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In this article, we look over:
- How to reward employees with share plans
- The benefits and limitations of these plans
- How to defer pay or bonuses using share plans
Rewarding Employees
Various share plans are used to incentivise employee groups. Companies are typically considering free share plans that enable all employees to benefit equally, with a short deferral period or a short period between the award being made and the employee receiving their shares.
With this in mind, we compare the two most common types of plan, Conditional Share Award and Share Incentive Plan.
Conditional Share Award
A Conditional Share Award “CSA” is a flexible way of issuing free shares. It may be possible to grant a CSA under an existing set of plan rules without further shareholder approval which will speed up the process.
Awards of shares can be offered with either a fixed vesting date or as a grant of an option. Granting an option gives employees a period when they can choose to receive their shares, meaning tax liability will only be triggered when they exercise the option.
Performance metrics and specific terms can be attached to the CSA. However, we're seeing awards where the only condition is the employment of the employee at the time of vesting.
Share Incentive Plan – Free Shares
The Share Incentive Plan “SIP” is a tax-advantaged plan used to reward UK employees.
Participating employees must be awarded free shares (up to £3,600 per tax year) on the same terms. However, conditions can refer to an employee's remuneration, length of service, hours or even performance.
Companies already offering Partnership shares are likely to be able to use the same plan for a free share grant, though companies will need to check the Trust Deed and Rules.
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Conditional Share Award |
Share Incentive Plan |
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Geographies |
· Can be granted in most jurisdictions |
· UK employees only |
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Length |
· A company chooses the length of vesting and exercise periods · Access to shares can be quick for employees |
· Minimum holding period of 3 years (though a company can set a maximum of 5 years) |
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Award value |
· A company can control the maximum award value |
· Shares up to a value of £3,600 per tax year |
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Award conditions |
· A company chooses who to award shares to and the level of the award |
· Awarded to all eligible employees on the same terms |
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Tax Implications |
· Not taxed advantaged · Tax is due on vesting or exercise |
· Tax and NIC payable in years 3 to 5 if shares sold/withdrawn, tax-free after year 5 · Employer NIC savings (or deferral if shares sold/withdrawn in years 3 to 5) |
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Leavers |
· A company can control whether to apply ‘good’/‘bad’ leaver terms and forfeiture |
· ‘Good’/‘bad’ leaver terms apply · A company can choose forfeiture terms up to 3 years |
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Dividends |
· Dividends receivable after vesting or exercise |
· Dividends are receivable from day one |
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Flexibility |
· Flexible
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· Less flexible for companies and employees |
Using Conditional Share Awards
As Conditional Share Awards are flexible, we have outlined three examples enabling bonus and pay deferral.
Additional Ad-hoc Grant
Companies may not choose to pay cash bonuses but to grant an ad-hoc award of shares for a smaller quantum, e.g. £350 to all employees, with employees receiving the shares within 1 to 12 months.
Deferring Bonuses
A company may have an obligation to pay a bonus in the coming months and to preserve cash could look to award as shares, with employees receiving the shares within 6 to 12 months.
Deferring pay
Companies may look to preserve cash by delaying a percentage of employees' pay and replacing with a share award that would vest within 6 to 12 months.
If the share price rises during this period, employees will make gains. If the share price falls, the company may deploy a ‘look back’ feature at the point of vesting. 'Look back' allows the award to vest at the prevailing market share price, but the company will make up the difference between the award share price and the vesting share price by way of a cash payment.
Other Considerations
Before deferring pay or bonuses, companies will need to consider:
Sourcing the award shares – This is likely to be newly issued/treasury shares, or shares already in an EBT. Market purchased shares are unlikely to be used at this time, as the aim is to preserve cash.
Selling shares - A company's share price is potentially affected by large quantities of shares vesting and selling on the same date. However, several mitigating actions can help to ensure orderly trading is maintained.