Module 2: Design Flashcards
Design, Implementation and Maintenance
Name the 5 W’s to consider when designing a share plan
Why?
Who?
What?
When?
Where?
Name some of the reasons WHY a company would implement a share plan
- incentivise employees;
- reward employees;
- attract and retain talent;
- shareholder alignment;
- employee engagement;
- good governance;
- risk management; and
- regulatory compliance.
It is important to identify the company’s key and supplemental objectives and why they want to have an
employee share plan at the outset, as this will be critical in looking at what type of plan to put into place to ensure it meets these objectives and is successful.
WHO could the company want to include in the share plan?
- executives;
- global management team;
- specialist groups of employees;
- talent; and
- all employees
Consider WHAT the company may want to give its employees?
For example, will the awards under the plan be offered for nil-consideration (free for the
employee), or will employees be required to purchase shares?
By determining what will be offered, the company can look more closely at the type
of plan to implement (e.g a long term incentive plan, deferred bonus plan or all-employee purchase plan).
WHEN does the company want to offer awards (frequency)
Annual, bi-annual,
monthly, or even a one-off.
WHERE does the company want to offer the share plan?
Global employees or local only.
A company doesn’t necessarily need to make this decision at the outset, but it will be important to consider in plan design, if there is a possibility of offering the plan in multiple jurisdictions.
Example: A company promoting a sense of ‘One Organisation’
Who? - Broad-based
participation
What? - Award of
shares for no
payment
When? - One off
Where? - All countries
Pros:
✓ Creates a strong global
message
✓ Employees participate on
the same terms so all on an
equal footing
Cons:
x Inflexible and does not
reflect local tax implications
or benefits
x May be difficult to roll-out
across all jurisdictions
without some variations
EXAMPLE: A share plan to align employees with shareholders
Who? - Key individuals/
decision makers
What? - Award of shares
for no payment,
subject to
performance
conditions
Where? - Globally
When? - Consider grant annually
Pros:
✓Tying the award to
performance conditions
aligns with shareholders
✓Can promote innovation
Cons:
x May be expensive/dilutive
x Individuals may not
understand the
performance conditions or
feel they can directly
influence them
Who should be on the Project Team for designing a share plan? (16 different parties)
- Share plan manager (Overall project management and plan delivery)
- HR (to agree on objectives which support the wider reward
vision/company strategy) - Communications (make sure the plan is effectively communicated)
- Payroll (payroll and tax aspects of the plan)
- Co Sec (handle compliance, reporting, share dealing restrictions, treasury, registrar)
- Legal (In-house and/or external expertise)
- Finance/treasury/accounting (to advise on the accounting and funding issues for the
plan) - Tax (to advise on tax rates, withholding, tax reporting and
mobile tax calculations) - Share plan administrators (to manage accurate records of
the plan and ensure the smooth operation) - Broker (advise on the acquisition and sale of shares)
- Local leadership and HR managers for implementation (To advise on local issues and champion the plan globally
once launched) - Investor relations (To anticipate investor reaction – particularly relevant for executive plans)
- IT (to advise on use of company’s IT or integration with
external providers e.g., administrators) - Procurement (to assist with on-boarding new suppliers)
- Marketing and PR (to work with communications team to publicise the plan
and drive take up) - Works council/trade unions (to be consulted about changes to employee share plans)
What are the 3 elements of the design process?
- DESIGN
- IMPLEMENTATION
- MAINTENANCE
What are the stages of the DESIGN process?
- OBJECTIVES: The objectives should be identified by the company with support
from lawyers/advisers. - considering market practice, governance requirements and investor expectations.
- carrying out research/due diligence on the company.
- interviewing key executives.
- facilitating employee focus groups.
- BUDGET: This plays a key part of the plan design.
- As well as the cost of providing the shares for the plan, it is important to identify the budget for the plan design, implementation, ongoing maintenance and administration. This should include the legal
and tax compliance. - PLAN FEATURES: A
detailed plan design paper, covering these issues, sometimes known as a ‘TERM SHEET’ would be
produced. - HOME COUNTRY COMPLIANCE: The legal advisers will provide advice on the laws of the company’s ‘home country’ – this is usually where the company is incorporated and/or listed.
