15 February 2011

• 10% fewer all-employee share schemes
• Management schemes up 25%

Employers are creating more share schemes for senior managers while excluding shop floor employees, according to figures obtained by our team.

The number of companies running share schemes open to all staff has declined by 10% over the last two years from 1,530 in 2006/07 to 1,370*.

Meanwhile, the number of companies offering shares to senior level staff has jumped by 25% over the same period, from 8,020 to 10,050**.

Approved share option schemes are popular with employees because they are entirely tax and National Insurance free up to the point of exercise. Any further gain arising after the end of the plan is liable to Capital Gains Tax.

Many employers have closed employee share schemes during the recession as part of their cost-cutting initiatives.

Plummeting share prices and low interest rates have made share schemes less attractive during the recession. During the credit crunch and recession the option price for many schemes was higher than the actual share price, meaning that employees were unable to benefit from the schemes. The tax free bonus employees are entitled to from some schemes, which is determined by the base rate, has also been hit by historically low interest rates.

Roy Maugham, tax partner in our London office, comments: “The falling value of shares, combined with historically low interest rates, has eroded the benefits from share schemes. The administrative costs have also risen, and with a lot of employers funding schemes out of their own pockets many have been persuaded to re-assess whether they want to provide this kind of benefit.”

“There has been a marked increase in schemes targeted at senior executives. As money becomes tight, employers tend to be more selective about which employees they incentivise and so tend to limit schemes to executives while excluding rank and file employees. This trend has accelerated during the recession.”

He adds: “Tax rises are making share option schemes increasingly tax efficient for high earners. The 50p tax rate has provided a boost to the attractiveness of management schemes. This is because the profit made at the end of the plan is taxed as a capital gain rather than income.”

Share schemes tailored specifically for senior executives may be a more palatable alternative to short-term bonuses in the current environment.

Roy says: “Some employers will take the view that incentivising senior managers through share options is a more politically acceptable form of compensation than cash right now. Granting senior managers share options rather than cash is also easier on cashflow, which has been a major concern for many employers during the recession.”

* Save As You Earn (SAYE) and Share Incentive Plan
** Enterprise Management Incentive

Roy Maugham