Top Problems with in-house Administration
Share plan administration is never easy, even if you are a small company with only a couple of people participating in your plan. This article looks at some of the most common problems facing companies who are looking to independently manage their schemes.
Who's in charge around here!?
Often the employee or team assigned to manage the administration in-house is sufficiently busy with their own existing 'day jobs' and somewhere along the line their responsibilities in relation to the share plan arrangements are squeezed in. When administering a share plan in-house, it is a common misconception that the level of knowledge and time required in order to ensure everything runs smoothly is minimal. The employee(s) responsible must understand the deliverables and accountabilities of all areas that come into contact with the scheme, as failing to do so may adversely affect overall plan performance and incur expensive tax charges and penalties. What's more, it is essential they possess the knowledge-base to answer questions from plan participants and at Board-level.
Typically, share plan administration responsibilities fall at the feet of HR and/or payroll, but the demands of pension auto-enrolment are already putting a time strain on such departments so great consideration has to be taken when contemplating further increasing their workload.
Failing to prepare and financial penalties...
It can be an easy mistake to make but it can be a real headache (as well as expensive in lost tax efficiency) discovering an incomplete share option exercise, or a missing deadline for an HMRC EMI 1 filing. Procedures need to be put in place for all key transactional, filing and compliance reporting activities otherwise there will inevitably be an negative impact on not only the success of your plan, but also on how employees view it.
HMRC will fine for late filings of the obligatory annual returns (a separate return is needed for each plan you operate, even an Unapproved Share Option Plan [USOP]). Do you know when you need to file a Form 42 with HMRC for an allotment of shares? Are you liaising with your Company Secretary to keep Companies House records up to date? If you have the most popular share plan, the Enterprise Management Incentive (EMI), are you fully aware of all the different things that can disqualify the favourable tax treatment? You don't want to fall into one of the many traps that would result in you being the person that needs to tell your most valuable key employees that their expected 10% tax charge is now effectively 60.8% due to an in-house administration error...
Are you keeping track of when options might vest and aware of when the accounting disclosure requirements for your share options might alter? If you have an all employee plan like the Share Incentive Plan (SIP) do you know what to do when an employee leaves and what the choices are when the plan matures?
If you are looking at new grants then do you know whether your authorities are still valid and if you have sufficient headroom to make the intended awards?
Do you fully understand the meaning of every provision in your plan documents and when were they last subject to a health-check and update?
Keeping up with the times
Are the employees responsible for your arrangements aware of how often securities, tax and accounting standards can change? Keeping up-to-date is unquestionably problematic, but it really is essential in ensuring a scheme's on-going compliance.
An example of this would be the difficulties created by the 0T tax code change in April 2011 as many administrators became unaware of how best to handle the modifications. See our blog here for more information on that. Case law also has an impact; see here for an example of when a tax on tax penalty might arise in relation to an option exercise.
Poor Plan Management
You must regularly audit all transactions and monitor records of awards granted and take actions on a timely basis, especially when dealing with leavers or major corporate actions. Prevention is very much better than a cure and outsourcing the compliance is a more cost effective solution than advisory fees for remedial work (assuming repair is possible) when things go wrong, or your lost commercial opportunity cost by having staff occupied grappling with the share scheme rather than spending their time on the other aspects of their job role.
The issues highlighted above may go some way towards explaining why companies look to outsource this potential minefield. At RM2, we act as plan administrator for most of the share schemes we create. In fact, the service is so comprehensive it is not uncommon for our Operations Team to pick up and rescue share plans that have been poorly constructed elsewhere. You pay for insurance cover in other aspects of your business to limit damage so think of outsourcing share plan administration in the same way. We provide you with peace of mind that you are compliant and not at risk.
We work with a wide range of clients from small entrepreneurial businesses to large household name quoted company organisations.
If you are currently encountering problems with your share plan administration, now realise from the above that it might be something to pass to an expert, or simply wish to explore a competitive quote against your current outsourced provider if you have one, then we would be pleased to arrange a free consultation in order to discuss a health check or plan administration outsourcing for you. For further details please email Caroline.Parker@rm2.co.uk, or call the office and speak to a member of the RM2 directly on 020 8949 5522.