Incentive Plan Implementation Guide. March 2015

Transcription

1 Incentive Plan Implementation Guide March 2015

2 Contents 01 Key Stages 02 Planning and Feasibility 03 Implementation 04 Administration 2015 Grant Thornton UK LLP. All rights reserved. 2

3 Key Stages Planning & Feasibility Considerations for identifying the most appropriate incentive arrangement Performance conditions and other provisions to include in the plan Valuation approach Implementation Draft plan rules Employee communications Valuation agreed with HMRC if required Administration Filing with Companies House Online registration of plan Potential PAYE on exercise or other events e.g. lifting of restrictions Annual returns 2015 Grant Thornton UK LLP. All rights reserved. 3

4 Planning and Feasibility

5 Understanding the company's objectives and constraints In order to determine which incentive arrangement is most suitable for your company, you should ask yourselves the following questions: What type of plan does the company wish to operate i.e.. cash plan, share plan, share option plan or phantom share plan? Are there any particular strategic drivers that the company would like to incorporate into the incentive structures (profit growth, income growth, etc.)? Are there any particular personal performance behaviours that the company would like to encourage? Are there any other constraints in relation to the equity structure of the company that may limit what kind of incentive arrangements could be put in place? For example shareholder or investor agreements where consents are required? Would an 'all employee' plan be supplemented by additional arrangements for sub-groups of employees (e.g. management)? Has a budget been identified to support the new incentive structures or will any new arrangements have to be self-funding? Does the company have any existing share schemes in place? If so, what are they? Does the company have an existing employee share ownership trust ("ESOT") in place to act as market maker for employee-held shares? What are the company's strategic goals for example is an exit event envisaged? Is there a time-frame that the company has in mind during which reward arrangements are to operate and become effective? 2015 Grant Thornton UK LLP. All rights reserved. 5

6 Share Award vs. Cash Bonus Companies should consider the pros and cons of using cash or shares Cash Key considerations Simpler to implement No dilution issues Short or long-term incentive (not just a bonus!) Less tax-efficient for employees Costly for the company Potential cash flow issues Cash can be used to look and feel like shares Shares Key considerations Short or long-term incentive Low cost, high return from a commercial perspective Aligns the objectives of the company and the employees Better from a cash flow perspective Can be more complex to design/implement Potential dilution issues 2015 Grant Thornton UK LLP. All rights reserved. 6

7 Consider whether the company qualifies for a HMRC Tax-advantaged Share Plan The advantage of using one or more of the HMRC Taxadvantaged Share Plan arrangements is that they offer wellestablished, tax-efficient arrangements that are easily understood by both the employee and the company Depending upon the ownership structure of the company, it may be possible to put in place an HMRC Tax-advantaged Share Plan (or plans) which would benefit from favourable tax treatments. If designed and operated correctly, Tax-advantaged Share Plans will result in little or no income tax charge for the employee, with capital gains tax ("CGT") payable on the first disposal of the shares. Tax-advantaged Share Plans have the added benefit of being non-controversial as they are generally accepted by HMRC, and there is cross-party government support of these as well. However, it is important to note that the ownership structure of the company may restrict the ability to implement such approved schemes. In addition, the shares used for Tax-advantaged Share Plans must be ordinary shares that are not subject to any special restrictions. This requirement could therefore create a problem for the company if they wanted to use shares in the company, but did not want to dilute the shareholdings of the existing shareholders. The following are examples of Tax-advantaged Share Plans: Share Incentive Plan ("SIP") Save As You Earn Option scheme ("SAYE") Company Share Option Plan ("CSOP") Enterprise Management Incentive Plan ("EMI") 2015 Grant Thornton UK LLP. All rights reserved. 7

8 HMRC Tax-advantaged Share Plans: EMI Qualifying Conditions There are a considerable number of conditions which must be met in order to qualify for HMRC Tax-advantaged Share Plans For example, to qualify for an EMI Plan, some of the conditions that would need to be satisfied are as follows: Company conditions Independence - the company whose shares are being used must not be under the control of another company nor a 51% subsidiary Gross assets - the company or group cannot have gross assets exceeding 30m Number of employees - the company or group must have fewer than 250 full time equivalent employees Qualifying trade - the company, or at least one of its subsidiaries must carry out a qualifying trade on a commercial basis with a view to profit Plan limits - the value of all shares subject to EMI options must not exceed 3m These are just a few of the qualifying conditions for an EMI plan and this list is not exhaustive. There are various conditions that an option holder must satisfy in order to participate in an EMI scheme. At the very least, the option holder must be an employee or director of the company. If your company wishes to pursue one of these Tax-advantaged Share Plans, it is important to thoroughly check that the relevant conditions are satisfied. In the case of an EMI plan, advance assurance can be obtained from HMRC to ensure the requirements for a 'qualifying company' are met Grant Thornton UK LLP. All rights reserved. 8

