Risk & Economy » Regulation » The incredible shrinking share

A TIME-honoured but not wildly efficient way of incentivising employees is through share options. As Michael Rose, a director at Rewards Consulting explains, there are two main and rather different share option schemes currently approved by HMRC – the SAYE (Save as You Earn) scheme and the SIP (Share Incentive Plan) scheme. Companies can also opt to simply gift employees shares according to whatever criteria they like, but if this is done outside an approved scheme it is viewed as another form of remuneration and taxed accordingly.

The SAYE scheme, from the employee’s standpoint, is a risk-free way of investing in their company. An approved SAYE scheme holds an agreed deduction from the employee’s salary for an agreed period – either three, five or seven years – along with an option to buy shares at that future date, at a price agreed when the scheme is set up. The company can sweeten this offer by discounting the agreed price by up to 20% against the market price at the time of the agreement.

As Rose notes, this is safe – from the employee’s standpoint – in that there is no obligation to buy the shares if they are under water with respect to the option price when the agreed date is reached. The employee can simply treat this as a savings scheme and withdraw the cash from the scheme. Interest at present is zero on a three-year scheme and next to zero on a seven-year scheme, so the real cost to the employee of going in for the scheme is simply what they have lost – assuming they do not exercise the option – by way of interest foregone had they invested in a more traditional savings vehicle.

The problem with SAYE from an employer’s perspective is that it has to be made available to all employees, so the link with productivity is zero. Does it generate goodwill? Who knows?

The SIP, by way of contrast, offers the employer far more flexibility on how the company chooses to use it.

“The SIP takes the place of the old profit share scheme and you can, for example, do a matching share scheme, where you gift one company share for each share the employee buys at market price,” Rose explains.

There are two major problems with employee share schemes. First, the company’s shares need to be increasing in value for the scheme to be meaningful – and that is not a given in volatile markets. Second, as Rose notes, you run into the “too many eggs in one basket” problem. If the company goes bust, the employee loses their job, their pension, and their share options tank as well. ?