Discretion and employee share schemes
Discretionary share schemes
Enterprise Management Incentive (EMI) and Company Share Option Plan (CSOP) options are popular choices for companies who want to operate their share option arrangements flexibly. Both plans allow the directors an element of choice and discretion in key areas:
- Who gets to benefit
- The level of awards
- How to treat leavers
The limits of discretion
Directors exercising discretion doesn’t mean directors
have a totally free hand - the board should exercise care when they’re making
decisions. Deciding to exclude someone
from a share plan without a good reason may, in the worst case scenario, open
the company up to potential actions from disgruntled employees, particularly if
there’s a suggestion that someone’s been excluded for discriminatory
How to exercise discretion reasonably
The risk of a challenge can be reduced if directors act reasonably and rationally – and can demonstrate that they did so at the time. For example:
Use objective criteria to select participants and
the value of awards to be made. For
example, base awards on roles and positions in the company (it’s perfectly
valid to differentiate between directors, senior managers and junior staff); or
another clear measurement such as salary (unless, of course, you’ve based
salaries on non-objective criteria to begin with!)
- If you pick out specific participants to get a higher (or lower) level of award, or decide not to include them at all, be very clear about why you’ve made that decision. That might be based on past performance, or length of service.
- If you’re running a small business, or a family owned business, take care to think about any conflicts of interest that might exist – creating “favourites” based on personal or family relationships should be avoided in a business context.
- Try and keep your approach consistent – this is particularly important when you’re considering whether or not to treat departing employees as “good” or “bad” leavers.
Whatever decision is made, this should be recorded
at the time, whether it’s made by the board itself or (for larger companies) at
remuneration committee level. At the time,
the reasons for making a decision may appear quite self-evident – but you can
be sure that, six months down the line, memories will be hazy and it may be
really hard to prove why a certain decision was made.
If the directors are in any doubt about whether
they are exercising their discretion correctly, they should always take
specialist employment law advice.