9 Unapproved Share Plans Unapproved Share Options, in contrast, are more flexible as they are (relatively) unrestricted by statutory requirements They can therefore be more readily tailored to include performance conditions to motivate certain behaviours from the company's employees. The options could also be offered over a new class of shares, thereby preserving the existing shareholdings (and value) of the current investors. However, unapproved option plans do not share the same tax efficiencies as the Taxadvantaged Share Plans. On exercise the difference between the market value of the share and the exercise price paid will be subject to income tax (at up to 45%) and employee and employer national insurance contributions ("NICs"). The employer's NIC can be passed to the employee (who gets tax relief on this additional cost) but this will mean that the employee pays a high tax and NIC cost of over 50%. Consequently, this approach is not popular with employees and must be carefully communicated to ensure that it does not undermine the incentive effect of the award Grant Thornton UK LLP. All rights reserved. 9

10 Other Share Plans Phantom Share Options do not result in employees receiving shares or a right to receive shares in the company ultimately the employee receives a cash payment based on growth in the value of the company shares. They will therefore leave the current ownership structure undisturbed. Phantom plans are very flexible and can be tailored to provide rewards for certain targeted behaviours, e.g. increased profit or capital growth of the company. However, they are relatively tax inefficient as awards are taxed as employment income (subject to income tax and NICs) upon pay-out. Furthermore, they represent a cash cost for the company. Growth/Flowering Share Plans are useful if the company wishes to incentivise its employees immediately. By awarding employees a stake in the business they align their interests with those of the existing shareholders by offering the opportunity to share in the growth in value of the company. They are implemented by introducing a new share class which will benefit if the company grows past a set performance 'hurdle'. Growth/flowering Shares can also be tax efficient, and if structured correctly, participants will typically suffer CGT (rather than an income tax liability) if the share rights 'flower' and the shares are subsequently sold. However, it is important to note that a relatively low upfront income tax charge would arise on the value of the flowering shares on award. Because the flowering shares are a new share class, they can be structured so as to not dilute the value held by existing investors. However, the incentive effect of flowering shares can be lost if the company fails to grow fast enough to meet the specified performance hurdle. They are also a relatively complex arrangement and administratively may not be suitable for a large employee population. There are also other tax-efficient arrangement which we would be happy to discuss with you Grant Thornton UK LLP. All rights reserved. 10

11 Provisions of the Plan Once a suitable incentive arrangement has been decided upon, the design of the plan can be further considered It may be possible to introduce performance conditions to encourage certain behaviours from employees, before shares are awarded, shares or options vest, or options can be exercised. Together, vesting and performance conditions are useful tools to retain and motivate employees. Careful consideration should be given to the performance conditions and the type of behaviour which this will encourage. The provisions included within the incentive plan rules should be considered carefully when designing the plan. For example, a key provision that should be clearly defined is cessation of employment. Additionally, if there is no exit on the horizon, how the employees realize the value in their shares can be an issue. In these circumstances, it is possible to create an internal market with the use of an ESOT. We can help with details on how this can be designed and implemented Grant Thornton UK LLP. All rights reserved. 11

12 Design Considerations Plan design aspect Participants Quantum of awards Valuation Good and Bad Leavers Performance Measures Vesting profile Funding Timing Design considerations The company will need to decide which employees within the workforce will participate. The interaction between achievement of performance criteria and award amounts must be considered. If shares are used, a transparent and equitable valuation methodology must also be developed, which is easy for the company to administer and transparent to the participants. To ensure plans are perceived as having long-term value good leaver provisions will need to be clear and perceived as being fair to the participants, as well as meeting the objectives of the company. Participant performance objectives and how they will be measured need to be established. These will be based on the company's long term objectives and must ensure participant accountability. Vesting dates will need to be considered and if shares are issued, the potential administration burden should be managed. Overall funding of the plan, including how participants will realise value must be considered. If cash will be used, will the company have the funds to satisfy payments? The length of performance and performance periods must be considered. If shares are awarded, a pre-determined sale window in which shares are capable of being sold should also be considered as this provides certainty to both the company in terms of administration and the participants. Realising value In the absence of an exit event or existing market for company shares, the company will need to determine how share value will be recognised, communicated to and realised by participants Grant Thornton UK LLP. All rights reserved. 12

13 Implementation

14 Drafting Plan Rules Typically, plan rules would include details on the following: grant of options / shares plan limits exercise of options / vesting of shares lapse of options / forfeiture of shares consequences of cessation of employment consequences of a corporate transaction employment rights how the plan will be administered In addition to this, the rules will usually include the following: option or share agreement between the company and the employee grant letter / award letter notice of exercise If the plan is tax-advantaged, for instance an EMI plan, an employee declaration should also be included to confirm that the employee satisfies the relevant employee conditions. In addition, there may be other formalities if the plan is tax-advantaged Grant Thornton UK LLP. All rights reserved. 14

