administration.

Support Services:

• Customer and Employee support centres (locally and global) providing hot-line assistance for queries and transactions.

Plan Reporting:

• Usually a comprehensive ‘matrix’ of company and employee reporting requirements will be designed and scheduled to ensure no important reporting deadlines are missed.

Communication Services:

• These may include:-
• e-delivery of information;
• design and dispatch of plan documentation/booklets;
• design of employee and corporate training and HR seminars/workshops.

Specialist Services:

• VIP Services (for senior or selected employees);
• Hedging and Share Buyback Programs to assist in managing risks that can be associated with share/stock plans;
• Strategies to provide share funding vehicles;
• Trustee services;
• Financial advice and planning for companies and their employees;
• Financial Education.

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific active concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.