AllEmployee Share Ownership Plans in the UK

1
All-Employee Share Ownership Plans in the UK

• Andrew Pendleton
• University of York, UK

2
Various plans

• Main all-employee plans
• SAYE (Save As You Earn) share option plan
  (a.k.a.Sharesave). Established 1980.
• Share Incentive Plan (SIP) free shares, share
  purchases, matching shares. Established 2000.
• Discretionary plans that can be used for all
  employees
• Enterprise Management Incentives (EMI). Share
  option plan for smaller firms. Est. 2000
• Company Share Option Plans (CSOP) primarily an
  executive plan but can be used for all-employees.
  Est. 1984

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SAYE

• Further details
• Subscribe to options for 3 or 5 years time
• Subscribe to monthly savings plan (5 - 250 per
  month) to raise cash to exercise options
• Options can be granted at 20 discount on market
  price, income tax-free
• Many companies make annual SAYE offers

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Share Incentive Plan

• modular plan
• Free shares Up to 3,000 shares can be awarded
  annually
• Partnership shares up to 1,500 can be
  subscribed each year by employees
• Matching shares company can match employee
  subscriptions to Partnership shares at up to 2 to
  1
• Dividend shares dividends from shares can be
  re-invested in shares

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ESO Coverage 2006-7

• SAYE live schemes 940. 570,000 employees take
  out options in this year
• SIP live schemes 960. Around one million
  awarded/purchase shares (my estimate)
• EMI 2790 firms award options. 27,000
  beneficiaries
• CSOP 3000 live schemes. 130,000 awarded options
• See www.HMRC.gov.uk for further information

6
The taxation regime for UK share ownership plans

• Benefits free from income tax. Instead, capital
  gains tax due on gains from increases in share
  value.
• For example SAYE
• - savings scheme is income tax free
• - discount on market price is income tax free
• - growth in value between award and sale of
  shares is liable to CGT rather than income tax.
• SIP has significant tax benefits employee
  contributions made from pre-tax income. Gains on
  share sale taxed through CGT if all plan
  conditions met

7
History of ESO tax regime

• Initially CGT had lower marginal rates than
  income tax 25 vs 40 for top earners
• CGT then harmonised with income tax because of
  abuse (top execs paid in capital assets rather
  than cash)
• Blair-Brown government introduced business
  assets taper relief the longer shares held the
  lower the CGT liability down to 10 per cent (5
  for lower earners).
• 2008 Brown government changes CGT regime in
  response to political furore over perceived
  abuses by private equity fund partners. CGT tax
  rates harmonised at 18 per cent ie an increase
  for share ownership plans.
• BUT quite generous CGT allowances remain (_at_
  9,000 per annum) meaning that most employee
  shareholders will not pay any CGT if plan sensibly

8
ESO and smaller enterprises

• All-employee share ownership plans typically
  operated by large, listed firms. Blair-Brown
  government sought to extend ESO in smaller,
  privately-owned firms
• SIP can use non-voting shares (assuage owner
  fears about losing control)
• SIP Free and Matching shares can be forfeited if
  employees leave the firm.
• EMI has light touch regulatory regime with no
  need to seek prior HM Revenue and Customs (HMRC)
  approval

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But continuing barriers to use by smaller firms

• Requirement for approval of share valuation by
  HMRC seen as cumbersome by some firms.
• SIP perceived by firms as complex (ironic, given
  government concern to promote flexibility)
• Difficult to use SIP in private equity buy-outs
  (SIPs cannot be used when a company is under the
  control of another)

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Evaluation and conclusions

• Blair-Brown government has not met policy
  objective of doubling the number of share plan
  firms
• However, some extension of share plans to
  unlisted firms.
• Overall, share ownership plans fairly stable
  currently. Not bad result given some unfavourable
  circumstances (introduction of IFRS2, market
  movements etc)
• Big question is what will happen when there is a
  change of government highly likely that New
  Labour will be replaced by Conservatives in the
  next election. Currently, Conservatives are
  broadly favourable to ESO but do not have any
  specific policies. Will they develop any?