Colin Buchanan and Partners Limited established an employee share market in 2004, we look at how it works and how it has transformed their shareholder base in less than 5 years. 

About Colin Buchanan and Partners Limited ("CB")

CB are a firm of transport, planning and economic consultants.

CB was founded in 1964 by the team that produced the seminal “Traffic in Towns” report commissioned by the UK Minister of Transport, this document is widely regarded as the starting point of modern transport planning.

CB was originally founded as a partnership but converted to company status in 1984. CB are market leaders in the field with over 300 staff in 12 offices in the UK, Ireland, China and Spain. Turnover for the financial year to 31 December 2007 was £22.3 million.

More details are available at:

Why establish an employee share market?

By September 2003 CB was 100% owned by 10 directors some of whom were approaching retirement. The board were faced with the prospect of a substantial proportion of the company's share capital coming up for sale over the following few years. In the face of this challenge, CB's objectives were to:

  • retain its independence;
  • facilitate the orderly transfer of ownership to the next generation of management;
  • develop incentive arrangements that would give CB an edge in the battle for talent;
  • widen their shareholder base beyond management to encourage a focus on the key goals in their business plan;
  • retain cash within the business so far as possible; and
  • alter the culture of the business to encourage a greater interest in performance and consequent wealth creation.

All these objectives pointed towards establishing a market to allow employees and the new generation of management to acquire shares from retiring directors. In December 2003, CB took the historic step of establishing an employee share market to facilitate the desired shift in ownership.

Summary of the CB internal market

CB operate two trading windows in the first two weeks of June and December during which employees can apply to buy and sell shares at a price agreed with HMRC to be the market value of CB’s shares. Leavers are required to offer their shares for sale in the following trading window.

CB established several employee share plans which are designed to stimulate buy-side demand namely:

  • a Share Incentive Plan ("SIP");
  • an enterprise management incentive plan ("EMI plan"); and
  • an Employee Share Ownership Plan Trust ("ESOP").

A SIP is an all-employee tax advantaged share plan for UK employees. One of the ways SIPs can be used is to allow employees to buy shares out of pre-tax salary. CB employees make monthly savings which the SIP trustee uses to buy shares on behalf of participants in each trading window.

In addition, the board grants EMI options to key employees in June and December each year. Options become exercisable after three years and lapse after 3.5 years, these “short life” options are designed to encourage key employees to become shareholders.

The ESOP trustee buys sufficient shares in each trading window to fully hedge options and transfers the shares to option-holders to satisfy option exercises. The ESOP trustee is funded by loans which are repaid out of the option exercise monies.

Retiring directors are required to release sufficient shares into the market to satisfy demand.

SIP - the tax breaks

A SIP is an all-employee tax advantaged plan for UK employees which was introduced by the Government in 2000.

One of the ways in which SIPs can be used is to allow employees to purchase "partnership shares" out of pre-tax and pre-NICs salary. Employees can save up to £1,500 per year (equating to £125 per month), the savings from the gross salary are then used to buy shares on their behalf. There is no employers' NIC on the savings from the salary.

In CB's case, savings are deducted from salary on 30th of each month and held by the SIP trustee which then buys shares on behalf of participants in trading windows and holds the shares in the SIP.

Participants qualify for tax breaks if they hold their shares in the SIP. Shares can be withdrawn at any time, if withdrawn:

  • after more than 5 years the shares are income tax and NIC free;
  • between 3 and 5 years the growth in value is income tax and NIC free; and
  • within 3 years the whole value of the shares is subject to income tax and NIC.

Leavers are required to withdraw their shares from the SIP, "good" leavers can do so free of income tax and NICs. There is no CGT on shares held in the SIP, the "base cost" of the shares is uplifted to market value at the time of withdrawal. Shares can be retained in the SIP even after 5 years in order to act as a CGT shelter.

How CB operate their SIP

The SIP legislation requires a special purpose trust to be administered by a UK resident trustee.

