Employee Share Option Schemes

EMI options are by far the most popular as they can be drafted for groups of employees as part of a scheme or tailored to the requirements of an individual employee.

Being an approved scheme, the employee will, subject to satisfaction of certain conditions, benefit from relief from income tax and national insurance contributions (NICs) on the receipt of the shares as well as benefit from business asset disposal relief on capital gain tax on a subsequent sale of the shares.

The conditions to exercise the options may be flexible and can be subject to specific performance targets or alternatively simply by a minimum time requirement.

CSOPs are approved schemes giving the employee, subject to satisfaction of certain conditions, income tax and NICs relief on the receipt of the shares.

They do not need to apply to all employees and can be subject to performance criteria.

However, they can only be exercised at least 3 years after their grant in order to receive the tax benefits.

These are both a share option scheme as well as a savings scheme and are more popular in companies with large numbers of employees.

They apply to all (eligible) employees making it more complex to administer.

As an approved scheme, subject to satisfaction of certain conditions, the employee receives income tax and NICs relief.

These allow employees to acquire shares as opposed to share options.

There are 4 types of share available under a SIP: free shares, partnership shares, matching shares and dividend shares.

These schemes are very flexible as the company can decide the elements it wishes to implement and the level of award.

These are very flexible and are beneficial where the shares under option do not qualify under any approved schemes.

These are usually a lot cheaper to set up and maintain, but do not have any of the tax benefits of the approved schemes.

EBTs are commonly used in larger employee share schemes such as CSOPs, SAYE schemes and SIPs where the EBT is required to acquire and hold shares in the company to provide benefits to both employees and former employees.

They can also be used to simply “warehouse” shares on behalf of the company.

Share options can include a number of different types of conditions which need to be achieved before the option can be exercised.

These can be performance or event related, for example:

• Performance conditions – these can be based on financial performance of the company such as sales or profit or on an individual or team basis

• Event conditions – the most common event is a sale of the company (known as an “Exit Only Option”), but other events could be a minimum length of service

The conditions could also be a mixture of both, for example a sale of the company provided that the sale value is of a minimum amount.