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Author: Jim Riley Last updated: Sunday 23 September, 2012

Financial motivation - share options

Offering employees shares in a business is an increasingly popular part of pay packages – particularly for businesses whose shares are traded on a stock exchange.

Offering shares is a more complicated kind of reward than paying employees cash. However, it can be much more effective in linking the objectives of the business (e.g. profit maximisation) and the objectives of employees (e.g. make a large gain on the value of shares held).

This payment method also encourages employees to commit to the business in the longer-term.

There are various schemes available which companies can use to offer shares as part of the remuneration package:

Employee Share Ownership Plans (“ESOP’s”)

ESOP’s involve setting up a trust into which a company offers shares in the business. In the UK, a company using an ESOP can give employees shares worth up to £3,000 each year. The gains made on these shares are free of tax (capital gains tax) as long as they are held in trust for more than five years.

Share Option Schemes

These are popular ways of incentivising senior management and key employees. Under a share option scheme, selected employees are given the right to buy shares at their current price, at a later date. If the shares increase in value in the meantime, employees will make an immediate profit when the “exercise” their options.

In the UK, employees may hold options on shares worth up to £30,000. The option can be exercised after three years but not later than ten years. Again, there is no tax paid on any gains made by exercising these options.

Sharesave Schemes

Sharesave schemes are made available to all employees – who must be able to participate in the scheme on equal terms. All scheme members get the right – but not the obligation – to buy a number of shares (normally at a lower price than their current price) after three, five or seven years.

In the meantime, employee members save a regular amount to pay for the shares. If the shares rise in value, employees have a profit when they buy the shares. No income tax is paid on any gains made on these shares.

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