Over two million people in the UK benefit from some form of Employee Shared Ownership Plan (ESOP). That number rises to around 14 million in the US.
Shared ownership over recent years has become an increasingly attractive concept as part of the remuneration mix for employees. According to official gov.uk figures 15,340 UK companies had a tax advantaged ESOP of some description in place in 2019-20. In comparison in 2000-01 that figure stood at just 5,160 companies, showing the increased importance of a plan as part of a package.
At the same time though, there are thousands of companies, those with a premium listing to smaller private firms, who could still benefit from implementing such plans – and even more for employees, at senior level and right through the workforce.
Bespoke Needs
There are many different types of share plans available, which can be structured to meet specific company goals and requirements when forming an employee package.
Looking at the options available to suit a company’s bespoke needs is vital, with models being informed by, for example, a company’s size, point in life-cycle, or industry.
Here is a summary of the main options available:
- All-employee share plans such as Share Incentive Plans (SIPs) and Save As You Earn (SAYE):
As HMRC-approved plans, these can bring the greatest employee engagement as they are made available to all employees of the company, regardless of seniority. They contain various flexible choices, such as an option to take cash with SAYE and different types of share awards with a SIP.
- Enterprise Management Incentives (EMIs) and Company Share Option Plans (CSOPs):
These are also HMRC-approved plans and provide options over company shares. They can be granted to anyone in the company as long as any qualifying conditions are met, but are more widely used for senior employees. Options can form an even greater incentive, as they may require an option exercise price to be paid. This means that senior executives may only financially benefit when the company share price is above a certain level, thereby incentivising them to be working to their full potential.
- Unapproved plans:
While not enjoying HMRC tax benefits, these plans are very flexible and can be tailored specifically to fulfill a company need, using a mix of: ordinary shares, options, growth shares, restricted shares and other derivatives.
Strong Rationale
At JTC, we practice what we preach – employee ownership has long been at the heart of our ethos and it is in our DNA. Our employees are shareholders through the firm’s long-standing Employee Benefit Trust (EBT), creating a genuine collective mindsight.
Today, JTC supports a broad cross-section of firms with ESOPs in place. They recognise there is strong rationale for including shared ownership as a component of an employee remuneration package:
- Driving employee engagement:
There is strong evidence to show that employee ownership provides much deeper employee engagement; this leads to a personal drive to perform to the best of an employee’s ability which ultimately converts to greater productivity.
- A route to deferral:
UK employers in the financial services industry are generally required to defer a proportion of senior employees’ bonuses under the remuneration code. Financial services companies, and indeed companies across all industries, also like to do this for retention purposes – sometimes called ‘golden handcuffs’, this gives employees a reason to stay at the company. Another key aspect of the deferral requirement is to promote sound long-term decision making by senior employees.
Share plans are able to facilitate deferral, with a period between when shares are awarded and when they vest, which can be years later, depending on a company’s requirements.
- Linking targets and variable pay:
Share plans, especially long-term incentive plans (LTIPs) – a type of unapproved plan – can be useful structures for providing an element of variable pay. They can be put in place with performance conditions, where vesting only happens if certain targets are met – from share price and basic KPIs, to earnings per share or environmental, social and governance (ESG) targets. This can provide companies with additional targeted methods to incentivise employees.
According to an executive remuneration report conducted by Willis Towers Watson (October 2020), 87% of FTSE 100 companies have at least one LTIP plan in place with 82% operating a performance share plan (PSP).
- Facilitating disclosure and transparency:
The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, implemented following a European Directive, have put an even greater emphasis on how Directors are remunerated. It increases transparency by putting in place additional disclosure requirements and strengthens accountability with respect to remuneration policy being subject to a shareholder vote. Often these measures are implemented more widely within companies in some capacity, reflecting how seriously they are taken.
The versatility of share plans means that companies can engage with shareholders and put something in place as part of compensation packages that is specific and acceptable to the respective stakeholders in light of these regulatory and disclosure requirements.
Corporate Glue
From enabling compliance with an evolving regulatory landscape to underpinning long-term strategic plans and driving employee engagement, it is perhaps not surprising that share plans are often referred to as the ‘corporate glue’, positively aligning the interests and goals of employees, management and shareholders.
Share plans offer firms of all sizes significant benefits in terms of attracting, motivating and retaining the talent a company needs to grow and be successful.
