Huge windfalls from Employee Share Plans!

Posted by RM2 at 15:51 on 26 Apr 2014


Earlier this month, Chris Thompson, an employee of Costa Coffee, received a massive £100,000 pay-out as the result of his participation in an employee share plan.

The windfall came to Chris as a result of saving £250 per month in a Save As You Earn (SAYE) share scheme, for a total of 5 years.

These savings were then used to purchase shares in the company at a price that was fixed at the outset, meaning that when the share plan matured, any gain in share value (after Capital Gains Tax) was cash in Chris’s pocket.

The media is rife with similar stories from other large household names:

  • Announcements from March 2014 indicate that some 24,000 of BT’s employees are to share a large bonus of £1.3 billion (yes, billion!) this summer when their share plan matures.
  • In August 2013, Sports Direct staff cashed in on a £112 million pay-out.
  • In 2010 Tesco saw more than 55,000 of staff share over £144 million after two employee share schemes matured.

Following the Finance Bill 2014, results like this may be set to improve even further. The SAYE maximum saving limit has increased from £250 to £500 per month for each eligible employee - the first limit increase since 1991.

The SAYE is very simple for employees to understand, helping to encourage engagement with the scheme. If, when the scheme has matures, employees do not wish to purchase company shares, the participants can choose to simply take their savings as cash instead.

Despite the potential for large gains, the adoption of SAYE plans has fallen in recent years. This is partly due to the fact that interest rates for such saving schemes currently stand at 0%. Nonetheless, it should be noted that historically interest rates have been as high as 4.36% and the scheme has proven very popular in the past.

An alternative arrangement, the Share Incentive Plan (SIP) has the potential to offer even greater rewards to employees. Each year, all eligible employees may be offered up to £9,000 worth of shares, in a combination of three different transfer methods:

  • £3,600 worth of ‘Free’ shares. No tax is payable at the date of award.
  • £1,800 of ‘Partnership Shares’. Employees pay for the shares out of gross income, i.e. before the deduction of income tax and National Insurance Contributions (NICs).
  • ‘Matching Shares’ for employees who have purchased Partnership Shares. A maximum of two Matching Shares for each Partnership Share purchased can be offered (equal to a total of £3,600 worth of Matching Shares per tax year).

RM2 SIP Case Study

‘Company A’, an overseas listed company, wished to include its worldwide workforce in a SIP.

Each year, the employees are given the opportunity to purchase shares on a monthly basis in a tax efficient manner. In addition, the employees can also use their annual bonus or part of it to acquire further shares in the company.

Last year, this allowed the employees to acquire over £60,000 worth of shares.

When discussing an all-employee share plan such as the SIP, one of the most common concerns we hear relates to the perceived potential for a loss of control. There are numerous ways we can design the scheme in order to mitigate any potential risks in this regard.

Private companies – unlocking share value

It is clear to see how share schemes can benefit the employees of large, listed companies when share prices improve favourably. After all, these organisations have a readily available market, providing a simple mechanism for the employees to sell their shares and realise a cash return when the plan has matured.

For private companies, the facility to buy and sell shares is not always so readily available. Even so, there is still an opportunity for large gains.

An example from our own client base highlights the possible benefits employees can attain in the event their employing company is sold.

A tech company, referred to as ‘Company X’, wanted to incentivise senior staff to build shareholder value ahead of an exit.

When we started working with Company X in 2006, we implemented a share option scheme known as the Enterprise Management Incentive (EMI). This is currently one of the most tax-advantaged share schemes available in the UK.

The share options were granted at an exercise price of £6.15 per share, meaning that this is the price employees agreed to pay to acquire shares at a later date.

When the company was later sold for £117 per share, several employees made six figure gains and 2 employees became instant millionaires.

In this instance, shares did not become available for employees until just prior to the exit event, so effectively the employees were able to use proceeds from the sale in order to fund the acquisition of shares.

Understanding how individuals can realise value from their shareholding, particularly in a private company, is a vital component for any organisation that is considering making an equity-based award – and this does not necessarily have to result in a company sale. Of equal importance is ensuring that this aligns with the organisation’s long-term objectives and corporate strategies.

RM2 have considerable experience working with a variety of companies to offer the best share scheme solutions. To find out more, please call 020 8949 5522 to speak with a member of our team, or e-mail in order to book a free consultation.