Sharesave and Sips can be tactical incentives in recruitment and retention battles, says Sonia Speedy
Sharesave schemes and share incentive plans (Sips) can prove invaluable tools in an employers’ arsenal for improving staff retention and boosting motivation. But the advantages of each need to be carefully weighed up to ensure employers select the scheme that will obtain maximum benefit for both their organisation and employees.
Sharesave, otherwise known as save-as-you-earn, schemes offer staff a risk-free savings plan linked to an option to purchase shares in the employing firm. Meanwhile, Sips provide an opportunity for employees to buy company shares outright from their gross salary, with the employer able to match, or even gift, free shares.
Phil Ainsley, senior manager of employee benefit services at Equiniti, formerly known as Lloyds TSB Registrars, says employers will often match staff share for share to a predetermined ceiling in the case of a Sip, which acts as a tax-free wrapper.
A sharesave plan is more straightforward in that employees can save between £5 and £250 per month into a three, five or seven-year contract, with tax-free bonuses payable at the end of that period. Employees are able to withdraw the money at any time without penalty and do not have to exercise the option to buy shares that is made available to them.
Money deposited into a Sip, however, is invested directly into company shares, immediately exposing employees to the vagaries of the share market.
Employees in a Sip are entitled to dividends on their shares, which they can take as cash or roll back into the Sip to buy more shares. Up to £125 a month – or no more than 10% of gross salary can go into such a scheme.
The tax relief on offer varies considerably between the two plans. While sharesave offers less risk, it also offers less tax relief than a Sip. Sharesave payments are made from an employee’s net salary, but offer tax-free bonuses. Capital gains tax, however, must be paid on any shares that are purchased when they come to be sold.
Sip payments, meanwhile, are taken from gross salary. If the shares are held for five years, employees benefit from full income tax and national insurance contributions (NIC) relief on the money and there is no capital gains tax to be paid on initial gains. Failure to hold the shares for the five-year period can mean potentially forfeiting the firm’s matching shares as well as tax relief, says Fiona Downes, head of employee share ownership at ifsProshare.
The extent of the tax benefit received by an employee also hinges on their marginal tax rate, says Ainsley. “If you pay no tax at all if you’re on very low wages, then you get no benefit from it coming out of gross pay. If you’re a standard-rate tax payer, you have probably got about a 30% effective discount and if you are a higher-rate tax payer, it will probably be just over 40%,” he explains.
These discounts are amplified further still if an employer matches the shares that are purchased by employees.
“There are some overall benefits which will apply to both plans. Certainly as far as companies are concerned, they are used as a way to generate employee engagement. [A share plan] is a tool for recruiting and retaining people, and it’s also a way to try and get them to align the interests of the shareholders with the employees,” adds Ainsley.
But Downes believes that there are differences in what the schemes can offer employers. With sharesave, the costs of setting up an approved scheme are tax deductible for corporation tax purposes and companies also receive a tax deduction equivalent to the employees’ gain when staff exercise their share options.
However, with Sips, Downes explains that employers benefit from a raft of corporation tax relief, for example, on: the costs of setting up and administering the plan, the gross salary allocated by employees to buy partnership shares, the amount incurred in providing shares for staff to buy where such costs exceed employees’ contributions, and the market value of free and matching shares at the time they are acquired by the trustees.
Which scheme employers should opt for will depend largely on their workforce demographic. “A lot of companies will offer both. If you take a retailer like Tesco, for example, they’ve got a huge number of people that participate in their sharesave scheme – over 50% – because they have no risk. But a much smaller percentage participate in the Sip, because, if you’re on a very low wage and you don’t pay tax, the same benefits obviously don’t apply to you,” says Ainsley.
However, because a Sip involves people owning shares and means employees need to commit for at least five years, Ainsley believes it is likely to be a more effective retention tool. “A Sip probably has a stronger hold, albeit that companies which put in place a sharesave plan will recognise that it has an effect too,” he explains.
Meanwhile, Downes suggests sharesave plans are generally better suited to those who are risk averse as these are generally more easily understood by employees.
However, the International Financial Reporting Standard 2 (IFRS 2) accounting cost is likely to be less with a Sip, which is also more flexible due to the ability to offer free or matching shares.
But as Downes points out, the fact share prices can fall means there is the potential for such plans to actually lower morale as well as cause recruitment and turnover problems.
John Graham, director at financial and business advisory firm Grant Thornton, explains that employers also need to bear in mind the costs involved, such as setting up the scheme and any added accounting costs such as auditing expenses. “If you’re a very small company that might be a little prohibitive, but if you’re a large organisation that’s not going to be a big deal.”
Staff must also be made aware of and fully understand how such plans operate to ensure the potential benefits are maximised, particularly with regard to maturing options, says Jonathan Watts-Lay, a director at JP Morgan Invest. He recalls encountering one employer with a sharesave scheme that had experienced a dramatic increase in its share price well above the option price. “But [it] did not explain to [its] staff that they should really exercise this option,” he explains. Figures later showed that 30% of employees in the plan had not exercised the option to buy the shares despite the “massive” gain, adds Watts-Lay.
Similarly, employers also need to ensure that staff understand the means available of mitigating any potential tax liabilities when share options are exercised, such as making use of individual savings accounts (Isas) and pension schemes.
Sharesave v Sips: the main differences
- Contributions made from net salary.
- Payments of £5-£250 per month with a choice of three, five or seven-year contracts.
- Tax-free bonuses paid at the end of the contract.
- No risk as money can be withdrawn at any time and employees do not have to exercise the option to buy shares.
- Shares subject to capital gains tax when sold.
Share incentive plans†
- Payments made from gross salary providing income tax and national insurance (NI) relief.
- Money invested directly in shares resulting in potential risk.
- Employees entitled to dividends on shares which may be taken in cash or reinvested.
- Employers may offer free shares and/or matching shares if employees invest.
- Employees need to hold shares in trust for five years to obtain full tax relief, including complete income tax and NI relief and no capital gains tax on initial increases in value, although subsequent gains may be liable.
Case Study: BT
BT dishes out share incentives
It offers employees access to both sharesave and share incentive plans (Sips), with free share allocations that are tightly linked to company performance – based on customer satisfaction and earnings per share.
Francis O’Mahony, shareholder services manager, explains: “We want to enable employees to build up a stake in the company and on a tax-beneficial basis. Now that we are much more of a global player, it is a real identifier for our employees in over 40 different countries too.”
BT has offered share plans dating back as far as 1984, but its current plans began in 2002 following the demerger of 02. Since then, it has seen encouraging levels of staff interest, with take-up reaching as high as 97% on its UK allshare plan, for instance, which gives employees free shares based on the organisation meeting its performance targets.
The group has paid out £139m in free shares to employees in its Sip since 2002 and in the 2007 financial year employees invested £14.3m of their own money to buy shares.