The plan will need to comply with local company law, stock exchange listing rules, governance codes,
etc. - GLOBAL DUE DILIGENCE: The legal advisers will also conduct a global due diligence process to ensure that the proposed structure is compliant in the intended countries of operation, in terms of legal and tax rules.
Name some of the elements featured in a TERM SHEET
- Issuing company
- Objectives
- Type of awards
- Conditions
- Source of shares
- Name of plan
- Eligibility
- Vesting
- Malus/clawback
- Dividends
- Leaver provisions
What are the stages of the IMPLEMENTATION process?
- APPROVAL PROCESS: (particularly if external consents are required – regulators and tax authorities can take a long time to reply, and if shareholder approval will be required, AGMs only happen once a year (in the UK).
- DOCUMENTATION: The lawyers will draft the plan rules and ancillary documents and ensure drafted documents are accurate,
consistent and comply with legal and listing requirements. - COMMUNICATIONS: Communications will help employees to make informed decisions and maximise the benefit of the plan to the company and participant. Think Exemia - videos, website, booklets. Want employees to get excited whilst understanding the risks.
- ADMINISTRATION: Project team meetings will be held to progress implementation of the plan and the company will typically appoint a third-party administrator to support the implementation and ongoing
administration of the plan. - TAX: – i.e., the point at which tax charges arise. Finance and payroll teams will need to be invovled to ensure it is doable from their perspective.
What are the two key elements in the MAINTENANCE phase?
MATURITY OF AWARDS AND POST VEST CONSIDERATIONS: The company will usually want to ensure that there are arrangements in place to facilitate participants holding shares post-vesting/delivery (i.e., once awards have matured and participants may receive their shares).
2ND ROLL OUT AND EFFECTIVENESS MONITORING:
Review how the first cycle of the plan has gone and consider whether any changes need to be made from the first launch. I.e new countries or a wider population, any changes to design? Any legal and tax issues from the first roll out?
The Company may use consultants to review the success of the plan and linkage to shareholder value. This includes assessing whether it has been meeting objectives as well as reviewing uptake, optimum plan investment
and how different employee groups have responded. Long-term monitoring includes evaluating the impact of the plan against the objectives, e.g., attraction, engagement and retention of employees.
If a Company wanted to implement discretionary plans, what are the TWO plan types they should consider?
DEFERRED BONUS PLAN: Under these plans a company may defer a cash bonus into shares.
Performance conditions often don’t apply but they may be subject to continued employment.
LTIP: These plans are typically discretionary and offered to senior individuals.
They are primarily future looking and based on continued employment or future performance.
What are conditional share awards and discuss their pros and cons.
Where the employer grants employee a right to acquire shares in the future (usually after a 3 year period) to employees for free/no contribution from employees, usually subject to certain performance conditions being met.
PROs:
- Reward the executives with whole share value, align executives with company goals (e.g., completion of performance
conditions) and align executives with shareholders.
- Can be simple to communicate and administer.
CONs:
- Performance targets may be complex – may not be understood by executives/shareholders.
- Targets must be set appropriately to meet desired objectives.
- All shares to be delivered
at the same time on
vesting - can cause issues
where low liquidity. - Can dilute existing shareholder interest.
- Provision of shares may be costly as no payment received from participants.
What are nil cost options and discuss their pros and cons.
Employer grants employee
an option – i.e., a right to
acquire shares in the future
(usually after a 3 year period)
commonly for no cost,
usually subject to
performance conditions being
met.
PROs:
- Reward the executives with whole share value, align executives with company goals (e.g., completion of performance
conditions) and align executives with shareholders.
- Can be simple to communicate.
- Employees have flexibility
as to when they exercise
options – so choose the
tax moment
CONs:
- Performance targets may be complex – may not be understood by executives/shareholders.
- Targets must be set appropriately to meet desired objectives.
- Can dilute existing shareholder interest.
- Exercise process can be trickier to administer.
- Provision of shares may be costly as no payment received from participants.
What are Restricted shares and discuss their pros and cons.
