Why all employee share plans should be on your agenda

23 February 2024

Many of the UK’s largest companies invite all of their employees to take part in one or more of their share plans. However, many mid-market businesses don’t, restricting participation to senior executives. 

Evidence suggests that extending share plans to a broader range of employees can bring tangible benefits. UK businesses looking to do this have a wide range of possibilities.

Can the benefits of broad employee ownership be measured?

Yes. Hamid Mehran’s ‘Unleashing the power of employee ownership’ found that over a four-year study period, companies with employee ownership elements had:

  • a 14% better return on assets; and
  • a 12% better total shareholder return.

Management also reported significant increases in employee engagement after introducing broader employee equity participation, with 82% reporting that employee share ownership increased corporate performance.

This perception extends to the views of employees themselves. A Computershare study of almost 4,000 employees found that share plan participants were more likely to work beyond their contracted hours and had lower levels of absenteeism. Share plan participants believed that their membership had a causal effect on both their motivation and that of their colleagues. They were more likely to be satisfied with their jobs, feel loyal to the company, share its values and view it as a good place to work.

Are all employee share plans impractical?

Not necessarily. However, it is true that few companies choose to have very large numbers of employees own shares directly due to the administrative burdens and tax complexity of this . If there are large numbers of participants holding shares directly, dealing with leavers can be difficult, and the tax consequences of issuing shares are not always straightforward.

For this reason, many companies that want all of their staff to have a stake in the business choose alternatives that are easier to manage. For example, they might use a cash-based plan that avoids the direct use of shares or a share option plan which can be much more straightforward to administer.

What types of all-employee share plans are used?

Phantom share plans

A phantom share plan does not actually use shares. It is a formal arrangement under which employees receive a cash payment linked to the value of a company’s shares. While offering some of the benefits of share plan participation, it avoids administrative or tax complexities, although it is not always the preferred solution due to payments being subject to income tax and National Insurance.

Share option plans

With share option plans, employees hold options to buy shares rather than directly holding shares. A company targeting an exit event, such as a sale or listing, can find these plans help simplify managing joiners and leavers, as employees only hold shares momentarily before exit. The process of an exit does not need to be painful, even when there are hundreds or thousands of option holders. There are two types of HMRC approved share option plan structures of this nature, Enterprise Management Incentives (EMI) and Company Share Option Plan (CSOP), which have different qualifying criteria. Companies and employees that qualify can benefit from much lower tax costs compared to a cash bonus plan or unapproved option plan.

Save As You Earn Plans (SAYE)

A SAYE Plan, sometimes called a Sharesave plan, is a different type of HMRC approved option plan that lets employees pay a part of their salaries into a savings account monthly to fund the future exercise of options. Employees can choose to save up to £500 per month. The employees can be offered a discount of up to 20% on the shares and qualifying exercises result in no income tax or National Insurance charges. SAYE plans require employers to invite all eligible employees to take part. 

Share Incentive Plan (SIP)

A SIP allows an employer to provide shares to employees that are held within a trust, making administration much easier. Employers can decide to offer ‘free shares’ and can also invite employees to buy ‘partnership shares’ from their pre-tax salary. The partnership shares can also be bundled with up to two ‘matching shares’ for every share bought. If shares are held for long enough, employees can realise value with no tax payable at all, as relief from income tax, National Insurance and capital gains tax is available.   As with a SAYE, all eligible employees must be invited to take part in a SIP.

Employee Ownership Trusts (EOT)

Some businesses take employee share ownership a step further, selling a majority holding in the company’s shares to a trust for the benefit of all employees. This is a big decision for the owners of a business, but selling shareholders (who can potentially sell at a 0% tax rate) may find this route attractive from both a tax and succession perspective. Employees benefit by sharing business profits and can also receive tax-free bonuses of up to £3,600 per year. 

Next steps

Consider offering share plans to all employees as part of a broader reward package. This may help you recruit, retain and improve the performance of employees. If you decide to implement an all-employee share plan, think carefully about how to structure it. You should not only consider the tax treatment but also design a plan that is easy to administer over its lifetime.

If you would like more information on designing share plans or to discuss how they might work in your business, please contact Martin Cooper.