Share options: why bother?

Share options a topic of discussion once more. Ian Wallis looks at whether you should be acting now


Hailed for boosting productivity and employee retention, share options lost their allure when the economy turned bearish.

Fuelled in the late 90s by dot com promises of untold future wealth, paper-rich workers ultimately had little or no prospect of realising any value. As a result many firms dropped plans along with intentions of going public. “When the economy suffered, staff became more interested in staying in progressive, well-paid jobs with quantifiable packages, so there was less reason to implement schemes,” says Peter Goodman, head of tax at accountant Wilkins Kennedy.

Then last year, Microsoft ditched its own option scheme. It decided to grant shares instead, explaining this practice is recorded on balance sheets, giving analysts a better view of the company’s financial state and workers a tangible incentive.

To compound matters, the International Accounting Standards Board is now proposing firms put the cost of share-based awards through the profit and loss account, significantly adding to the expense for smaller businesses.

And finally, the Quoted Companies Alliance, the body representing the interests of smaller quoted firms, claims tax legislation introduced by Gordon Brown has left companies fearing unforeseen tax liabilities.

But, all this has not deterred a new wave of businesses from setting up schemes in an improved economy. With more flotations on the cards this year than for some time, share options are rising back up the agenda.

Adrian Moss of Deal Group Media was one entrpreneur eager to take the plunge. The AIM-listed company introduced its options scheme in December 2003, and says the market responded positively. He went for an Inland Revenue approved scheme, which all his staff are entitled to be part of after six months.

“From my perspective the benefits are beneficial and real,” says Moss. “The benefit of real cash for staff who have generated profits is fundamental to their package, and these options should potentially be worth in excess of a year’s salary.”

He is keen to emphasise the company does not offer attractive options against lower than market salaries and chose one with strong tax breaks. It would otherwise be demotivating if the share price dropped.”

Another firm to have set up a scheme is city centre apartment developer City Lofts, which floated on AIM in December 2003. It opted for both an Inland Revenue approved and an unapproved scheme, due to the £30,000 limit per employee under its approved scheme. Chairman Nigel Denby says the company’s benefits package is fairly limited, but options are crucial.

It chose an ‘off-the-shelf’ set of rules, avoiding complexity. “It’s important to make sure they’re not too complicated. We’re not a big company in terms of numbers, but we believe these schemes will incentivise our staff,” he says.

INLAND REVENUE APPROVED SCHEMES FOR YOU

Enterprise Management Incentive (EMI)

Popular with fast growing small and medium-sized businesses, and relatively easy to set up, it offers significant tax benefits, such as no income tax payable on grant or exercise, so long as the exercise price is at market price at the grant date. It also allows capital gains tax taper relief to run from the day options are granted. Employers can grant options of up to ?100,000 worth of shares per employee (with a maximum of ?3m per company). The Inland Revenue must be notified when EMI options are granted.

Company Share Option Plan (CSOP)

Aimed at companies looking to grant options to senior executives and key staff, this discretionary scheme also boasts no income tax providing conditions are met. Generally, three years must pass between data grant and exercise of option to ensure that no income tax applies and there?s also a ?30,000 limit per employee. Capital gains tax benefits are more limited.

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