15 Employee Communication It is especially important that the employees invited to participate in an incentive arrangement appreciate the value of the award. Where performance conditions are included they should understand how they can achieve these. Therefore, employee communication is key to the success of such an arrangement. For example, a presentation could be delivered to the employees, outlining how the plan works and how they could benefit from participating in the plan. Furthermore, a participant guide could be issued to explain the arrangement in detail. If there are performance conditions incorporated into the plan, the employees would need to understand how they can assist the company to work towards achieving the target. In our experience, it may be helpful to hold a session on the financial performance of the company alongside the communication of the plan to the employees in order for them to see the clear commercial strategies and objectives of the company, and how they can assist with this. We would suggest that the following is included in any employee communication:- How the plan works Benefits of the plan What the performance conditions are Tax implications of the plan and associated reporting obligations 2015 Grant Thornton UK LLP. All rights reserved. 15

16 Administration

17 Administration The following steps may need to be considered when implementing a plan: Revision of Articles of Association Board Resolutions Documents issued to participants Filings at Companies House The Articles of Association should be reviewed to ensure such a plan can be operated, and the Articles may need to be revised accordingly. A Board meeting is likely to be required to approve all documentation and relevant resolutions. Final documents must be signed by the company, participants and where applicable the trust. Tax Election (e.g.. s431) may be entered into for protective purposes Form SH01 would need to be completed and filed at Companies House. If Articles are amended, a written resolution and the Articles would need to be filed at Companies House. Registration of Plan Share plans would need to be registered online before the tax year end. This could take up to a week and therefore should be completed in good time. Annual Returns An annual return would also need to be submitted to HMRC in relation to the grant or award of shares (and future exercise) by 6 July following the end of the relevant tax year. New issue of awards Some or all of the steps above would need to be undertaken on the issue of new awards to employees. Updates Share plans may need to be updated to reflect any changes to the company and its objectives, or the introduction of new legislation. Share plans typically only last for ten years and may need to be reviewed Grant Thornton UK LLP. All rights reserved. 17

18 Registration with HMRC Any new or existing share plans must be registered online with HMRC's Employment Related Securities (ERS) service from April 2014 The company will be able to access the ERS Service through HMRC Online Services PAYE Online. Within the ERS service, the company can register the Plan. The company will need to provide the following details in order to register the Plan: Scheme Type (It is understood that the alternatives are: CSOP, EMI, SAYE, SIP and Other); Tax Year of First Event; Scheme Name; and Company reference number (CRN) and Corporation Tax reference. Annual Returns In addition to this, the company would also need to file an annual return online (formerly Form 42) for the tax year in which the grants where made and the year the shares were acquired. This must be submitted by 6 July following the end of the tax year in which the grant/acquisition/exercise etc. took place. EMI Plan HMRC must be notified of the grant of EMI options within 92 days of the date of grant. This must be done online via the ERS Service online once the plan has been registered Grant Thornton UK LLP. All rights reserved. 18

19 How we can help Grant Thornton Equity Reward Team can assist in the design of reward packages including: designing appropriate performance targets for incentives identifying innovative approaches for pay and incentives to ensure that the company gets the maximum benefit from the arrangements advising on the design and implementation of long-term incentives and bonus arrangements that assist in achieving the company's business plan drafting disclosure in shareholder documents and assisting with communications with shareholders communicating details to participants to ensure that they are clear on the effect of any new arrangements. As Grant Thornton has a multidisciplinary team we offer a 'one-stop shop' approach that encompasses these services and everything necessary to implement them including: tax, legal and accounting input drafting of all documentation valuation services including tax, IFRS valuation and specialist input on certain types of incentive plans corporate governance advice specialist technical accounting advice that will assist in your discussions with your audit team. Our team comprises solicitors, accountants, tax qualified staff and valuation experts who all specialise in this field Grant Thornton UK LLP. All rights reserved. 19

20 Contacts

21 Who to contact for further information We hope that this guide will help you to understand some of the practical, tax and legal considerations which are relevant when designing and implementing an employee incentive plan. Please note that this document is not exhaustive and we recommend that further advice is obtained when considering your own company's arrangements. If you require any assistance, please do not hesitate to contact us. Amanda Flint Tax Partner, Grant Thornton UK LLP T +44 (0) E amanda.flint@uk.gt.com Emma Selway Tax Manager, Grant Thornton UK LLP T +44 (0) E emma.selway@uk.gt.com Sonal Shah Tax Associate, Grant Thornton UK LLP T +44 (0) E sonal.shah@uk.gt.com 2015 Grant Thornton UK LLP. All rights reserved. 21

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