Rewarding employees and

increasing shareholder value using share schemes

15 July 2011

benefitsmethods

considerations

Benefits

• boosts share values by aligning interests of participant and company

• promotes profit awareness• striking tax advantages• cash flow advantages• engagement of employees• succession planning opportunities

boosting share values

• share price performance• productivity• gross value added• qualitative evidence

tax advantages

• default tax on all benefits = income tax

but ...• approved share options = CGT only• deferred share purchase = CGT only• approved share incentive plans

= reduced IT or no tax at allBeware! Disguised Remuneration

Concerns

• complexity• technical pitfalls• needs quoted stock• dilutive• costly • reduced control• ABI guidelines• accounting

standards

• real• real• no• choice• value & savings• choice• usually choice• public or private?

Methods: Types of Schemes

The medium

Share Purchase:DSPP, JSOP

Share Gift:The Share Incentive Plan

The message

no risk, CGT, no dividends or votes

some risk, low or no tax, dividends, appreciation of past servicesome financial commitment, CGT, dividends

Share Option:EMI, CSOP, SAYE, USOP

Enterprise Management Incentives

• UK’s most favoured share scheme

• Flexible individual options

• Share value agreed in advance

• Limit of £120,000 / £3 million

• Qualifying criteria :- company : trade, < 250 employees

< £30m gross assets, group structure- employee : working time 25hrs / 75%

no material interest (30%)

EMI tax treatment

• No tax on grant• Any discount to MV is IT on exercise• Otherwise CGT

• Beware : Entrepreneurs’ Relief : Disqualifying events

Share Incentive Plan

Free Shares

• Shares awarded free of tax and NIC• Up to £3,000 per year• Award can be linked to performance• Holding period of 3 to 5 years• Forfeitable • Free-standing module

Partnership Shares

• Employee allocates pre-tax salary to buy shares to limit of £1,500 or 10% of salary

• Shares purchased monthly or rolled up over an accumulation period of up to 12 months

• Purchase price is lower of market value at start or end of period

• Forfeiture and holding period not applicable

• NIC savings potential (employer 13.8 %)

Matching Shares

• Awarded in relation to partnership shares

• Matching on same basis to all employees

• Ratio of up to 2 matching shares to each partnership share

• Additional to any free shares awarded• Holding period of 3 to 5 years• Forfeitable

Dividend Shares

• Reinvestment of gross dividends permitted

• Employer choice• Reinvestment must be within 30 day

period• Generous tax-free limits• Not forfeitable• 3 year holding period unless leaver

The Limits

Tax Treatment

• Income tax regime if < holding period• CGT-free arrangement (0% tax !)• Corporation tax relief for:

– costs of setting up and administration– gross salary allocated to buy Partnership

Shares– market value of Free and Matching

Shares• Potential NIC savings on Partnership

Shares

how much to offer?

• inclusive or selective?• looking forward or back?• timescale• too little – wastes equity• too much – wastes equity

effective incentives change behaviours

Dilution

• Dilution versus growth• Can be managed using a trust• Care re Entrepreneur’s Relief• ABI Guidelines• Typical dilution levels:

– all-employee schemes: 5-10 per cent.– targeted schemes: 5-15 per cent.

Succession Planning

• shareholder can sell shares into trust• CGT for shareholder, not dividend tax• tax efficient incentives for employees• corporation tax relief for employer• entrepreneurs’ relief now £10m at 10

per cent – too good to last?

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£ (CGT)£

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CT reliefemployees

Succession planning

Considerations: Complexity

• Corporate strategy/ethos

• Company law• Employment law• Trust law• Tax law

• Company finance• Exit strategy• Valuation• Accounting Issues• Communications

and PR

Solution: comprehensive advice and support

Timescales

• Approved scheme (SAYE, CSOP, SIP):– 4 to 6 months (much longer if non-

standard articles)

• Registered scheme (EMI)– In principle, 6-8 weeks

• Unapproved scheme – In principle, 4-6 weeks

Leavers• CSOP, EMI options may lapse• Good leavers:

– Illness, disability, transfer of employment, retirement, death, redundancy (?)

• For “bad” leavers:– SIP shares can be forfeit – SAYE options may lapse

• Articles of Association & Shareholder Agreement

Employee Communications

• explanatory literature • scheme presentations – pre and post• email and telephone helpline• employee tax support• intranet and website

Plan Administrators – Why?• ensure an audit trail of all actions, timely

completion and ongoing compliance;• generate comprehensive reports of plan benefits

by company and employee;• validate all awards and exercise events;• track all leavers and joiners;• manage document production;• calculate taxable amounts in relation to

transactions, ready for submission to the company’s internal or external PAYE facility;

• generate plan returns, trustee self-assessment returns and trust accounts where applicable.

• employees and employers are able to access data and make plan choices on the system via a bespoke plan website.

Complete Solutions

scheme design/health check documentation trustee services share capital structure valuation resolutions and minutes employee communications administration, compliance

About RM2• A leading full service employee share

scheme consultancy

• 15 years of share scheme experience

• from SMEs to large listed companies, every sector

Success storyA wireless payment company wanted to incentivise senior staff to build shareholder value ahead of an exit.

In 2006 we implemented a tax-efficient share option scheme for them, the Enterprise Management Incentive at an exercise price of £6.15 per share. The company was sold earlier this year (2011) for £117 per share.Several employees made six figure gains and 2 employees became instant millionaires.

The RM2 Partnership Ltdwww.rm2.co.uk0800 043 81500208 949 5522lh@rm2.co.uk