Where the employer awards shares upfront which are subject to a forfeiture/restriction period
during which the employee’s
rights to the shares are
limited (e.g., cannot sell them/forfeitable if performance conditions are not met), with such restrictions usually falling
away after 3 years).
PROs:
- Reward the executives with whole share value, align executives with company goals (e.g., completion of performance
conditions) and align executives with shareholders.
- Can be simple to communicate.
- Potentially greater alignment than other award types as individuals are shareholders from the outset and may be
permitted to receive dividends/exercise voting
rights.
CONs:
- Performance targets may be complex – may not be understood by executives/shareholders.
- Targets must be set appropriately to meet desired objectives.
- Can dilute existing shareholder interest.
- Provision of shares may be costly as no payment received from participants.
- Tax can be more complex i.e., amount may be
payable upfront - Dilutes existing
shareholder interest from
day 1
What are the THREE all-employee award types a company may consider offering?
- Options (market value)
- Purchased shares
- Purchase plan with match
What are market value options and discuss their pros and cons.
Employer grants employee an
option – i.e., a right to buy
shares in the future (usually
after a specified vesting
period) at a price set at the
start of the option period
PROs:
- Employee paying a price to acquire shares potentially gives greater engagement
than conditional share awards.
- Employees pay for shares, so make an investment, potentially giving greater shareholder
alignment than conditional share awards. - Can be tax advantageous
in the UK if structured as
an SAYE plan - No real financial risk for
employee until option is
exercised and they decide when to do so.
CONs:
- Only provides reward to
the extent value has been
created over the option
price paid.
- Limited active shareholder
alignment prior to exercise - Options can act as limited
incentive when ‘underwater’
Discuss Purchased shares and their pros and cons.
(Often seen in a tax advantaged SIP)
Typically, the employee
purchases shares using
salary, and shares are
purchased at intervals (e.g.,
monthly or quarterly). The
purchase price may be
discounted (e.g., 15%).
PROs:
- Employee paying a price to acquire shares potentially gives greater engagement
than conditional share awards.
- Employees pay for shares, so make an investment, potentially giving greater shareholder
alignment than conditional share awards. - Employees can potentially
vote and receive dividends
in respect of purchased
shares from the outset.
CONs:
- Employee funds at risk if
purchased shares
decrease in value
- May not be affordable for
the wider workforce - Requires regular
movement of funds which
can be complex
Discuss Purchased shares WITH MATCH and their pros and cons.
(Often seen in a tax advantaged SIP)
Typically, employee
purchases shares using
salary, which are then
matched by the employer at a
pre-set ratio and subject to
the purchased shares being
retained for a specified
period. Match is often
structured as a conditional
share award.
- Employee paying a price to acquire shares potentially gives greater engagement
than conditional share awards. - Employees pay for shares, so make an investment, potentially giving greater shareholder
alignment than conditional share awards. - Can be tax advantageous
in the UK if structured as a
SIP - Matching shares can help
to offset risk - Holding period can create
a retention effect
CONs:
- Level of match must be set
carefully to ensure that it
does not favour higher
earners and is meaningful
to employees
- Matching element can be
costly to the business
Matching element can
dilute existing shareholder
interest - Employee funds at risk if
purchased shares
decrease in value
Name 4 types of UK Tax Advantaged plans
- Save As You Earn (SAYE/Sharesave) option plans;
- Share Incentive Plans (SIPs);
- Enterprise Management Incentive (EMI) option plans; and
- Company Share Option Plans (CSOPs).
USEFUL INFORMATION TO REMEMBER ON:
TAX ADVANTAGED PLANS
- A key benefit is generally the INCOME TAX relief for employees who participate in the plan.
- A drawback is that tax advantaged plans are less flexible than non-tax advantaged plans.
Key features:
- The company and the shares used must comply with HMRC requirements or meet certain
conditions, which can be stringent. - Limits on the values of shares under option, or which can be acquired under the plan.
- Constraints on when tax advantaged options can be exercised or shares freely disposed of.
- For SAYE and SIP, all eligible employees must be invited to participate.
- Can impose performance conditions for the discretionary CSOP and EMI plans, but not for SAYE, and only to a limited extent for a SIP.
- No ability to grant cash awards or settle awards in cash.
