Balancing Employee Motivation And Cash Retention During COVID-19 - Equiniti
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Balancing Employee Motivation And Cash Retention During COVID-19

05 May 2020

A big concern for companies at this time is how to continue to reward and motivate employees while preserving cash. Many of us are looking at new and inventive ways to strike the right balance, and many are turning to share plans.

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.

 

Conditional Share Award

Share Incentive Plan

Geographies

·   Can be granted in most jurisdictions

·   UK employees only

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)

Award value

·   A company can control the maximum award value

·   Shares up to a value of £3,600 per tax year

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

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)

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

Dividends

·   Dividends receivable after vesting or exercise

·   Dividends are receivable from day one

Flexibility

·   Flexible

 

·   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.

If you have questions or require any form of support from us, please don't hesitate to contact your Relationship Manager or me, Jennifer Rudman, Industry Director, Employee Plans, jennifer.rudman@equiniti.com.

 

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