The concept of an employee share plan is actually a very simple one. Give your staff the chance to own a slice of the company they work for, and they will work harder, and show greater loyalty to the company, knowing that they the better the company performs the better their own finances will perform.
The idea is a popular one – ifs ProShare, the not-for-profit organisation that represents the share ownership industry, reports that 1.7 million employees in the UK are currently saving into Save as You Earn (SAYE) schemes alone.
The SAYE, Company Share Option Plan (CSOP) and Share Investment Plan (Sip), are the three main schemes that are tax approved, as HM Revenues and Customs (HMRC) have given the plans their seal of approval. If these schemes are run in accordance to scheme rules there can be substantial tax breaks available for members of the plan.
These are not the only plans in operation, there are also unapproved share plans, such as the Long Term Investment Plan, where employees are given free shares after a certain amount of time or when they hit certain performance targets. Unapproved schemes such as this offer no tax breaks but do offer the opportunity for employers to design their own scheme without HMRC imposing their own boundaries. However, the majority of companies in the UK operate approved schemes to enjoy the tax advantages.
Paul Stoddart, new business development manager at HBOS Employee Equity Solutions, says: “The SAYE has been around the longest and is the most popular in the UK because it carries no risk for the employee.”
In the SAYE arrangement, the employer must offer all employees the chance to save between £5 and £250 per month to buy shares with over a set period of time, commonly three, five or seven years.
The share price is fixed at the outset and they can also be offered to employees at a maximum 20 per cent discount to encourage participation.
At the end of the fixed period, the employee receives a tax-free bonus, which is calculated via a formula set by the Treasury, and can either use the total cash saved to buy shares or if the shares have dropped in value the employee can simply take back the accumulated cash.
The CSOP is slightly different in that it doesn’t have to be offered to all staff. It can be restricted to certain members of the company. The employees that are eligible to take part have the chance to buy a set number of shares at a fixed price. Although there is no discount under the CSOP as there is in the SAYE plan, the employee does still have the option of buying company shares in the future, at today’s price.
The employee is limited in the CSOP, and the total value of shares should not exceed £30,000 – anything above this amount will not be deemed as part of the approved plan and will therefore be liable for tax.
Under the Sip, rather than only offering staff the option of employees buying shares as in the previous two plans, the employer can award free shares to staff or matching shares with ones the employee has already purchased. However, the Sip is also the approved share plan that requires the most work from employers, and will cost the most to put in place simply because of its complexity.
Yet its variety and design means that it can be attractive to companies that want to offer employees different features to a share plan.
Sid Singh, director at ESS Consultants, says: “The Sip involves giving shares to employees as opposed to options or rights to acquire shares. Under the Sip the employee can receive free shares, they could buy shares in the company, and the company at the same time can match those shares that are purchased with further matching shares.”
The rules say employers are restricted to awarding staff £3,000 per year in free shares, while members are limited to buying £1,500 of shares per year, and the firm can only match the employee’s purchased shares with a further £3,000 worth of shares.
If employees can keep their shares in the plan for a minimum of five years, they can be taken out of the plan and sold completely free of all taxes. If however the shares are taken out before three years, or between three and five years, tax will be liable, adds Stoddard.
“There is an opportunity to take shares out of the plan before three years, but the employee will pay tax and NI on the market value of the shares when you take them out of the plan.
“So if they are worth twice as much you will pay twice as much tax and NI, but if they are worth half as much you will pay half as much tax and NI.”
The tax rules change again if shares are taken out of the plan after three years but before five years, and a member of a scheme will pay tax and NI on the lower of the value when they bought the shares, or when they are being taken out, so clearly there is an incentive here for an employee to remain within a scheme for a five year period.
The complexity of the Sip gives a clear indication of how much work is involved in running the plan, and although the gains for the employer can be great, these are not straight forward plans to put in place and operate.
First of all, any share plan will have to be communicated adequately so that employees can understand their position around the taxing of shares, and also the potential pitfalls of those plans if the value of shares decrease. Employers must produce coherent literature for their staff, without this members may end up feeling de-motivated if they lose out, or do not gain as much as they were led to believe from their investments.
Fiona Downes, head of employee share ownership at ifs ProShare, explains: “It is essential that the communication process is as effective as possible. People need to understand that shares that they buy can go up and down.”
Another issue that is sometimes underestimated when a company is implementing a share plan is the complexity of offering the plan to employees outside of the UK.
Often companies set up share plans in the UK and then, to keep employee benefits consistent on a global scale, look to expand the plan abroad.
David Kilmartin, client services director at Capita Share Plan Services, explains: “If you have employees overseas, employers think that they can just apply the same rules as they do with staff in the UK, when of course they can’t.”
Third party providers and administrators can be used to take a large slice of the management of schemes away from the employer, but there will always be day-to-day issues for the company to deal with, adds Stoddart.
“Whilst an administrator will try to take as much of the work off the company as possible, there are always things the employer must do, for example having input into the communication process, deducting contributions from pay and informing us when someone leaves.” he says.
Capital Gains Tax is one tax that needs to be clearly explained to employees. Post April 2008 there is just one rate of 18 per cent tax to be paid on any gains made over the annual threshold of £9,600. Although this tax system is simpler than it once was, employers need to be sure that members understand the rules and are not left to deal with an unexpected bill at the end of the year.
Share plans: Do they work?
According to the 2007 HMRC report, Tax-advantaged employee share schemes: Analysis of productivity effects, tax-advantaged share schemes overall increased productivity by 2.5 per cent within surveyed organisations.
Further, those employers with SAYE schemes enjoyed an increase of 4.1 per cent, while firms operating a CSOP positively affected productivity by 1.6 per cent.
All studies into productivity and share plans should be treated with caution, as there are many factors such as working environment, quality of leadership and management that can cause negative or positive effects on productivity, insists Andrew Pendleton, professor of human resource management at York University Management School.
“The general picture from academic research is that share plans are positive in their general effect but we can never be 100 per cent because so many other things could affect their success,” he explains.
However, more and more employers are using their benefits package to recruit new employees and offering a share plan with the prospect of guaranteed profits or at the very least your money back, can certainly help to lure highly- skilled employees to a firm, and encourage them to stay for the long term.
“The evidence generally suggests that the employee turnover rates are lower with share plans, and there is also evidence to suggest that employees appreciate share plans, and that they encourage more loyalty – this is fair to conclude,” adds Professor Pendleton.
Mike Hazelgrave, reward manager, Asda
That’s ASDA share price
Supermarket chain Asda operates an SAYE plan for staff, allowing them to save between £5 and £250 per month, and then after three years, with the accrued money, employees can buy shares in the company for a price that was fixed three years earlier.
The shares also come at a 20 per cent discount for staff.
The fact that employees must wait three years to be rewarded from the SAYE is a good incentive for them to stay, and the firm confirms that the plan works as a good retention tool.
Mike Hazelgrave, reward manager at Asda, says: “After three years employees get the chance to join the plan year after year and the plan matures year after year, so it is a good retention tool because you get a liking for that annual maturity. It’s like holiday money every year.”
The store doesn’t believe that the CGT changes that were introduced in the Budget this year will affect take up of its plan, because it is unlikely that anyone will make gains above the annual threshold of £9,600.