N4 - What are employee share plans?

Question 1

What is a SAR?

Answer 1

Stock/Share Appreciation Right. An employees right to receive a value equal to the difference between the market value of the shares calculated at the time of exercise and the market value at the time it the shares were granted.

Gain may be settled in shares or cash.

Generally no specific tax benefits

Question 2

What are employee share plans?

Answer 2

Employee share plans are arrangements enabling employees to acquire shares in their employing company, its parent, or more unusually another group company.

Sometimes there are plans that involve non-employees e.g. self employed consultants, non-execs or those employed by a third party company

Question 3

What is an award?

Answer 3

This is the actual benefit/reward that the employee receives

Question 4

What is a plan?

Answer 4

A plan is a framework, structure or arrangement to facilitate granting an award

Question 5

What two categories do share awards usually fall in ?

Answer 5

Rights to acquire shares - employee has an award which gives them the right to acquire shares in their employer or its parent company in the future subject to various conditions

Actual shares- employee acquired shares at the outset or upfront

Question 6

What are conditional share awards or Restricted Stock Units (RSUs)?

Answer 6

Employees granted a conditional right to receive shares at a point in the future.

Usually employee does not have to pay for those shares or the right to receive them.

Subject to conditions that must be met in order for the award to vest.

Frequently used in discretionary plans but also all employee.

Not normally eligible for tax benefits

Question 7

What are Options?

Answer 7

Conditional right to acquire shares in the future, but employee must exercise the right to acquire the shares.

Exercise price set at grant that employee is required to pay to exercise the option.

Subject to conditions- continued employment, performance and times which must be satisfied in order for the award to vest.

Can carry tax benefits like the CSOP and EMI

Question 8

Market value ?

Answer 8

The full value of the shares at the time of grant

Market value options are only valuable to employee of the share price increased may have only time based conditions

Question 9

Discounted exercise price?

Answer 9

A discount on the market value at the time of grant

Question 10

Nominal exercise price?

Answer 10

Meaning only the nominal value of shares is payable on exercise

Question 11

Nil cost options

Answer 11

Nothing payable upon exercise and the shares are acquired for free

Usually have a performance based conditions

Question 12

Restricted Stock

Answer 12

The employee owns the shares from the beginning at the time the shares are awarded to them.

Maybe subject to time conditions with possible forfeiture conditions.

Question 13

Phantom awards

Answer 13

Employees granted the right to receive a cash amount which is calculated according to an underlying share value.

No tax benefits

Question 14

Cash award

Answer 14

Employee awarded cash but there is no link to share value

Question 15

What’s an LTIP?

Answer 15

Long Term Incentive Plan

Employees receive shares in their employing company, or its parent, usually free of
charge as part of their variable remuneration and usually as an incentive to drive
company performance.

Discretionary - eligibility is extended to all employees, but actual participation will be limited to executive directors
Usually performance conditions need to be met in order for the employee to receive shares.

Usually conditional shower awards, but some of the structured in meal cost options.

Question 16

What is a DBP/DBSP?

Answer 16

Deferred share bonus plan

Employees receive shares in their company free of charge, usually granted, instead of the employee, receiving some or all of their annual bonus in cash. Part of the employees bonus becomes deferred and delivered via a share award in the future.

Performance conditions do not normally apply as the bonus has already been earned however, they are subject to continued employment.

Question 17

What is an employee share/stock purchase plan?

Answer 17

Plans which involve the participant purchasing shares in their company, usually using salary deductions. she then bought using that salary deduction, usually at a discounted price.

Usually referred to as US employees stock, purchase plan or ESPP, these tax favoured in the US, with a discount of up to 15%.

All employee arrangement

Question 18

What are share match plans?

Answer 18

Employee makes salary deductions to purchase shares, usually at the full price, but instead of offering a discount, the employer grants matching shares free of charge .

Allocation usually based on a matching ratio dependent on number of shares purchased.

Employee will usually have to keep the purchase shares for a period of time in order for the matching shares to vest.

All employee plan, which has a tax advantage in the UK known as the SIP or share incentive plan.

Question 19

What are co investment plans or executive matching schemes?

Answer 19

The employees required to make an investment in shares, and will then receive additional share awards as an incentive.

Usually a discretion rearrangement for more senior employees investment may be a one off annual amount and maybe linked to a cash bonus arrangement. The additional award may be subject to performance conditions.

Question 20

What are employee benefit trusts (EBTs)?

Answer 20

A mechanism for holding and delivering shares under the various employee share plans.

A discretionary trust which holds shares, and all cash for distribution to its beneficiaries, who are the employees of the relevant company or its subsidiaries.

Separate legal entities which have specific tax treatment and legal provisions that apply to them