Participants save up to £125 per month out of pre-tax salary, the savings are retained by the SIP trustee and used to buy shares in trading windows. The timing of the savings periods and trading windows is critical. In particular:

  • CB deduct savings from salary on the 30th of each month;
  • six deductions are made in the period from 23 December to 1 June and another six from 23 June to 1 December and so on, these are known as "accumulation periods" and are self-renewing;
  • the SIP trustee uses the savings to buy shares on behalf of participants in the trading windows in the first two weeks of June and December following each accumulation period;
  • CB's shares are valued by reference to the most recent published accounts and management accounts, CB make up accounts to 31 December and announce results on 23 June; and
  • CB agree a share valuation with HMRC for "valuation periods" running from 23 December to 22 June and 23 June to 22 December so there tends to be a jump in the share price on 23 June each year when annual results are announced, and a further increase on 23 December if trading is satisfactory.

Crucially, the SIP trustee buys shares in each trading window at the valuation agreed with HMRC at the beginning of each accumulation period. The market is structured in this way to avoid any cash cost to CB (indeed there is a small saving of employers NIC on salary paid to participants).

The SIP legislation requires the SIP trustee to sell shares to participants at the lower of the market value at the beginning and end of each accumulation period. If the share price were to be higher at the end of the accumulation period, the SIP trustee would have to buy shares at the higher price and sell at a lower one causing a funding shortfall in the SIP which CB would have to make good.

The operation of the SIP can be represented diagrammatically as follows:

Key features of the market 

It is critical to the success of the market that it is operated in a credible and transparent manner. CB have a "shareholder plan" document which sets out the policy behind the operation of the market, the policy document is available for inspection by all employees.

Trading windows occur in the first two weeks of June and December at the end of which the company secretary matches buy and sell applications so far as possible. Once matched, share transfers are registered on the books of the company before the start of the next valuation period.

The shareholder plan deals, amongst other things, with what happens if there is an excess of buy or sell applications. The document requires directors who are approaching retirement to offer shares for sale in each trading window to the extent necessary to satisfy surplus purchase applications. If there is a surplus of sale applications, priority is given to leavers with small holdings and then other voluntary sales of small holdings.

The articles allow shareholders to trade shares outside trading windows but require all share trades to take place at the valuation agreed with HMRC for the purposes of the SIP.

Both the SIP and ESOP trusts are administered by Barclays as CB felt a recognised household name would boost the credibility of the market.

No criminal insider dealing rules apply to private company shares but CB's results (and the consequent new share value) have to be kept under wraps until 23 June if the increase in share price is substantial, otherwise the trading window in the first two weeks of June would be distorted. Those directors who are privy to the information are not permitted to profit from it.

The sweetener

CB pay a chunky dividend (in the region of 7%) to encourage share take up. The dividend is paid to all shares in issue (other than to the ESOP trustee which waives dividends on shares held in the ESOP). Dividends are paid quarterly to shareholders on the register on specified record dates (the SIP trustee passes the cash to SIP participants as it holds shares on their behalf).

The high dividend yield obviously has a cash cost attached but it is designed to encourage take up both via the SIP and outside it. In particular it is designed to assist key employees to fund option exercises.

Alternatively, it would be possible to target the sweetener more accurately at SIP participants. The SIP legislation allows companies to offer employees "matching shares" in the ratio of up to 2 shares for each share purchased through the SIP. Matching shares are free to participants and can be withdrawn from the SIP tax and NIC free after 5 years. The SIP would have to buy shares in the market funded by contributions from CB to be able to offer matching shares.

A company operating these arrangements could offer matching shares or possibly a combination of a lower dividend and matching shares to reduce cash costs.

CB's SIP so far

45% of eligible employees currently hold shares via the SIP to date representing 31% of the total workforce (CB has employees in Ireland, Spain and China who are ineligible to participate in the SIP).

Participants save an average of £90.58 per month.

These figures compare favourably with the average SIP take-up and savings figures of 34% and £83 per month respectively (per the latest 2007 ifs Pro-Share Survey). We think these figures are all the more impressive given that 90% of the companies surveyed were listed whereas CB's shares are not.

The CB SIP has raised a total of nearly £340,000 since launch in June 2004 and SIP participants now own 5.14% of the issued share capital of the company.

Incentives for key management

CB need to attract, retain and motivate key employees and they need to shift share ownership to the new generation of management. CB's discretionary incentive arrangements have been carefully structured to promote these objectives.

CB make bi-annual option grants to key employees based on individual performance. Options are granted shortly before the start of the 23 June and 23 December valuation periods. The exercise price is set at market value as agreed with HMRC for the purposes of the SIP. Options become exercisable 3 years after grant and lapse after 3.5 years. These "short life" options are designed to encourage option-holders to become shareholders.

