The best time to launch a sharesave plan

Sharesave plans require strategic implementation, as considerations of share price and the timing of the launch will impact on its success, says Peter White

Case Study: The Rank Group

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According to the Hitchhiker’s Guide to the Galaxy ‘the answer to life, the universe and everything’ is 42. This, of course, also answers the question of when it’s best to launch a sharesave scheme.

Organisations looking to reward staff by allowing them to save a portion of their salary to buy shares in their company must offer any such deal within 42 days of publishing its company results (see box below). However, timing the introduction is a key consideration for employers looking to launch an all employee share vehicle and is not quite so simple.

Launching a sharesave scheme when a company’s share price is relatively low and is expected to rise would financially benefit staff, who would then see a larger return on their capital. Meriel Aspinall, shares administrator at Asda, says that while shares in the supermarket chain’s parent company, Wal-Mart, are currently low, this could eventually help staff. "It’s a good time to start a sharesave scheme because there is loads of scope for making profit there. In three years time, with a bit of luck, the share price will be back up. You can’t say the share price can’t go down, [but] it’s in a good position for speculation."

But low share prices do not always make the happiest of workplaces and for employees to invest some of their own hard-earned cash into their company, sometimes business also needs to be on the rise.

So sharesave schemes can almost work as informal employee attitude surveys. Marcus Peaker, chief executive of Halliwell Consulting, says: "While it might not make complete commercial sense, staff are probably more likely to respond favourably to sharesave plans when the firm is perceived to be doing well amid a rising share price.

"Workforces vary in degrees of sophistication around equity participation. But the principle factor that influences employee investment in the company is how they feel about the company rather than the specifics of where they are in the share plan cycle."

Over the past few years, underwater share options have been a real problem for many organisations and sharesave schemes, despite their low risk nature, are not averse to this problem. According to Fred Hackworth, director of the Employee Share Option Centre, around a quarter of UK companies still have at least one share scheme underwater: "It’s very demotivating because employees can’t see the point of it. They will of course get their money back with accrued interest, but that’s not really what it’s meant to be about. So it’s very tempting for companies to launch a new savings contract at [a lower share price] because the chances are that in three years there will be some booty for the employees to take away."

Companies also need to ensure that the practical timing of a launch suits its business. If the scheme is being launched through a flexible benefits plan, this interaction needs to be carefully constructed. If the firm is also launching a share incentive plan, it needs to decide whether to launch both plans together or separately to avoid possible communication overload.

The time of year a plan is launched is also important. Launching a sharesave plan, or indeed any other benefit which requires employees to contribute, during the festive season is considered poor timing. Paul Stoddart, national new business manager at Halifax Share Services, says that employees are unlikely to buy into sharesave plans if they are busy buying Christmas presents. Many workers also spend the first couple of months of the new year paying off debts from credit cards and overdrafts.

He adds that if the plan is Europe-wide it is smart to avoid the summer months because many European offices almost close down completely during July and August because employees devote up to a month on holiday.

Many newly-floated firms find introducing sharesave plans to coincide with their stock market listing works for them. Phil Ainsley, senior business development manager at Lloyds TSB Registrars, says that, as a result, staff can take advantage of a low float share price. "A lot of the new plans we see try and put the sharesave as close to the flotation date as possible because the company wants staff to gain the benefit of growth in the short term. It also gets everyone on board and feeling unified within the company."

He adds that a number of companies have historically always run a sharesave scheme, with some plans existing for up to 25 years, but times are changing. Accounting standards have had a major impact on many sharesave plans. "A small number of companies have dropped sharesave because of the accounting changes. It’s forced companies to focus on what value they get from a plan. Even though technically it shouldn’t make any difference to the valuation of the company itself, the very fact that you see sharesave on the profit and loss accounts makes finance directors start asking questions," he explains.

But organisations do not necessarily need to be scared of the accounting changes. Peter Leach, director at Killik Employee Share Services, says that firms could even use it as a reason to launch a new plan. "Sharesave is now certainly going to be caught by the new accounting standards. With that in mind, one of the best times to launch a sharesave scheme is in a rising market. The thinking behind this is to protect the company from the accelerated accounting charge for the cancellation of sharesave contracts, which will typically happen as a result of a declining share price as staff will be tempted to cancel existing contracts and re-join at a lower option price."

So employers should watch out for all of these issues when launching a sharesave scheme and remember that employees will sometimes be better off if a prospective plan is delayed or cancelled.

Sharesave rules and timescales

There are a number of rules, determined by the Inland Revenue, that employers must abide by when launching or re-launching a sharesave scheme.

Once a company has devised its plan rules, with the help of a share scheme conversant lawyer, it needs to get formal approval from the Inland Revenue and from shareholders if new shares are issued.

Once this approval has been received, the company will then need to offer the plan to staff within 42 days of formal approval by the Revenue or the AGM at which the resolution for issuing new shares for sharesave was passed. However, a firm can ask the Revenue for preliminary approval, which provides a company with the ability to launch the scheme on its own timescale.

After this initial launch an organisation planning a new scheme will need to tie the offer in to its results, inviting participation within 42 days of either its half-year or full-year company results.

There is also generally a provision for special circumstances allowing a launch after such things as an EGM or flotation.

In all situations, sharesave options should generally be granted within 30 days of the first date from which organisations monitor the stock market to set the option price.

Case Study: The Rank Group

The Rank Group decided to change the date of its annual sharesave launch to ensure previously participating staff were not excluded.

This year, the leisure and gaming group’s sharesave plan matured in May. However, because of its scheme rules, the company would have had to launch its 2005 scheme in April, meaning that some employees would have to wait 11 months to rejoin the benefit.

This led the group, which owns the Hard Rock CafÈ and Mecca Bingo brands, to move its offer date to September. Roger Fairhead, group compensation and benefits director at Rank Group, said: "Given that a new sharesave offer is usually made once a year, I think it’s important to ensure a consistent time each year. That way, those exiting from a maturing scheme will be able to go straight into the next offer without delay. If the offer date moves around, you can end up with problems with employees [waiting] up to 11 months to take up another offer. That can be frustrating for [them]."