Getting the best from a share scheme

Share schemes can be highly rewarding, but are not low maintenance, due to tax timetables and rollercoaster stock prices, says Vicki Taylor

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A share scheme is like a garden. Simply sowing the seeds and leaving it to its own devices won’t produce the best results as aftercare is always required.

Employers which treat an employee share scheme like an unloved lawn could find themselves faced with a number of potential problems. Scenarios such as failing to inform staff about tax issues or the ability to transfer shares from a share incentive plan (Sip) in to a self-invested personal pension (Sipp), may not only leave employees feeling bitter, but could even potentially leave an employer open to legal claims.

Jonathan Watts-Lay, a director of financial education company JPMorgan Invest, says employers are being threatened with legal action in the US over pension plans, and this could easily occur with share schemes.

Even simple things such as staff not realising that the value of shares can go down as well as up can result in them becoming disheartened with a scheme if shares are underwater when they come to purchase options. The risk is that employees rely on recent stock market performance as an indicator that shares will perform well.

David Craddock, chairman of David Craddock Consultancy Services, says: “Because it is a buoyant economy, there is a chance of making very high-level gains. Expectations are very high so you have to keep that enthusiasm, but speak to [employees] in a way that keeps their feet on the ground.”

There is clearly a fine line when it comes to pointing out potential risks, while ensuring schemes remain attractive to staff.

Mathew Gorringe, head of share incentives at law firm Eversheds LLP, advises employers to provide staff with a factual summary about the scheme. This should make that point that staff must not assume that share prices will always go up.

Geoff Price, director of global share plans at Computershare, adds that employers shouldn’t dwell on the negatives, but are right to point them out to staff. “You don’t want to be downmarket in the presentation of a plan when there are real benefits that you can talk about very factually.”

One situation that can cause problems is if staff don’t realise that they must exercise their share options by a deadline in order to benefit. Victoria Goode, a partner at law firm Lewis Silkin, explains: “If you don’t [exercise your option] within a certain time then it lapses and it becomes completely worthless.” The solution is simple as organisations just need to ensure they tell staff when the exercise period starts and ends.

And employers shouldn’t be fooled into thinking that some employees will be clued up enough not to need this advice. Even a broker at large investment bank is known to have been caught out when the exercise period expired.

Another thing to watch for in unlisted companies is if employees are unable to sell shares to fund their income tax liability when a scheme matures. Under HM Revenue & Customs rules, employers pay the tax due on their employees’ behalf and then have 90 days to recover the money from staff before they are taxed on it as a benefit in kind.

If employees cannot sell the shares because there is no external market, they either have to put their hand in their pocket, or borrow money to repay the company. Making sure that staff are aware of this in advance is likely to lessen the impact.

“The company [also] needs to consider what to do with the employers’ national insurance (NI) contribution,” says Gorringe.

An organisation is liable to pay 12.8% NI on employees’ option gains, however, it can transfer this liability to employees if proper provisions are made in the scheme rules and the organisation produces documentation for staff setting out its intentions at the start of the plan.

“A lot of [companies] will look at this as an employers’ cost and think shifting it onto employees isn’t overly charitable, but that is not to say that companies don’t. If there has been astronomical growth and the gains are huge, then 12.8% of a large gain is a [high] number,” Gorringe adds.

On the back of new rules introduced under pensions simplification legislation in April this year, employees can now transfer shares from a Sip or sharesave scheme into a Sipp, and receive tax relief based on the market value of the shares at the date they are contributed to the Sipp.

So providing staff with information about this possible option is key, not least because many Sips have recently matured, or are close to doing so, after first being introduced in 2000. “If [employers] don’t explain it now, employees are going to go off and start doing things with this money,” warns Watts-Lay.

Another situation that could lead to employees becoming dissatisfied with a share scheme is where they are not made aware of the fact that they could protect some of all of their shares from tax by putting up to £7,000-worth in an individual savings account (Isa).

If staff are not informed of this, a situation could arise where two colleagues who pay the same amount into a sharesave plan take different actions when it mature, with one selling some shares, and the other putting theirs into an Isa. “What happens is that person A ends up with a tax bill so has a lower [gain] at the end of it, while person B has protected theirs,” explains Watts-Lay.

But Computershare’s Price says many employers are worried they will be seen to be giving financial advice if they inform staff of their options. However, they can do so without impunity as long as they don’t recommended a particular course of action.

Paul Stoddart, head of new business at HBOS Employee Equity Solutions, says employers should also provide education on share diversification because staff with a large holding in a single company could lose out if the share price plummets. Employers might well ask why they would want to spend money setting up a share plan and then encourage staff to buy other companies’ stock, but if they don’t and their own company’s shares take a dive, they could be left with some unhappy employees.

With a little thought behind the communication of share schemes, employers can ensure plans are valued and staff don’t make errors that mitigate the benefits.

Case Study: Asda

Asda’s sharesave scheme is one of its employees’ most valued benefits. For this reason, Mike Hazelgrave, reward manager, believes it is vital that nothing detracts from this.

Staff are warned, for example, that share prices can go down as well as up, but this is done in a way that won’t put staff off. “We stress that if the share price does go down, they are not to worry because they will get back their savings plus a bonus. We [also] make it clear the money is not lodged with Asda, it is sent to a bank or building society, and that money is always safe.”

Employees are also made aware of the fact that they would have to pay capital gains tax if they make more than £8,800 profit. The firm also has executive share options, for which around 1,000 staff are eligible. The scheme has been approved by HM Revenue & Customs, so the first £30,000 of shares are free from income tax.