During the highs of the dot.com boom at the end of the last millennium, stories of employees in the technology sectors walking away with £100k payouts from share schemes were common, while online business owners won and lost paper fortunes overnight.
In between the subsequent dot.com crash and the current recession the potential role of shares and options in reward appears to have gone on to the backburner. But, slowly, share schemes are now drawing more attention – partly driven by rising share prices, partly as compensation for pay freezes and most definitely due to the punitive tax increases on the highly paid.
Ongoing pay freezes are going to become a real issue for employers. Using one of the government-approved share plans can be a cheap way to tie in staff through to the real upturn and truly reward them for their loyalty.
But the key driver for a re-examination of the worth of shares and options to reward staff is the impact of the tax changes for high earners. This echelon of the workforce has always had options and shares as part of their performance and incentive packages. But reward experts feel that the impending increase in the tax rate on cash salary and bonuses for the higher paid might drive even more to opt for a greater portion of shares and options instead of cash.
All round, I fully support the use of shares as a way to boost the wealth of all levels of staff. But much ignorance exists about shares. Few employees fully understand how much their shares and options are worth to them between the launch of a scheme and its maturation. And even senior execs are often hard pushed to fully comprehend at any moment in time how much of their wealth is potentially tied up in their employer.
This is a crucial piece of communication that employers would do well to improve on to help staff see the clear link between their performance and the value of their option and stock plans. Otherwise, these schemes can lose much of their impact as a true staff incentive. Some online platforms do allow staff to see the value of their schemes in real time, but too many total reward platforms still do not include shares and options.
Maybe this year we will see even greater developments to see share schemes come in from the cold, not just in the reward package but also on corporate wrap and total reward platforms.
Debi O’Donovan is editor of Employee Benefits magazine
Share schemes are already an established part of the reward package for employees at many organisations and, in particular, those at listed companies. Recent and prospective changes to tax and National Insurance will only serve to make such schemes even more important.
The benefits of share schemes do not stop at reduction in direct employment costs. With numerous different types of scheme available, both approved and unapproved, most companies should be able to find an arrangement that allows them to enjoy at least some of the less tangible advantages – recruitment, retention and motivation of employees, performance improvement, alignment of interests and the ability to keep cash in the business.
Whilst pensions are still the most effective way to save for retirement for the majority of employees, a more holistic approach to wealth planning in the workplace is emerging whereby pensions, shares schemes and other savings vehicles can be combined to meet employees’ short, medium and long-term financial objectives. Progressive employers are already making pension and share arrangements more integrated to enable employees to take optimum advantage of the features and benefits of the various schemes available.
Consultants and benefit providers are developing powerful technology to communicate and administer these more complex strategies. The most tax advantageous long-term saving mechanism is a combination of SIP (Share Incentive Plan) and Sipp (Self-Invested Pension Plan).
Contributions into a SIP are made from pre-income tax and NI remuneration. The employer can enhance this further through matched or gifted shares. If held for longer than five years there is no liability to income tax, NI or Capital Gains Tax on the proceeds, at which time these shares can be transferred directly into a SIPP and receive a minimum of basic rate tax relief of 20 per cent (equivalent to an uplift of 25 per cent) subject to high earner anti-forestalling.
There are risks to be considered, for example employees can inadvertently accrue a disproportionate amount of their wealth in shares of their employer, or the negative impact on morale of sustained underperformance of an employers share price, which is why communication is crucial.
Duncan Howorth is chief executive of JLT Benefit Solutions