Options are sourced by shares purchased by the ESOP trustee, in each June and December trading window the trustee applies to buy sufficient shares to fully hedge the position. The trustee is funded by loans which are repaid from the exercise monies (so as to minimise any possible cash surpluses or shortfalls in the ESOP).

Participants have, to date, received EMI options but CB ceased to be able to grant further EMI options in July this year following Royal Assent to the Finance Act 2008. The act added a condition that companies only qualify for EMI if they have fewer than 250 full-time (or full-time equivalent) employees. We are in the process of introducing an HMRC approved "company share option plan" or "CSOP" to enable CB to continue to grant options tax efficiently in the future.

The first tranche of option grants are due to become exercisable in October this year. Participants will be able to fund the exercise price out of CB's "bonus sacrifice scheme". In addition, participants will be able to time option exercises so as to benefit from dividend payments.

The ESOP is located off-shore to avoid any CGT exposure and is administered by an off-shore trustee.

Change in the ownership base

In September 2003, CB had approximately 250 staff and was 100% owned by 10 directors. CB now has over 300 staff and is owned as follows:

  • 63.2% directors (including new directors since September 2003)
  • 14.46% ESOP (nearly all these shares are subject to "short life" options)
  • 5.14% SIP
  • 10.02% non-director employees
  • 7.17% retired directors

In less than 5 years, approximately a third of the share capital has been shifted from the original 10 directors to employees and the new generation of management.

In a very encouraging development, over 10% of the share capital is now owned outside the SIP by employees below board level. Typically, these employees have purchased the maximum permitted by the SIP rules and invested more of their own money (without the benefit of any tax breaks) because they believe strongly in the success of CB.

We are pleased to say they were right! In addition to enjoying an annual dividend yield of 7%, CB's share price has increased by 572% from December 2003 to date!

Trevor Bradshaw ACIS - Company Secretary and Head of Finance of CB said: "The careful planning, communication and relative simplicity employed in designing and implementing our share schemes has been rewarded with excellent participation and enthusiasm for them. They have played their part in producing increased income and wealth for the company and the participants, which has delighted everyone involved and increased confidence for the future. We have been very pleased with the help and support received from our advisors and trustees."

We congratulate CB on what has been a very successful market and we wish them every success in the future. We will keep you updated on developments.

Introducing an employee share market

Companies introducing an employee share market need to select a team of top qualify advisers consisting of:

  • lawyers (who better than International Law Firm of the Year 2008: Bird & Bird?)
  • share valuers
  • SIP trustee and administrator
  • ESOP trustee

The documentation required includes:

  • SIP: trust deed, rules, ancillary documents, partnership share agreement, brochure and a shareholder plan document
  • ESOP: trust deed, loan agreement and operating agreement
  • Option Plan: EMI (or possibly CSOP) plan rules and ancillary documents
  • Article changes to allow the market to operate and to comply with the SIP (and possibly CSOP) legislation

Once the documentation has been drafted and agreed, the article changes will need to be adopted by shareholders and the SIP (and CSOP) formally approved by HMRC.

Careful thought needs to be given to timing. A company with a 31 December year end (like CB) may be able to launch by December 08 in time to allow a full 6 month savings period to June 09. If the timing slips, it is always possible to operate a shorter initial savings period (say) from February to June.


Employee share markets are not just another employee benefit, they require a change of culture from the top downwards. Management should commit to preparing annual accounts and updating the business plan so as to fit in with the cycle of the market. Dividend payments and bonuses should be timed to assist key employees to fund option exercises.

The announcement of annual results is a big opportunity for management to communicate to employees who need to understand: 

  • how the company is valued (typically by applying a p/e ratio to profits);
  • what the key objectives are in the business plan over the next 18 months;
  • what they need to do to grow the business; and
  • that these arrangements have been introduced to enable them to share in wealth creation through improved performance.

Management should literally buy into the arrangements by applying to save the maximum under the SIP and new management should be set share ownership targets (CB do this in the shareholder plan). Management and key employees should be encouraged to use bonuses to fund additional share purchases outside the SIP.

If correctly communicated to employees, we believe these arrangements have every chance of improving productivity and contributing to wealth creation. We have considerable experience of advising on employee share markets for CB and other clients and we would be delighted to assist companies that choose to take the leap!