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.
various schemes available which companies can use to offer shares as part
of the remuneration package:
Employee Share Ownership Plans (“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
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
In the UK, employees may hold options on shares worth up
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 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.
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.