Employee Share Schemes – a modern approach to employment arrangements?

Employee share schemes (“Schemes”) can aid the recruitment of new employees as well as improving the retention and motivation of existing employees by creating an incentivising environment which instils loyalty and aligns interests within the workforce.

Schemes can provide a cost effective and, dependent on the Scheme chosen, tax efficient choice for both the employer and the employee.  Schemes may also provide an interesting dimension for succession planning; with no need to seek a third-party buyer as ownership of the company is gradually transferred to the company’s employees.

What are Schemes?

Whilst there are numerous types of Schemes, with each having its own intricacies, Schemes generally allow an employer to grant, or provide a right to acquire, shares in the company to some, or all, employees in the company.  Schemes can be tax-advantaged or non-tax-advantaged.

Schemes differ from the situation in employee ownership companies in that Schemes involve the shares being held by employees personally, usually alongside other shareholders, and typically shares held as a result of a Scheme will amount to a minority shareholding in the company overall and may not have a meaningful interest.  In employee ownership companies, all of the employees hold, in aggregate, a large shareholding (which is typically a majority, or entire shareholding) in the company and which provides a significant and meaningful stake in the business.

What Schemes are available?

The right Scheme for each company will depend on various criteria; including the objectives of the business, the extent of employee ownership you wish to introduce, the eligibility criteria for participating in the Scheme and the needs of employees.  The extent of flexibility required may determine whether a tax-advantaged or non-tax-advantaged plan is most suitable for each company.

The following are the available tax-advantaged Schemes:

• company share option plans;
• save as you earn, sharesave, or savings-relate option schemes;
• enterprise management incentives; and
• share incentive plans.

The following are the available non-tax-advantaged Schemes:

• non-tax-advantaged share option schemes;
• long term incentive plans / performance share plans;
• deferred bonus / share matching plans;
• phantom option plans;
• joint ownership arrangements / shared growth plans;
• employee benefit trusts; and
• employee shareholder employment status.

If you are considering implementing a Scheme, or wish to learn to more about Schemes, our experienced and friendly Corporate team are here to help.

This is the first article within our Schemes series, with the remaining articles considering the different variants in more detail.