Introduction  

The world of executive remuneration and the combination of cash and share based incentives is ever under the spotlight. Rewarding, motivating and retaining senior employees and attracting new high profile executives to your company requires a well structured, tax efficient and effectively administered remuneration package.  

Effective share based incentive plans should be designed to align the activities of executives and senior employees with the requirements of the company’s shareholders and meet their expectations with regard to quantum and corporate performance. Share plans should also be designed to benefit from any tax advantages available to the employing company.  

Share plans typically include vesting periods of 3 to 5 years subject to certain performance targets being met. This form of incentive planning should meet the criteria imposed by the appropriate representative bodies such as the ABI and NAPF and more recently the FSA’s new code of practice for remunerating employees of regulated entities.  

Employers need to be aware of what products are in the market place and have access to experienced advisors, administrators and trustees to actively manage the risks and rewards associated with the set up and ongoing operation of share plans.  

This guide highlights the variety of share plans in the market and illustrates the way in which these can be tailored to meet specific requirements as needed.  

Executive Share Plan  

At senior level the majority of equity based reward is available under “unapproved” plans. While these structures are not subject to caps or particular legislative requirements imposed by HMRC, rewards are typically subject to UK income tax and National Insurance charges and must be designed with the shareholders’ or other regulatory bodies’ needs and expectations in mind. The range of share plans typically considered by companies for their executives and senior employees includes:

Long Term Incentive Plan (Performance/Restricted Share Plan)

Under a Long Term Incentive Plan, an executive is typically granted an award of shares that vest after a restricted period, typically 3 years, subject to the achievement of pre-determined financial performance targets. The executive pays no price for the shares but any value is subject to UK income tax and National Insurance.  

Executive Share Option Plan  

Executives may be granted an option to acquire a specified number of shares after a pre-determined date, typically 3 years from grant. The purchase price per share is normally the market value at the date of grant and the extent to which that option becomes exercisable is typically subject to the achievement of performance targets. Any gain made on the exercise of the option is subject to UK income tax and National Insurance.  

Deferred Bonus Plan  

Under a Deferred Bonus Plan, an executive may be invited (or required) to defer part or all of his or her annual cash bonus into company shares. These are held in trust for 3 years and may be matched with additional shares subject to the achievement of performance targets.  

Jointly Owned Equity Plan  

This is a structure under which selected employees are invited to subscribe for shares in the employing company jointly with the trustees of an offshore employee benefit trust. The joint interest entitles the employee to any growth in the value of the shares above a set hurdle. As with the other plans referred to above, this structure can be designed to include restrictions and forfeiture criteria as well as demanding performance targets. A key benefit for the executive is that any growth in value of the shares at release is subject to UK capital gains tax treatment rather than UK income tax.  

Phantom Plan  

A phantom plan is a cash plan mirroring the type of executive share plan adopted by the company. Any cash paid out under the phantom plan reflects the payout that would have arisen under the share plan. Such a plan may be used where legal, regulatory or other restrictions prevent the use of shares in a particular jurisdiction. The plan still successfully aligns the executives’ interests with those of shareholders.

HMRC Approved or Unapproved  

Tax advantages are still available under a limited number of HMRC approved share plans offered to executives and other senior employees.  

The Company Share Option Plan (CSOP)  

The CSOP is a market value share option plan offering income tax relief on gains made on the exercise of the option. Due to a £30,000 cap on the value of the shares at the date of grant, at senior level the CSOP is typically used in conjunction with an unapproved share option plan, although with recent share price movements, there may be opportunities for significant growth to be sheltered through the use of these plans.  

The Enterprise Management Incentive Plan  

The EMI is a share option plan available to smaller companies (up to £30m gross assets employing up to 250 employees) that meet certain trading requirements. Under an EMI plan a company may grant options over shares with a value up to £3m. Any single employee may be granted an option with a market value up to £120,000. There is flexibility in the setting of the option exercise price by the company. Any gain made on the exercise of an option is taxed under UK Capital Gains Tax rules (currently at 18%) rather than taxed as UK income.  

Companies should always remember that their executives and senior employees can also participate in the broader HMRC approved “all-employee” share plans including the Save As You Earn (SAYE) and Share Incentive Plan (SIP).  

Employee Benefit Trusts (EBT)  

Executive share plans are typically operated in conjunction with an EBT. This is usually an offshore trust that is established and funded by the employing company. It is the trustees’ duty to act in the interests of the employees (and ex employees) who are beneficiaries under the EBT.  

The EBT fulfils a number of functions depending on the plan structure, the stage in its life-cycle and the employing company’s structure. The trustees can be funded by the company to acquire the shares to hedge the company’s exposure to its own share price prior to awards vesting and/or options being exercised. It can also assist in creating a market for a private company’s shares, or if there is an illiquid market in a listed company’s shares. A key service provided by the trustees of the EBT is the day to day administration of the plan dealing with key company contacts as well as directly with the participants in the plan. A well drafted EBT deed will allow for multiple plans to be managed through a single trust arrangement.  

Conclusion  

It is possible to tailor executive share plans to meet employer’s specific financial and incentive needs.

A crucial element of effective remuneration planning is the use of experienced and professional tax and legal advisors as well as professional independent trustees and administrators that can deliver the service excellence that the successful operation of a share plan demands.