The choices

Employee incentive schemes can be designed to meet given objectives of the employer in order to:

  • align the interests of employees/executives with those of the shareholders;
  • recruit, retain and/or motivate employees;
  • nurture employee loyalty; and/or
  • provide cost effective and tax efficient remuneration packages.

They broadly fall into the following categories:

  • share option schemes;
  • purchase or award of shares;
  • phantom share awards and cash bonus schemes;
  • cash deferral arrangements, which may either be trust-based or contract-based.

Share option schemes

Approved share option schemes

These are schemes for which certain tax benefits are available to employees and employers, provided certain conditions are met.

They currently they take the form of:

  • Enterprise Management Incentives ("EMI") Schemes;
  • approved Company Share Option Plans ("CSOP"); and
  • Save As You Earn Share Option Schemes ("SAYE").

EMI schemes are tax efficient and low risk share option schemes which are popular with both private and AIM listed companies (although certain FTSE listed companies may also be eligible) and which are looking to implement a discretionary share incentive scheme for key individuals.

CSOPs and SAYE schemes tend to be implemented by listed companies which are looking to incentivise all levels of employees.

For more information on HMRC approved schemes please see:

Guide to EMI Options

Guide to SAYE schemes

Unapproved share option schemes

Unapproved share option schemes operate in a similar manner to EMI and CSOP schemes (therefore offering a risk free incentive for the employee). There is greater flexibility in terms of structuring these schemes but gains on exercise of the unapproved option will be subject to income tax (and potentially employer's and employees' National Insurance contributions), making unapproved share option schemes less tax efficient for the employee. However, a corporation tax deduction may be available for the employer company.

Purchase and award of shares

Employees can also be given the opportunity to acquire shares (or an interest in shares), either at full market value, a discount to market value or no cost. Shares can be purchased or awarded under schemes such as:

  • HMRC approved Share Incentive Plans (SIPs);
  • Long Term Incentive Plans (LTIPs);
  • Joint Share Ownership Schemes (JSOS);
  • Growth Share Ownership Plans (GSOP); and
  • Nil Paid Employee Share Acquisition Schemes;

The above schemes can provide tax efficient alternatives for employees where tax approved share option schemes cannot be implemented.

For example, JSOSs may be appropriate for AIM and fully listed companies seeking to incentivise executives and key management in a tax efficient manner, when either the company does not qualify to participate in HMRC approved schemes, or the individual limits imposed on such schemes are not sufficient.

Furthermore, structured correctly a SIP can provide the ability for employees and executives to receive £7,500 worth of shares per year at a cost to them of only £750. For more information on such schemes please see:

Guide to unapproved share award plans

Guide to SIPs

Phantom share awards

Phantom Share Awards (often also called Share Appreciation rights) provide a method of awarding bonuses based on the growth in the value of the company's shares. They can be used where shareholders do not want dilution of their equity, or they do not wish to disturb an arrangement such as a joint venture. Phantom awards do not give actual rights over shares.

Cash deferral arrangements

The landscape for UK cash deferral arrangements changed fundamentally with the introduction of the so-called "disguised remuneration" legislation in the 2011 Finance Act. As a result, there are essentially two categories of arrangements:

1. Those introduced prior to the disguised remuneration legislation which are adversely affected by it from a UK tax perspective.

2. Those which are affected by the legislation in a limited way or not at all, and which may continue to be implemented and used by employers.

For further information on cash deferral and the disguised remuneration legislation, please see:

Guide to EBTs and disguised remuneration issues

Due to the wide variety of incentivisation schemes available, it is likely that there will be a scheme suitable for your organisation, regardless of size or sector. To find out more, please contact a member of the Charles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.