Employee share schemes, also known as employee share purchase plans or employee equity schemes, give employees shares in the company they work for, or the opportunity to buy shares in the company.
The point of them is to motivate staff with financial benefits if the company performs well. If the company does well, the staff gain rewards and sometimes tax advantages too.
Understanding employee share schemes
The clue is in the name, the stocks are shared with the employees, and as a result, the financial profit of the company is shared with the staff members.
The stocks are often paid for through the salary of the employee over a set time period or by using the dividends received on the stocks. Some plans also allow employees to pay for the shares in full and upfront.
Employees on higher incomes often receive shares as a performance bonus, instead of receiving a higher salary.
The share schemes differ depending on the size of the company. For larger companies, they usually offer employees ‘ordinary shares’ that provide a fair investment in the company. However, smaller companies often offer schemes that pay dividends but fail to give employees the rights associated with traditional share ownership, such as the right to vote at general meetings.
Employees can benefit from the financial rewards if the company does well. However, there are drawbacks. There are often limitations on when the employee can buy, sell and access shares through the share scheme.
For example, if the employee is paying for their shares over a period of time, they can’t do anything with them until they’re paid for them. Additionally, a lot of companies insist that employees give back their shares when they leave – even if the price is less than what they paid in the first place.
When looking into joining a share scheme, you need to do some research. Look at the success of the business, this will give you an idea of whether owning shares could actually bring you a profit.
Each employee share scheme is different. You need to know what you’re getting into before you do anything else. Employee share schemes can be a great way of gaining access to discounted shares, however, you should think about how they fit into your personal investment strategy before you decide to get involved.
Employee share schemes are a type of legal insider trading, as employees trade stocks and shares of the company they are part of.
Approved share option schemes
If a company grants share options that aren’t approved by the HMRC, employees are subject to income tax via the Pay-As-You-Earn (PAYE) and National Insurance (NI) contributions. By going with approved schemes, you are reducing the tax liability attributable to awarding share options.
There are four HMRC approved share scheme options out there:
1. Share Incentive Plan (SIP)
2. Save as you Earn (SAYE)
3. Company Share Option Plan (CSOP)
4. Enterprise Management Incentive (EMI)
SIP and SAYE, are both relatively low-value schemes which are usually only used by large organisations to motivate a sizeable workforce. These schemes must be made available to all employees, whatever level of importance, and however many hours they work.
The CSOP and EMI schemes are optional schemes allowing a significant award of share options with more favourable tax treatment than unapproved schemes. The difference is that the employer often chooses who holds shares in these cases, rather than all employees automatically getting shares. The profits tend to be higher with these schemes as a result.