We’re starting with one of the most popular long-term incentive plans, which is the Enterprise Management Incentive (EMI) scheme. The EMI scheme is a way to offer tax-effective incentives to employees and it’s effectively an option to acquire shares in the company at a future date for a specified price. At the time the option is granted, employees don’t need to pay anything and they won’t actually become a shareholder until the option is exercised and they pay the exercise price. The time at which employees can exercise their shares is referred to as an exit event and the chosen exit events can vary from the business being sold to time-based exit events.
Restrictions apply around the size and trade of the company that can implement an EMI scheme.
The CSOP plan is popular for businesses that do not meet the requirements to implement an EMI scheme, as there are no restrictions on the company size or the trade of the business. However, a CSOP has its own restrictions around options being granted at market value, the limit on the value of options (£30,000 per individual), and the requirement to hold options for at least three years to be exempt from income tax.
Unlike other plans such as Save As You Earn (SAYE) or Share Incentive Plans (SIP), a CSOP allows you to select particular directors and employees to be offered the share options rather than all employees having the option to participate.
The Save As You Earn (SAYE) plan allows businesses to grant options to their employees to buy shares at a fixed price which can usually be exercised after a three or five year period. One of the positives of the SAYE from an employee’s perspective is that it’s risk-free, they can exercise the SAYE option at the end of the period if the market value of the shares has increased, but if not they can instead take the cash.
The plan is tax advantageous for employees as no income or NIC is charged on the grant of the SAYE option and the more favourable capital gains tax applies on any gains made on sale.
With Share Incentive Plans (SIP), all employees can be offered up to £3,600 of free shares with holding periods between three to five years before they can be withdrawn in normal circumstances. No income tax or NIC is charged on the withdrawal of the shares and provided their sold immediately after withdrawal, no capital gains tax would be charged either.
In addition to the free shares, employees can purchase partnership shares of up to £1,800 a year (or 10% of their salary if this is less) with their pre-tax salary. Employers can also provide up to two free matching shares for each partnership share, which effectively creates a discount. In total, with the free shares, the partnership shares and the matching shares, allow up to £9,000 shares as a maximum possible share entitlement per year.
Growth shares are a popular option for businesses that want to reward their employees immediately, but want to incentivise their employees in line with the growth of the company. The concept of growth shares is that they allow shares to be issued where employees only benefit from the increase in equity value.
Phantom shares are an option for businesses that don’t want to provide actual equity to employees. These phantom shares are more akin to a deferred bonus arrangement, where a payment will be made to employees in the future contingent on them still being employed and reaching certain performance targets, and often the payment will be linked to share price growth. Whilst the lack of equity makes phantom shares easier to implement, it doesn’t have the same tax benefits as some other equity or quasi-equity schemes.