Create an employee share plan

Figures from HM Revenue and Customs (HMRC) show employee share plans are increasing in popularity.  Emma Vigus, Head of ShareMark, looks at how unlisted companies create a share plan.

Over 7,000 unlisted companies operate share plans compared with just 680 listed companies. Alongside common problems relating to identifying the correct plan, administration and communicating your idea to staff, unlisted companies face issues relating to company valuation and your exit plan. 

What type of plan?

There’s a range of employee share plans available from the inclusive and flexible Share Incentive Plan (SIP) to the Enterprise Management Incentive Scheme (EMI). 

The choice of plan will depends on your objectives, the number and type of employees to be included in the plan, the stage your company is at in its life cycle, the size of the company and the strength of the company’s financial performance.

An increasing number of advisers offer specialist advice to companies on what type of plan to implement and consulting them should help prevent making the costly mistake of implementing the wrong plan.

Admin requirements

Once you have decided on the appropriate plan, you need to consider how that plan is introduced and administered. The following is summary of the activities that plan administration incorporates:

•    Obtaining HMRC approval;
•    Drawing up plan rules and procedures;
•    Calculations regarding the number of options/shares to be granted;
•    Document preparation and dispatch;
•    Maintenance of shares register(s);
•    Headroom monitoring;
•    Financial and HMRC reporting;
•    Processing notices of exercise.

Outsourcing administration should be considered, as many companies fail to realise the extent of what is required to ensure a plan is a success and errors can be costly.

Communication is important!

The prospect of share ownership can be intimidating and confusing. To introduce an effective plan, it’s important to make sure employees understand the concept and potential advantages of share ownership and the objectives of the plan, for example how will it converge with existing remuneration policy?

When The Share Centre introduced a Share Incentive Plan for ARLA Foods, they undertook a series of staff road shows around the UK. These were supported by a poster and literature campaign. This requires commitment, but staff are unlikely to buy into a plan if they don’t understand the benefits.  

Companies should also consider providing access to a financial adviser, so employees fully understand the tax and risk implications of participating in a plan. This will help them make an informed decision about what to do with shares or options when they mature. 

Keep staff informed of financial progress (both positive and negative) too. Regular financial updates are a statutory requirement for listed companies, but unlisted companies often overlook the importance of regular shareholder communication. It’s even more important when your shareholders are also your employees.

Valuing your shares

Unlike your listed counterparts, unlisted companies do not have regular access to a share price. This may have a significant impact on the complexities and costs of implementing an employee share plan and overall take up.
 
To overcome this companies often choose to have their shares independently valued on a regular basis. Whilst this is a popular option, you must consider the costs of undergoing a regular valuation, in terms of both time and money.

As a guide companies should expect to pay upwards of £3,000 for a formal valuation. But this figure will vary according to the complexity of a company’s business and the nature of the valuation.

As an alternative, companies may wish to think about joining one of the UK’s smaller stock markets. With annual fees starting at £5,000, markets such as ShareMark and Angelbourse and are a useful alternative, especially when you consider the benefits admission can bring, such as higher profile and credibility and the provision of an exit route for shareholders.

Provide an exit route

To provide an exit route, many companies operate an internal market.  They may trade shares at the formal valuation or in some instances they will operate on a matched bargain basis, via a stockbroker.

Internal markets are perceived to be relatively simple and low cost, they provide an exit route, they don’t force the company to accept external shareholders and they don’t require adherence to a complex set of rules and disclosure requirements, which most formal stock markets do. 

On the downside running an internal market can be fraught with regulatory problems and the settlement of trades can be complex and time consuming. 

Formal stock markets like ShareMark and Angelbourse are comparatively simple and cheap to join, and they ensure that the entire share trading process is outsourced and contained within a secure, transparent and regulated environment. Additionally for companies who wish to restrict trading in their shares, these markets include the ability to operate a ‘closed market’. 

Ultimately the objective of any employee share plan must be to motivate and retain staff and this requires a long term commitment and co-ordinated across a number of areas. Valuation, exit and communication can be barriers to the success of a plan but they are fairly easy to solve, if the plan is thoughtfully introduced and administered.

Rating

By Emma Vigus  on   Jul 07,2008

Add a comment  |  Add a rating  |  Email to a friend

Keywords

share schemes    employee benefits    renumeration   

Comments